Coming Soon: Merchants +Credits Cards=Millions of 1099s

Starting on 2011, credit card issuers will be required to report to the IRS the payments that merchants receive via credit and debit cards. Such payments will be reported on Form 1099 in conjunction with payee statements, which will therefore mandate reporting of that income by the merchant recipient.

This includes direct merchant transactions, as well as transactions such as those managed by PayPal and Bill Me Later, in addition to intermediary merchant-like entities such as EBay who have a hand in the transaction process. This is going to cause big headaches for card issuers when it goes into effect in three years, but no reporting will be necessary for merchants with under 200 payments per year or less than $20,000 in annual credit and debit card sales.

New Law Encourages Cash Donations for Midwest Disaster Relief

Taxpayers who make qualifying cash contributions for disaster relief efforts in the Midwest could benefit from a recently passed law that suspends the percentage-of-income limits that would normally apply when taxpayers deduct the contributions on their 2008 federal tax returns.

Under the Heartland Disaster Tax Relief Act, an individual taxpayer who itemizes deductions may choose to deduct qualifying cash contributions up to 100 percent of his or her adjusted gross income, reduced by deductions for other charitable contributions. Similarly, an electing corporation may deduct qualifying cash contributions up to 100 percent of its taxable income, reduced by deductions for other charitable contributions.

Cash contributions qualify for this special treatment if they are made to a public charity for disaster relief efforts related to certain areas in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska or Wisconsin. The areas must have been declared federal disaster areas on or after May 20 and before Aug. 1 of this year as a result of severe storms, tornados or flooding, and the areas must have been designated to receive individual assistance from the federal government because of the damage resulting from the disasters.

The contributions must be made no later than Dec. 31, 2008. “Cash” includes payments made by check or credit card.

Qualifying cash contributions of more than the amount allowed as a deduction can be carried over and deducted in succeeding tax years, subject to the normal limits. To substantiate the deduction, a taxpayer must obtain from the charity a written acknowledgment that the contribution was or will be used for relief efforts related to one or more of the Midwestern disaster areas.

In addition, deductions by individuals for qualifying contributions are not treated as itemized deductions for purposes of the overall limitation on itemized deductions. This means that, for taxpayers with higher adjusted gross incomes, the deduction for these qualifying contributions is not limited the way other itemized deductions are limited.

2009 Inflation Adjustments Expand Tax Benefits

For 2009, personal exemptions and standard deductions will rise and tax brackets will widen because of inflation adjustments announced today by the Internal Revenue Service.
By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2009. Key changes affecting 2009 returns, filed by most taxpayers in early 2010, include the following:
The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008.
The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.
The annual gift exclusion rises to $13,000, up from $12,000 in 2008.

President Bush Pardons Man From South Carolina

President Bush pardoned a Travelers Rest man on Monday, more than 12 years after he was convicted of income tax evasion and sentenced to 180 days of home confinement.

Carey C. Hice Sr., 67, said, "I thank Jesus Christ for it. I’m just elated."
Bush pardoned 13 others along with Hice, who paid a $13,000 fine after his 1996 conviction. The crime will be eliminated from Hice’s record.
Hice said he is a chemical company owner, a father of three and grandfather of five with no connections to the Bush administration. "I’m just an average person who never had been in trouble," Hice said.
The new round of White House pardons are Bush’s first since March and come less than two months before he will end his presidency, according to The Associated Press.

Hice said he asked for a pardon without the help of an attorney. He said the attorney he had initially hired either couldn’t or didn’t want to find the papers he needed. The process included an interview with the FBI, Hice said. "It’s not something I dwelled on," he said. "I did my best, told the truth the best I knew it." Under the Constitution, the president’s power to issue pardons is absolute and cannot be overruled.


Taxpayer's Sentence:

Carey C. Hice Sr. -Travelers Rest, S.C. Offense: Income tax evasion; 26 U.S.C. Section 7201 and 18 U.S.C. Section 2. Sentence:March 5, 1996; District of South Carolina; three years' probation condition on 180 days' home confinement and a $13,000 fine.

