Worker Classification is Still Important

Over the last year, many companies have experienced “workforce fluctuations.” If your business has engaged independent contractors to address staffing needs, be careful that these workers are properly classified for federal tax purposes.

Tax obligations

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).

No uniform definition

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.

The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Consult a CPA before filing Form SS-8 because doing so may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Latest developments

In January 2021, the Trump Administration published a final rule revising the Fair Labor Standards Act’s employee classification provision. The rule change was considered favorable to employers. However, as of this writing, the Biden Administration has delayed the effective date of the final rule change. Stay tuned for the latest developments and contact us for any help you may need with employee classification.

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Be Prepared for Taxes on Social Security Benefits

Whether you’ve filed your 2020 tax return or soon will, you probably don’t want any surprises. One thing that takes many older people off-guard is getting taxed on their Social Security benefits.

Will you be taxed and how much will you have to pay? That depends on your other income. If you’re taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.) This doesn’t mean you’ll pay 50% to 85% of your benefits back to the government. It means you may have to include 50% to 85% of them in your income subject to regular tax rates.

Calculate provisional income

To determine how much of your benefits are taxed, you must calculate your “provisional income.” Doing so involves adding certain amounts (for example, tax-exempt interest from municipal bonds) to the adjusted gross income on your tax return.

If you file jointly, you’ll need to add your spouse’s income, and then further add half of the Social Security benefits that you and your spouse received during the year. The result is your joint provisional income.

If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed. If your provisional income is between $32,001 and $44,000, and you file jointly, you must report up to 50% of your Social Security benefits as income. If your provisional income is more than $44,000, and you file jointly, you need to report up to 85% of your Social Security benefits as income on Form 1040.

For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income. And if your provisional income is more than $34,000, the general rule is that you need to report up to 85% of your Social Security benefits as income.

Sidestep a surprise

If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.

Contact us for help in accurately calculating your provisional income. We can also assist you with other aspects of tax planning before and during retirement.

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How the Consolidated Appropriations Act Affects Education Funding

The Consolidated Appropriations Act (CAA), signed into law late last year, contains a multitude of provisions that may affect individuals. For example, if you’re planning to fund a college education or in the midst of paying for one, the CAA covers two important areas:

  1. Student loans. The CARES Act temporarily halted collections on defaulted loans, suspended loan payments and reduced the interest rate to zero through September 30, 2020. Subsequent executive branch actions extended this relief through January 31, 2021. The CAA leaves in place that expiration date.

Also under the CARES Act, employers can provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The payment can be made to the employee or the lender. The CAA extends the exclusion through 2025. The longer term may make employers more willing to offer this benefit.

  1. Tax credits. Qualified taxpayers generally can claim an education tax break with the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Previously, though, the two credits were subject to different income phaseout rules, with the AOTC available at a greater modified adjusted gross income than the LLC. In addition, before the new law, there was a “higher education expense deduction” for qualified tuition and related expenses that taxpayers could opt to claim instead of the credits.

The CAA adopts a single phaseout for both the AOTC and the LLC, effective for tax years beginning after December 31, 2020. The credits will phase out beginning at $80,000 for single filers and ending at $90,000. For joint filers, they will begin to phase out at $160,000 and disappear at $180,000. The new law also repeals the higher education expense deduction. Instead, taxpayers can claim the LLC credit.

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Blog Header Image with the headline "IRS Extends IRA, HSA Contribution Deadline to May 17, 2021."

IRS Extends IRA, HSA Contribution Deadline to May 17, 2021

On Tuesday, March 30, the Internal Revenue Service provided another deadline postponement for taxpayers making certain contributions.

In extending the deadline to file Form 1040 series returns to May 17, 2021 the IRS is postponing to the same date the time for individuals to make the following 2020 contributions:

  • Individual retirement arrangements (IRAs and Roth IRAs)
  • Health savings accounts (HSAs)
  • Archer Medical Savings Accounts (Archer MSAs), and
  • Coverdell education savings accounts (Coverdell ESAs).

Finally, the IRS again stated that the due date for 2021 1st quarter estimates has not been extended and remains due April 15, 2021.

For additional guidance on this extension, feel free to contact your preferred office. We are here to help!

