CARL WATTS & ASSOCIATES

February 7th, 2011

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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We mentioned before that, as a household employer, you are required to report Social Security and Medicare taxes, federal income taxes withheld (if any) and federal unemployment taxes for your household employees on Schedule H (Form 1040).
If this is the case, you also have to file Form 941 to report, on a quarterly basis, wages you have paid, federal income tax withheld, both your and your employees’ Social Security and Medicare taxes, and other credits and payments.
However, if you run your own business and have other employees in addition to your household employees, then you should report your annual FUTA (Federal Unemployment Tax Act) tax on Form 940 for all your employees.
Household Employees
Addendum
If you are a business owner and you hire or work with individual contractors and/or businesses, then you should use Form W-9 to officially ask the individual or business to provide their name, address and taxpayer identification number or business tax identification number. You don’t have to file Form W-9, just keep it with your other records.

If you pay an individual contractor with whom you regularly work more than $600 during the course of a calendar year, then you are required to issue Form 1099-MISC to report the income received by the contract worker, which may be subject to self-employment tax.


Capital Gains / Losses
Capital assets can be defined as almost everything you own and use for personal purposes, pleasure or investment (stocks, bonds, mutual funds shares, property, etc.).
When you sell a capital asset, the difference between the amount you sell it for and your cost basis (which is usually what you paid for it plus any related expenses) is a capital gain or a capital loss.

Capital gains and losses are divided by the calendar into long-term or short-term, depending on how long you hold the asset before you sell it. If you own a property for a year or less, then your gain or loss is short-term. If you hold an asset for more than a year, then of course your gain or loss is long-term.


There are exceptions to the holding rules:
  • Non-business bad debts are treated as short-term losses;
  • Capital gain distributions are considered long-term;
  • Inherited property is treated as long-term as well.

From the taxation point of view, short-term gains are treated like ordinary income (which includes wages, interest and dividends), while long-term profits are treated much more favorably, at 15% for taxpayers in the top four tax brackets and can drop up to 0% for lower-income individuals.

There are, of course, exceptions:

  • Long-term gains on collectibles such as stamps, antiques and coins are taxed at 28% instead of 15%;
  • Gains on real estate attributable to depreciation are taxed at 25%, unless you’re in the 10% or 15% bracket.


If you invest in stocks, bonds and mutual funds through a tax-deferred retirement account, then your investment profits are not reported as capital gains, instead income from this account is tax-deferred until the money is withdrawn, when it is taxed as ordinary income.

If you have capital losses that exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, up to an annual limit of $1,500 if single and $3,000 if married filing jointly.

If your capital losses are more than the annual limit on deductions, the loss can be carried over to the following year.

If you have your own business, your business assets (equipment, furniture, tools) are taxed as ordinary gains and are reported on Form 4797.

If you are an investor, you need to calculate gain or loss on each investment transaction and then report it on Schedule D of Form 1040.
Schedule D is very similar to a spreadsheet containing all the essential information about each investment you sold during the year, helping you to figure out your total gains or losses. To assist you with this schedule, you should have a Form 1099-B sent by your broker.


Capital Gain Distributions

If you invested in a Mutual Fund, then you know that the fund distributes profits to shareholders in the form of capital gain distributions.

When you sell your shares in the mutual fund, you need to calculate your capital gain or loss for every mutual fund share you sold.

There may be a different cost basis and a different holding period for each share and you will have to choose a method for calculating your gain.


The IRS allows the use of four different accounting methods for calculating your gain:

  • Actual cost basis using specific identification, which enables you to choose which shares to sell for the greatest possible tax benefit. For instance you may sell the most profitable shares to offset other losses, or sell the least profitable shares to minimize the capital gains tax.

  • Actual cost basis using FIFO (first-in-first-out) identification, meaning that when you calculate your gain you assume that the first shares sold are the first shares you bought.
  • Average cost basis, single-category method, where the average cost basis is the total purchase price of all shares divided by the number of shares owned. When you sell, it is assumed that shares are sold on FIFO basis and the capital gain is calculated using the holding period of the oldest shares being sold.
  • Average cost basis, double category method, where you must separate your shares into long-term and short-term investments and then calculate the average cost basis for each category of shares.


As you can see, calculating your gain or loss can be complicated and time-consuming, so it is always better to get professional help.