IRS Announces 2009 Mileage Rates

The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.
The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.
The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Myth: Taxpayer is not a “citizen” of the United States

Some individuals argue that they have rejected citizenship in the United States in favor of state citizenship; therefore, they are relieved of their federal income tax obligations. A variation of this argument is that a person is a free born citizen of a particular state and thus was never a citizen of the United States. The underlying theme of these arguments is the same: the person is not a United States citizen and is not subject to federal tax laws because only United States citizens are subject to these laws.

The Law: The Fourteenth Amendment to the United States Constitution defines the basis for United States citizenship, stating that all persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they
reside.” The Fourteenth Amendment therefore establishes simultaneous state and federal citizenship. Claims that individuals are not citizens of the United States but are solely citizens of a sovereign state and not subject to federal taxation have been uniformly rejected by the courts.

The IRS issued Revenue Ruling, warning taxpayers of the consequences of making this frivolous argument.

Myth: Wages, tips, and other compensation received for personal services is not income

This argument asserts that wages, tips, and other compensation received for personal services are not income, because there is allegedly no taxable gain when a person “exchanges” labor for money. Under this theory, wages are not taxable income because people have basis in their
labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed. A variation of this argument misconstrues section 1341, which deals with computations of tax where a taxpayer restores a substantial amount held under claim of right, to somehow allow a
deduction claim for personal services rendered.

Another similar argument asserts that wages are not subject to taxation where a person has obtained funds in exchange for their time. Under this theory, wages are not taxable because the Code does not specifically tax these so-called “time reimbursement transactions.” Some take a different approach and argue that the Sixteenth Amendment to the United States Constitution did not authorize a tax on wages and salaries, but only on gain or profit.

For federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services. Any income, from whatever source, is presumed to be income under section 61, unless the taxpayer can establish that it is specifically exempted or excluded.

In 1994,the court stated, “an abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived.” The IRS issued Revenue Ruling 2007-19, advising taxpayers that wages and other compensation received in exchange for personal services are taxable income and warning of the consequences of making frivolous arguments
to the contrary.

Myth: Filing "Zero" Reduces Your Tax Liability

Some taxpayers are attempting to reduce their federal income tax liability by filing a tax return that reports no income and no tax liability (a “zero return”) even though they have taxable income. Many of these taxpayers also request a refund of any taxes withheld by an employer. These individuals typically attach to the zero return a Form W-2, or other information return that reports income and income tax withholding, and rely on one or more of the frivolous arguments discussed throughout this outline in support of their position.

The Law: There is no authority that permits a taxpayer that has taxable income to avoid income tax by filing a zero return. Section 61 provides that gross income includes all income from whatever source derived, including compensation for services. Courts have repeatedly penalized
taxpayers for making the frivolous argument that the filing of a zero return can allow a taxpayer to avoid income tax liability, or permit a refund of tax withheld by an employer. Courts have also imposed the frivolous return and failure to file penalties because such forms do not evidence an honest and reasonable attempt to satisfy the tax laws or contain sufficient data to calculate the tax liability.

Returns: The Law

The requirement to pay taxes is not voluntary and is clearly set forth in section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts as determined by the tables set forth in that section. (Section 11 imposes a tax on the taxable income of corporations.)

Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the noncomplying individual to criminal penalties, including fines and imprisonment, as well as civil penalties.

In discussing section 6151, the Eighth Circuit Court of Appeals stated that “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the . . . tax, a duty which he chose to ignore.” United States v. Drefke, 707 F.2d 978, 981 The requirement to pay taxes is not voluntary and is clearly set forth in section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts as determined by the tables set forth in that section. (Section 11 imposes a tax on the taxable income of corporations.)

Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the noncomplying individual to criminal penalties, including fines and imprisonment, as well as civil penalties. In discussing section 6151, the Eighth Circuit Court of Appeals stated that “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the . . . tax, a duty which he chose to ignore.” United States v. Drefke, 707 F.2d 978, 981

There have been no civil cases where the Service’s lack of response to a taxpayer’s inquiry has relieved the taxpayer of the duty to pay tax due under the law. Courts have in rare instances waived civil penalties because they have found that a taxpayer relied on a Service misstatement
or wrongful misleading silence with respect to a factual matter. Such an estoppel argument does not, however, apply to a legal matter such as whether there is legal authority to collect taxes.