Individual Tax Filing Deadline Extended to May 17, 2021

On Wednesday, March 17, the U.S. Treasury Department and Internal Revenue Service announced that the federal income filing date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. In addition, any balance due payment for the 2020 tax year is now due on May 17, 2021, instead of April 15, 2021. In line with the federal extension and payment due dates, the Illinois Department of Revenue and Missouri Department of Revenue have also extended individual income tax filing and payment deadlines from April 15, 2021, to May 17, 2021.

First Quarter 2021 Federal and State Estimated Tax Payments

The May 17, 2021 filing and payment of balance due extensions for 2020 individual tax returns do not apply to the first quarter estimated tax payments for tax year 2021. These tax payments remain due on April 15, 2021.

Corporations, Trusts, and Estates

The May 17, 2021 extensions as noted above do not extend the due date of C-Corporations, trust returns, and estate returns and are still due by April 15, 2021.

Hours of Operation

At Scheffel Boyle, our experienced tax professionals have been working extended hours. As such, our offices will continue to operate with our extended hours until April 15. We urge our clients to continue to bring in their tax information to our offices and we will keep you informed.

As always, feel free to contact your preferred office if you have any questions or require additional assistance. We are here to help!

President Biden Signs American Rescue Plan Act

Last Thursday, President Joe Biden signed the American Rescue Plan Act into law. The $1.9 trillion coronavirus relief bill includes several different provisions such as $1,400 stimulus checks for individuals, extended unemployment benefits, and aid for small businesses and not-for-profits. Click here to read the full text of the law.

We encourage you to reach out our professionals for questions about these provisions. We are here to help!

A summary of key provisions from the final bill is as follows:

Individual Provisions

  • Recovery Rebate Credits/Stimulus Checks
    • Taxpayers with adjusted gross income (AGI) under $75,000 will receive $1,400 direct payments. Married taxpayers filing jointly with AGI up to $150,000 will receive $2,800
      • Eligible taxpayers will also receive $1,400 for each dependent
      • Advance payments of the credits will be sent as economic impact payment checks
  • Unemployment Benefits
    • The first $10,200 in unemployment benefits for taxpayers earning less than $150,000 per year is now tax-free effective for the 2020 tax year
    • If you have already filed for 2020, you will need to file an amended return.
    • Extends weekly federal benefit of $300 a week through September 6, 2021
    • Extends pandemic unemployment benefits for gig workers and self-employed individuals
  • Premium Tax Credit (Related to Health Insurance)
    • Expands the Premium Tax Credit for 2021 and 2022 by changing the applicable percentage amounts
    • Taxpayers who have received too much in advance premium tax credits in 2020 will not have to repay the excess amount
    • A special rule is added that treats a taxpayer who has received, or has been approved to receive unemployment compensation for any week beginning during 2021 as an applicable taxpayer
  • Earned Income Tax Credit
    • The credit would be allowed for certain separated spouses
    • Threshold for disqualifying investment income raised from $2,200 to $10,000
    • Taxpayers are allowed to use their 2019 income instead of 2021 income in figuring the credit amount
  • Child Tax Credit
    • Expands the Child Tax Credit by:
      • Making the credit fully refundable for 2021;
      • Making 17-year-olds eligible as qualifying children for 2021 only; and
      • Increases the amount of the credit to $3,000 per child ($3,600 for children under 6)
    • The Child Tax Credit would phase out for taxpayers with income over $150,000 for married taxpayers filing jointly, $112,000 for heads of households, and $75,000 for others
    • Payments of 50% of the credit can be received in advance and will run from July through December 2021. The IRS will create an online portal allowing taxpayers to opt out of advance payments or adding information that could modify the amount received
  • Child & Dependent Care Credit
    • The credit is fully refundable for 2021 only
    • The bill increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021 ($5,250 for married filing separate)
    • The max credit is now worth 50% of eligible expenses up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual or up to $8,000 for two or more.
    • Credit reduction begins at AGI over $125,000. For households over $400,000, the credit can be reduced below 20%.
  • Family & Sick Leave Credits
    • Extends credits established by the Families First Coronavirus Response Act until September 30, 2021
    • The fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave
    • Increases the limit on the credit for paid family leave to $12,000
    • The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60
    • Paid leave credits will be allowed for leave that is due to COVID-19 vaccination
    • The limitation of overall days taken into account for paid sick leave will reset after March 31, 2021
    • Credits are expanded, allowing 501(c)(1) governmental organizations to take them
  • Student Loans
    • The act specifies that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026

