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EXPENSING MEALS & ENTERTAINMENT
In Summary
The IRS considers the cost of Meals & the cost of Entertainment as two different activities. In both cases, the expense is 50% deductible.
- Meals can only be deducted when an employee is away from their hometown.
- Entertainment is not limited to the “out-of-town” requirement like a meal, but it does require another person in the meal that is non-employee.
Subcontractors should not be reimbursed for Meals / Entertainment under these categories. Instead, they should be reimbursed via an invoice from the contractor in the same fashion as their payment for services. This reimbursement will appear as part of the 1099 reporting. The contractor may then deduct the Meal/Entertainment charges as a Business Expense.
Details on the Subject
MEALS: AWAY FROM HOME OFFICE
If you’re traveling for business, away from home, your travel expenses are partially deductible. While you can deduct 100 percent of your lodging and mileage expenses, you can only deduct 50 percent of the meals you purchase. You may include the entire cost of the bill when you calculate the expense, including food, beverages, sales tax, and gratuity.
Away from home. This is defined as being outside your general area of work and you have to get rest while away.
Business owners can only take this deduction if they are truly out of town. In the eyes of the IRS, that means you’re outside of the general area where your work is located. To qualify as a business trip, the period of time must be substantially longer than a day’s work and you need to rest or sleep while away. So unless it’s exceptionally long, a day trip doesn’t qualify.
50% Deductible. The IRS will only allow this expense to be 50% deductible. This means that
Business Related. Before you deduct the expense, make sure that there’s a legitimate business activity connected to the trip. The IRS uses the terms:
- Ordinary
- Necessary
These terms are used to determine whether a meal is deductible as a business related expense.
Traveling for a conference, seminar, trade show, continuing education, or to visit a customer or potential client are all valid business activities.
MEALS: WHILE ENTERTAINING
As long as there’s a business connection, meals can be considered a deductible form of entertainment. You need another person to make this one work — there’s no deduction allowed if it’s just you. However, you may write off the cost of your meal when you’re purchasing it along with a meal for a current customer, potential client, or employee. To write it off, there must be some substantial business discussion before, during, or directly after the meal. If you expect to get some income or business benefit from providing the meal, it also qualifies as a deduction.
50% Deductible. As with travel-related meals, you can only deduct 50 percent of meals as entertainment expense.
MEALS: FOR EMPLOYEES / WORKERS
If you have employees, your meal expenses are 100 percent deductible under the following examples:
- For the Benefit of Employee. Occasional small snacks and meals that are purchased for the benefit of employees. Doughnuts and coffee purchased for an office meeting are a perfect example.
- To Facilitate Working Hours. Lunches and dinners brought in to facilitate working through lunch or working late also count.
- Company-wide Events. The cost of food and drink involved in hosting a company-wide event, like an annual picnic or a summer outing.
100% Deductible. Unlike the ruling of Meals & Entertainment, the IRS allows the company to deduct 100% of the expense, including the cost to have the food served and cleanup.
Two elements that the IRS looks for is:
- Whether the meal is for the benefit of the employee, and
- That more than 50% of the employees are benefiting from these meals.
It could be said that for companies with multiple departments who purchase meals at different times, as long as the company as a whole and by year’s end has benefited in aggregate >50% of the total employees, then this requirement is met. Furthermore, a budget should be in place to assure this compliance is achieved.
Final Word
Tax guidelines and requirements for meal deductions are surprisingly complex. Luckily, there are helpful resources available to help you sort through it. IRS Publication 463 has all the information you need but can be time-consuming to navigate. Check out our other article on how to maximize your meals and entertainment tax deductions if you want to learn more.
REFERENCES
- A blog from Quickbooks: https://quickbooks.intuit.com/r/taxes/when-can-you-write-off-meals-on-your-taxes/
- A blog from a CPA Firm: http://www.hpccpa.com/how-to-tell-if-meals-are-50-percent-or-100-percent-deductible
- IRS Publication 463
- From the IRS website: See below.
payroll taxes - for the self employed
SUMMARY
Did you know that as a Self-Employed, you must not only pay Income Taxes but you are responsible for your Payroll Taxes? These are also known as FICA taxes and are based on the net earnings from self-employment.
What are the taxes applicable to payroll? In short, people refer to Payroll Taxes as:
- Income tax withholding
- Social security - old age, survivorship and retirement benefits (12.4% for wages upto $118,500 in 2016)
- Medicare - hospital insurance (2.9%, no limit on wages)
Therefore the social security and medicare taxes (otherwise known as FICA) need to be paid even though you are not liable for Income Tax. That is a total of 15.3%. You pay these taxes on income upto $118,500 (for 2016).