Payment Of Tax Is Voluntary

In a similar vein, some argue that they are not required to pay federal taxes because the payment of federal taxes is voluntary. Proponents of this position argue that our system of taxation is based upon voluntary assessment and payment. They frequently claim that there is no provision in the Internal Revenue Code or any other federal statute that requires them to pay or makes them liable for income taxes, and they demand that the IRS show them the law that imposes tax on their income.

The stance that is taken is that until the IRS can prove to these taxpayers’ satisfaction, which is effectively impossible because they never will be satisfied, the existence and applicability of the income tax laws, they will not report or pay income taxes. These taxpayers reflexively dismiss any attempt by the IRS to identify the laws, thereby continuing the cycle. The IRS has issued Revenue Ruling 2007-20, 2007-14 I.R.B. 863, discussing this frivolous position at length and warning taxpayers of the consequences of asserting it.

Direct Depositing Your IRS Refunds

Refunds:

Direct Deposit and IRS.gov Set Records-

More taxpayers chose to receive their refunds through direct deposit during 2008. The agency made 66 million direct deposit payments in 2008, up 8 percent from 61 million payments at the same time in 2007.

Overall, the IRS issued 107 million tax refund payments in 2008, up almost 2 percent from 105 million refund payments for the same time in 2007. As of Oct. 31, the average refund for 2008 was $2,371, up 4 percent from $2,280 at the same time in 2007.

What Do Revenue Officers Do ?

If you have tax debt, and you have recently been assigned a Revenue, you may be asking yourself what they do? Well Revenue Officer's assigned to a taxpayer's accoutn due to negligence on the taxpayers part in regards to unpaid liabilities.

A revenue officer is the highest level of the collections chain. When a revenue officer is assigned to you, they have the ability to levy you into the ground. If you happen to own your own business where you have employees, the IRS can seize your property and close your business if you to not comply to what they ask of you.

Most Revenue Officers are more concerned with staying current on taxes going forward as opposed to back taxes. If you own your business, it would behove you to file your current returns to get in compliance. And, because your business is assigned to a Revenue Officer, the IRS will collect to the extent that there is funds available by the business and the responsible individuals.

Revenue Officers do not consider OICs (Offer In Compromise) - they have to send it to a Centralized OIC Unit in Holtsville, NY or Memphis, TN who can send it out to a Field Office (Not your RO though) to make an independent determination (they do this if you have a business or have trust fund tax liabilities).

IRS Partners Host Free Tax Help for Low-Income, Elderly Taxpayers

Nearly 12,000 free tax preparation sites will be open nationwide this year as the Internal Revenue Service continues to expand its partnerships with nonprofit and community organizations performing vital tax preparation services for low-income and elderly taxpayers. The IRS Volunteer Income Tax Assistance (VITA) Program offers free tax help to people who earn less than $40,000. The Tax Counseling for the Elderly (TCE) Program offers free tax help to taxpayers who are 60 and older.

Today, more than 150 of these partners and local officials will be hosting news conferences or issuing news releases nationwide to highlight the Earned Income Tax Credit and their free tax preparation programs. The EITC is already the government's largest cash assistance program targeted to low-income Americans. However, not all eligible taxpayers may be aware or claim the credit. Taxpayers need to bring to the

VITA/TCE sites the following items:

* Photo identification
* Valid Social Security cards for the taxpayer, spouse and dependents
* Birth dates for primary, secondary and dependents on the tax return
* Current year’s tax package, if received
* Wage and earning statement(s) Form W-2, W-2G, 1099-R, from all employers
* Interest and dividend statements from banks (Forms 1099)
* A copy of last year’s federal and state returns, if available
* Bank routing numbers and account numbers for direct deposit
* Other relevant information about income and expenses
* Total paid for day care
* Day care provider's identifying number

To file taxes electronically on a Married Filing Jointly tax return, both spouses must be present to sign the required forms. Trained community volunteers can help eligible taxpayers with all special credits, such as the Child Tax Credit or Credit for the Elderly. Also, many sites have language specialists to assist people with limited English skills. In addition to free tax return preparation assistance, most sites use free electronic filing (e-filing).

Individuals taking advantage of the e-file program will receive their refunds in half the time compared to returns filed on paper — even faster if taxpayers have their refund deposited directly into their bank accounts.As part of the IRS-sponsored TCE Program, AARP offers the Tax-Aide counseling program at nearly 8,000 sites nationwide during the filing season. Trained and certified AARP Tax-Aide volunteer counselors help people of low-to-middle income with special attention to people age 60 and older. To locate the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's Internet site.

