Business owners will need to address multiple types of tax issues, including withholding payroll taxes from employees’ incomes and paying these taxes to the IRS and the California Employment Development Department (EDD). These issues can become more complicated when a business hires independent contractors or when other types of payments are made. In general, payments that are reported on 1099 forms do not require a payer to withhold taxes. However, there are certain situations where the IRS may require backup withholding.

What Is Backup Withholding?

Form 1099 is an information return that lets the IRS know about certain types of payments made by a business. The recipients of these payments are expected to report and pay taxes on these payments. However if there are issues related to the reporting of payments, a payer may be required to withhold a certain percentage of these payments and pay these taxes to the IRS. The tax rate for backup withholding is 24 percent.

In most cases, backup withholding will be required because the recipient of payments failed to provide a correct taxpayer identification number (TIN). A TIN may include a person’s Social Security Number (SSN), an individual taxpayer identification number (ITIN), or an employer identification number (EIN). If a TIN is missing or incorrect, the IRS will notify the payer that they may be required to begin backup withholding for any payments made to the payee.

During the business formation process, a business’s owner, partners, investors, or shareholders will need to determine how the business will be structured. The selection of a business entity may determine how a company will be organized and managed, and it will also affect the taxes that the business will need to pay. By understanding how taxes apply to different types of business structures, owners or partners can determine which type of business entity will provide them with the most benefits.

Taxation for Different Types of Business Entities

The structure of a business will determine whether income taxes will apply to the business itself or to its owners, partners, and shareholders. If a business is a pass-through entity, profits and losses will be passed through to those who have an ownership share in the business, and individual income taxes will apply to these amounts. 

Some commonly used business entities are taxed as follows:

There are multiple different types of retirement accounts that a person may use to ensure that they will have the necessary financial resources later in life. These accounts can provide a number of tax benefits in addition to allowing money saved throughout a person’s career to grow significantly through well-managed investments. However, the treatment of these accounts by the IRS can sometimes become complicated, including in cases where a person dies either before or after they begin receiving distributions. Recently, the IRS issued a Proposed Rule that details the requirements that apply in these situations.

Changes to RMD Rules Under the SECURE Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was implemented in December 2019, made a few updates to the rules related to required minimum distributions (RMDs) for certain types of retirement accounts, including 403(b) plans and individual retirement accounts (IRAs). One major change was an update to the required beginning date (RBD) at which a person must begin receiving distributions. For people born after July 1, 1949, the RBD has been increased from age 70 ½ to 72.

The SECURE Act also addressed situations where an account owner dies before they have received distributions of all funds in an account or plan. A person will typically name one or more beneficiaries who will receive any remaining funds, and the SECURE Act details when different types of beneficiaries will be required to take distributions from a decedent’s account.

The internet has allowed many people to pursue opportunities that had not previously been available, including when raising money for business purposes or to support charitable causes. “Crowdfunding” has become a popular way to raise funds, and multiple platforms are available for people and businesses that are looking to connect with individual people and receive donations or sell products or services. For example, Kickstarter is a platform that many people and businesses use to raise funds to publish books, record and release musical albums, create video games, or pursue other opportunities. Platforms such as GoFundMe have also helped people raise money for charitable purposes through donations, such as to pay for medical bills. As these platforms become more popular, these who receive money through these methods will need to understand their tax reporting requirements and the situations where they may need to pay income taxes on the money raised.

Form 1099-K and Crowdfunding

Crowdfunding websites or services are required to report distributions of money to recipients in certain cases. This is done by filing a form 1099-K with the IRS, and a copy of this form will also be provided to the person or organization that has received funds. For tax year 2021 or any previous years, the reporting threshold for Form 1099-K was only met if a person received a total at least $20,000 through donations or other transactions from at least 200 people. However for tax years beginning January 1, 2022 or later, this threshold has been lowered to $600. If a person receives at least this amount, regardless of the number of transactions or donations, a Form 1099-K will be required.

Form 1099-K may be filed by a crowdfunding website or by a payment processor that receives payments from contributors and distributes the amounts raised to a recipient. While this form will be required in cases where contributors receive goods or services in return for their payments, it may not need to be filed in other cases, such as when people make charitable donations to a crowdfunding campaign.

In recent years, virtual currencies have become a popular investment. Many people have been able to realize significant gains through buying, selling, and trading cryptocurrencies, and they have also used these currencies to complete multiple types of digital transactions. As the use of virtual currencies has continued to rise, the federal government has taken steps to ensure that assets and transactions are reported properly so that they can be taxed by the IRS. The way these currencies are treated may change in the future based on proposals from the administration of President Joe Biden.

Changes to Cryptocurrency Taxes Could Raise Billions in Tax Revenue

A budget proposal released by the Biden administration in March 2022 included several possible changes to how virtual currencies may be treated. These include:

• Cryptocurrency taxes may shift to using mark-to-market rules. Currently, virtual currencies are treated as property, and capital gains taxes are applied when cryptocurrencies are sold or traded. Under a mark-to-market system, increases in value of cryptocurrencies would be treated as income, and in some cases, owners would be required to pay income taxes to the IRS. However, virtual currencies would not be considered to be securities or commodities, and mark-to-market rules would only apply for currencies classified in a new third category of assets. The Treasury Department will determine which types of currencies are included in this category depending on whether they are actively traded, whether they are regularly bought and sold using currency issued by the United States or other countries, and whether reliable price quotes are available.

  ...