Business Provisions

  • Paycheck Protection Program (PPP)
    • Allocates an additional $7.25 billion for PPP forgivable loans; applications scheduled to close on March 31, 2021
  • Restaurant Revitalization Fund (RRF)
    • Allocates $28.6 billion for food and beverage establishments
    • RRF grants equal to the pandemic-related revenue loss of the entity, up to $10 million per entity, or $5 million per physical location (limited to 20 locations)
    • RRF grants are calculated by subtracting 2020 revenue from 2019 revenue and can be used for certain eligible expenses including: payroll costs, mortgage payments, rent, utilities, maintenance expenses; supplies, food and beverage expenses; covered supplier costs; operational expenses; paid sick leave; and any other expense determined to be essential to maintaining the business.
    • Sets aside $5 billion for eligible applicants with 2019 gross receipts of $500,000 or less
    • During the first 21 days of the grant period, the SBA will prioritize applications from restaurants owned and operated or controlled by women, veterans, or socially and economically disadvantaged individuals
    • Funds from RRF grants should not be included in the gross income of the person who receives the grant
  • Economic Injury Disaster Loan (EIDL)
    • Allocates $15 billion to Targeted EIDL grants to businesses located in low-income communities that have no more than 300 employees and have suffered an economic loss more than 30% of gross receipts
    • Funds from Targeted EIDL grants should not be included in the gross income of the person who receives the grant
  • Employee Retention Credits (ERC)
    • Allows eligible employers to claim a credit for paying qualified wages to employees
    • Extends the program through the end of 2021
  • Shuttered Venue Operators (SVO) Grant
    • Allocates $1.25 billion to the SVO grant program

SBA issues interim final rule revisions to PPP

The U.S. Small Business Administration recently laid out its interim final rule revisions to the Paycheck Protection Program. These changes, which are effective immediately, relate to maximum loan amount calculations and program eligibility and apply to PPP loans approved after the effective date of the rule.

The SBA will be accepting PPP loan applications through March 31, 2021.

The key interim final rule revisions to the Paycheck Protection Program are as follows:

  • Individuals who file an IRS Form 1040, Schedule C can calculate their maximum loan amount using gross income instead of net profits
    • At this time, Schedule C borrowers cannot increase the amount of a PPP loan they have already applied for, received, or had forgiven by the SBA
    • With this revised funding formula, First Draw Schedule C borrowers with over $150,000 in gross receipts are subject to review of the good faith loan necessity certification
  • Removes eligibility restriction that prevented business owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans
  • Removes eligibility restriction that prevented businesses with owners who are delinquent or in default of their federal student loans from obtaining PPP loans

In addition to the eligibility and calculations updates, the SBA also provided revisions for six application forms, including:

  • Updated PPP borrower first-draw (Form 2483) and second-draw (Form 2483-SD) application forms
  • PPP first-draw (Form 2483-C) and second-draw (Form 2483-SD-C) borrower application forms for Schedule C filers using gross income
  • A revised lender application form for PPP loan guaranty (Form 2484)
  • A revised PPP second-draw lender application form (2484-SD)

If you have any questions about these changes, the program, or if you have any additional concerns, please contact one of our trusted professionals at Scheffel Boyle. We are here to help!

House passes $1.9 trillion COVID-19 relief package

The U.S. House of Representatives passed the latest COVID-19 relief package early Saturday morning. The bill, titled The American Rescue Plan Act of 2021, H.R. 1319), includes several different provisions such as $1,400 stimulus checks for individuals, extended unemployment benefits, and aid for small businesses and not-for-profits. Click here to view the full text of the bill.

The bill is anticipated to be signed before March 14, when current extended unemployment benefits are set to expire.

At the time this blog was posted, these provisions have not been signed into law. Additional revisions may also be made to the bill by the Senate before their deciding vote. We encourage you to reach out to one of our professionals for questions about these provisions. We are here to help!