The military also partners with the IRS to provide free tax assistance to military personnel and their families. The Armed Forces Tax Council (AFTC) consists of the tax program coordinators for the Army, Air Force, Navy, Marine Corps and Coast Guard. The AFTC oversees the operation of the military tax programs worldwide, and serves as the main conduit for outreach by the IRS to military personnel and their families. Volunteers are trained and equipped to address military specific tax issues, such as combat zone tax benefits and the effect of the EITC guidelines.

Frivolous Claims To Avoid

The Internal Revenue Service today issued a notice that lists four additional erroneous legal positions that taxpayers should refrain from using as an excuse to avoid paying their taxes.
An individual or group may not avoid paying their fair share of taxes by making “frivolous” legal arguments such as those listed in this notice. The IRS publicizes these frivolous claims to help taxpayers understand the law and avoid penalties.
Notice 2008-14 lists positions identified as frivolous for purposes of the penalty under section 6702 of the federal tax code for filing a frivolous tax return or submitting to the IRS a frivolous request for a collection due process hearing or application for an installment agreement, offer-in-compromise, or Taxpayer Assistance Order.
Taxpayers who file a tax return or make a submission based on a position listed in this notice are subject to a $5,000 penalty. This notice adds to the positions listed in Notice 2007-30, 2007-14 I.R.B. 883. The positions that have been added are found in paragraphs 9(g), 11, 14, and 25.
The four new frivolous claims pertain to the following:


*Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
*Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.


*A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
*Certain instances of misuse or excessive use of the section 6421 fuels credit.


In 2006, Congress increased the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

IRS Announces 2009 VITA Grants

The Internal Revenue Service has awarded almost $8 million in matching grants to support its Volunteer Income Tax Assistance program.Under the VITA Grant Program, the IRS awarded matching grants to 111 organizations that plan to offer free tax preparation sites in 2009. The sites will be located in all 50 states and the District of Columbia.“This is the first time we’ve been able to provide matching grants to support the VITA program. These grants can be used to expand free services to some of the millions of taxpayers served each year by these VITA sites and their volunteer tax preparers,” said Richard E. Byrd, Jr., IRS Commissioner, Wage and Investment Operating Division.The funds will be used to:

Enable VITA programs to extend services to underserved populations and hardest to reach areas, both urban and non-urban
Increase the capacity to file returns electronically
Heighten quality control
Enhance training of volunteers
Significantly improve the accuracy of returns prepared by the VITA sites

There was an overwhelming response to the first-ever VITA grant with 379 organizations submitting applications requesting more than $30 million in matching funds.VITA partners are organizations that provide free federal tax return preparation and electronic filing for low to moderate income individuals. For tax year 2008, individuals and families with an adjusted gross income of $42,000 are eligible for assistance.The VITA program has enjoyed tremendous support in the years since its creation in 1969. Along with Tax Counseling for the Elderly, another volunteer return preparation program sponsored by IRS for older individuals, more than 3 million tax returns and economic stimulus payment requests were prepared and filed in 2008 at nearly 12,000 locations nationwide.

Monthly Disposable Income

Did you know that Monthly Disposable Income is the determining value of how much the IRS will negotiate a payment for? The key is knowing what goes in to determining how much you can afford and what the IRS deems as a necessary living expense.

As a general rule, the IRS has standards for food, clothing,car payment,medical expenses. Say for instance, if one person lives in the household, the IRS standard for food,clothing is $507 with medical expense as $57, car payment would be around $489. The IRS also allows for a car maintenance standard but has to take in consideration the state/county one lives in.

When attempting a resolution with the IRS, a taxpayer will have to provide full financial disclosure (of liability exceeds $25,000) including but not limited to utilities, mortgage payments, car payments, other secured debt, medical payments, and car insurance. Other permissible expenses would need to be court ordered or secured by another financial institution.

Determining ones Monthly Disposable Income (MDI) means taking your income minus your expenses. If you have tax liability, it would behoove you to hire a professional to assess what your best possible outcome by determining your MDI. There are so many factors to take into consideration (while determining this MDI) that the average taxpayer is not inclined to know.

There are tax professionals in a growing industry that can help you today !