What are the forms that need to be used?
- Complete Form 1040 ES to estimate your taxes. The form is not necessary if you are basing the current year taxes on the taxes from your prior year.
- Pay your taxes. The most efficient way is to use
- For individuals (includes pass-through entities such as S Corp): IRS Direct Pay, or
- For businesses: EFTPS website.
Here are the filing requirements.
These must be filed on a quarterly basis, and is due by the 15th day following the closing of the quarter. Example, for the quarter ending March 31, you will need make a deposit by April 15th.
This website/article is intended to be used for general information only and does not carry the force of legal opinion.
You may contact me at LeoViana.CPA@gmail.com or write me a comment under Contact Us.
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DETAILS ON THE SUBJECT
The Big Picture of paying taxes for Self Employed
The IRS requires that any earnings made during the year, from self-employment, rents, interests, require that the applicable taxes be paid quarterly as we earn it. If your business is seasonal, the IRS may allow you to pay taxes in the quarters you make your sales.
So then how do we determine the taxes we need to pay? We need to determine whether we base it on last year's tax return or do we calculate an estimate for the current year. The minimum amount that must be paid is the smaller of:
- 100% of the taxes paid in the prior year, or
- 90% of the current year’s estimated taxes.
The value select is then divided by 4 equal installments to be paid quarterly. This amount is due by the 30th of the month following the closing of the applicable quarter.
Once the quarterly payment is determined, visit the IRS website to pay the amount due
- For individuals: IRS Direct Pay, or
- For businesses: EFTPS website.
You may also mail your payment using a payment voucher, Form 1040-V.
In order to submit payment, the IRS requires a unique number to identify you. The number could be any of the following:
- Social Security number (SSN): for US citizens, permanent residents, or temporary aliens to pay taxes as an individual.
- Individual Taxpayer Identification Number (ITIN): those individuals that don’t qualify for a SSN, such as a non-resident alien and foreign national, but are required to file certain returns.
- Employer Identification Number (EIN) - every business / employer required to pay taxes needs to use this number to pay taxes for the business.
Using this unique identifier, the IRS is able to match you quarterly deposits to your tax return when filed at year-end.
Here is the link to acquire an ITIN from the IRS.
How to determine your Self-Employment Taxes
In the U.S., we are required to pay:
- Income Taxes - revenues that go to fund federal programs (interstate highways, military, social programs, etc.). The tax rate is progressive, meaning the % value increases as your income increases.
- Social security - old age, survivorship and retirement benefits (12.4%)
- Medicare - hospital insurance (2.9%)
Know the terminology. The two components of taxes are:
- Self-Employment Taxes refers to social security and medicare deductions.
- Estimated Taxes refers to income taxes.
Taxes are calculated from Net Earnings. These earnings may derive from:
- Self-employment
- Rental income
- Dividends & interest earned.
These earnings are not salaries earned from employment. For wages (another term for salary), your employer is required to withhold a % of your salary, of which is then paid to the IRS.
Net Earning is revenue less those expenses necessary to conduct your business.
The employer-equivalent of the Self-Employment Tax (7.65%) is deducted to arrive at your Estimated Taxes. Once you determine what you Net Earnings are, you then deduct 7.65% to arrive at the Taxable Amount. For example:
Calculating Self-Employment Taxes
Utilizing Form 1040ES, below is a summary of the major components to estimate your Self-Employment taxes.
Self-Employment (insert excel spreadsheet).
Estimated Taxes (insert excel spreadsheet).
FILING REQUIREMENTS
Amounts to Pay to Avoid Penalty
You are not required to file quarterly tax payments if:
- You expect to have a tax liability of more than $1,000 when your tax return is filed,
Or, you pay throughout the year the lesser of:
- 100% of the prior year's tax liability (110% if AGI > $150,000), or
- 90% of the current year’s liability.
Example.
- Prior Year: Bob's total tax on his 2015 return was $21,000; AGI was $158,000; so for this calculation, Bob will use $23,100 ($21,000 x 110%).
- Current Year: The expected tax for 2016 is $34,000.
Because Bob had more than $150,000 of AGI in 2015, he must use 110% of the prior year tax liability, thus $23,100. So he determines his required annual payment is the lesser of the two amounts $23,100 and $34,000.
Deadlines
Taxes need to be paid quarterly throughout the year. They are due by the 15th of the month following the closing of the quarter. For example, the quarter ending March 31 needs to be paid by April 15th.
REFERENCE