A summary of key provisions from the proposed bill is as follows:

Individual Provisions

  • Recovery Rebate Credits/Stimulus Checks
    • Taxpayers with adjusted gross income (AGI) under $75,000 individually will receive $1,400 direct payments. Married taxpayers filing jointly earning up to $150,000 will receive $2,800.
      • Eligible taxpayers will also receive $1,400 for each dependent.
    • Eligibility is calculated using 2019 AGI unless a taxpayer has already filed a 2020 return.
    • Advance payment of the credits will be sent as economic impact payment checks.
  • Unemployment Benefits
    • Extends pandemic unemployment benefits for gig workers and long-term unemployment through August 2021
    • Increases state benefits by $400 per week, up from $300
    • Increases the total number of weeks eligible for the supplement to 73 weeks from 50 weeks
  • Premium Tax Credit (Related to Health Insurance)
    • A special rule is added that treats a taxpayer who has received, or has been approved to receive unemployment compensation for any week beginning during 2021 as an applicable taxpayer
  • Child Tax Credit
    • Expands the Child Tax Credit by:
      • Making the credit fully refundable for 2021;
      • Making 17-year-olds eligible as qualifying children; and
      • Increasing the amount of the credit to $3,000 per child ($3,600 for children under 6).
    • The Child Tax Credit would phase out for taxpayers with income over $150,000 for married taxpayers filing jointly, $112,500 for heads of households, and $75,000 for others
  • Child & Dependent Care Credit
    • Expands the Child & Dependent Care Credit by:
      • Making the credit fully refundable for 2021; and
      • Increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
    • Family & Sick Leave Credits
      • Extends credits established by the Families First Coronavirus Response Act until September 30, 2021
      • Increases the limit on the credit for paid family leave to $12,000
      • The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60
      • Paid leave credits will be allowed for leave that is due to COVID-19 vaccination
      • The limitation on overall number of days taken into account for paid sick leave will reset after March 31, 2021
      • Credits are expanded, allowing 501(c)(1) governmental organizations to take them

Business Provisions

  • Paycheck Protection Program (PPP)
    • Allocates additional $7.25 billion for PPP forgivable loans; applications scheduled to close on March 31, 2021
    • Makes more not-for-profit organizations eligible
    • Some larger not-for-profit organizations are also now eligible to apply for PPP loans
    • Internet-only news and periodic publishers with more than one physical location are now eligible
  • Restaurant Revitalization Fund (RRF)
    • Allocates $25 billion for food and beverage establishments
    • RRF grants equal to the pandemic-related revenue loss of the entity, up to $10 million per entity, or $5 million per physical location (limited to 20 locations)
    • RRF grants are calculated by subtracting 2020 revenue from 2019 revenue and can be used for certain eligible expenses:
    • Sets aside $5 billion for eligible applicants with 2019 gross receipts of $500,000 or less
    • During the first 21 days of the grant period, the SBA will prioritize applications from restaurants owned and operated or controlled by women, veterans, or socially and economically disadvantaged individuals
    • Funds from RRF grants shall not be included in the gross income of the person who receives the grant
  • Economic Injury Disaster Loan (EIDL)
    • Allocates $15 billion to Targeted EIDL grants to businesses located in low-income communities that have no more than 300 employees and have suffered an economic loss more than 30% of gross receipts
    • Funds from Targeted EIDL grants shall not be included in the gross income of the person who receives the grant
  • Employee Retention Credits (ERC)
    • Extends the ERC through the end of 2021
  • Shuttered Venue Operators (SVO) Grant
    • Allocates $1.25 billion to the SVO grant program

Webinar Replay Now Available: Paycheck Protection Program & Employee Retention Credits

On January 27, the professionals of Scheffel Boyle CPAs explained the latest updates of the Paycheck Protection Program (including changes related to farmers) and Employee Retention Credits. There was a Q&A session at the end of the presentation.

A replay of our webinar is now available to watch on demand on Zoom. Please fast forward to 5:28 on the recording to begin the presentation. A document containing the slideshow is also available for download and can be accessed by clicking here (PDF).

  Paycheck Protection Program & Employee Retention Credits Webinar Presentation (PDF)

 

Free Webinar: Paycheck Protection Program & Employee Retention Credits

Join the professionals of Scheffel Boyle CPAs as they explain the latest updates of the Paycheck Protection Program (including changes related to farmers) and Employee Retention Credits. There will be a Q&A session at the end of the presentation.

Click here to register. There is no fee to attend the webinar, but registration is required. This event is open to the first 500 who register, so sign up today!

Download the Webinar Flyer