Obama's Plans To Tax The MLB Teams

Going once...going twice...signed by the major league baseball team willing to pay a signing bonus before December 31st.

That is what we might hear from baseball players' agents after they have considered the real possibility that Barack Obama's intention to hike the tax rate on the wealthiest Americans will impact their clients.

You see, the current minimum yearly salary for a big league player is $400,000. That puts the lowliest of bench warmers and pinch hitters into the top 1% of all wage earners in this great country. Obama campaigned on the promise of restoring the top income tax rate to 39.6%, the applicable level during the Clinton administration.

That minimum salary figure equals the increase in yearly taxes that will be paid by a major leaguer who makes $10,000,000 a year if the Obama tax plan becomes law. Incredible. So what's a super-agent to do in this first week of activity in the free agent market?

He has to devise a strategy to get major league clubs to pay some of a player's 2009 compensation prior to the end of 2008. The only way that can happen is in the form of a signing bonus and a quick negotiation before the end of the year.

This year I think he'll try to convince the clubs that it may be in their best interest as well as a tax advantage for them to characterize salary as a bonus.

Penalty Abatement

Recently I had a client that assumed we would be able to lower their liability for them. This is a very broad statement and one that is possible, but needs some major substantiation. According to the IRS, the only reasons they would abate penalties on liability would be for the following reasons:

* Incarceration
* Lost/Misplaced Documents
* Severe Medical Condition
* Erroneous Advice gievn by an IRS agent

[http://www.irs.gov/pub/irs-pdf/i843.pdf]


All this would prevent a taxpayer from being able to physically file their returns.

The IRS will never abate interest, but would possibly abate penalties provided they meet the above qualifications.

For example, I had a client that said he was the primary care giver while going through a difficult
divorce. He asked if he qualify for penalty abatement, to which I said unfortunately not, because he physically able to file his returns to consequently prevent further penalties. If he were the one with a medical condition, then the outcome would be different and would be more advantageous to file for penalty abatement.

Part Two Of SE IRA Deduction

Qualifications to claim deductions
If you are self-employed, you may qualify for a tax deduction for contributions you make to a qualified retirement plan. You must have self-employment income to qualify. Self-employment income consists of net profits from Schedule C or Schedule F.

The deduction is the total plan contributions you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible. You can avoid examinations and additional assessments by making sure you qualify for the deduction.

The self-employed retirement plan deduction may not be allowable if:
- Form 1040, Schedule SE, Section A (if applicable), Line 4, is less than the amount on Form 1040, Line 28.
- Form 1040, Schedule SE, Section B (if applicable), Line 6, is less than the amount on Form 1040, Line 28.
- Form W-2 indicates an individual is a Statutory Employee and the amount in Box 1 is less than Form 1040, Line 28.


Deduction limits for the self employed
If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment — which takes into account both of the following deductions:
- Deduction for one-half of your self-employment tax.
- Deduction for contributions to your own SEP-IRA.

Use the rate table or worksheets in chapter 5 of IRS Publication 560, “Retirement Plans for Small Business” for figuring your allowable contribution rate and tax deduction for your SEP-IRA plan contributions.


Deducting contributions
When to deduct contributions for a year depends on the tax year on which the SEP is maintained. If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year.

For example, you are a fiscal year taxpayer whose tax year ends June 30. You maintain a SEP on a calendar year basis. You deduct SEP contributions made for calendar year 2008 on your tax return for your tax year ending June 30, 2009.

Self Employees Can Deduct Retirement Plan Expense

Retirement plans are not just for big businesses. They are also available for sole proprietorships. If you are self-employed small business owner, you can set up a qualified retirement plan for yourself and your employees.

If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustee fees if contributions to the plan do not cover them.

The Internal Revenue Code provides significant tax incentives for employers that establish and maintain retirement plans that comply with the requirements of the Code. Such plans include Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) plans.

Generally under these plans, contributions that are set aside for retirement may be currently deductible by the employer, but are not taxable to the employee until distributed from the plan.
You must set up and fund a qualified retirement plan such as a SEP or SIMPLE-IRA. No matter what type of plan for the self-employed you are considering, you must actually make contributions to a qualified and properly maintained retirement plan account. This fact sheet provides a quick look at preventing incorrect deductions for retirement plan.