August 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
Monthly Archives: July 2020
Big Tax Breaks for Hiring Your Children in the Family Business
Article Highlights:
Child Under the Age of 19 or a Student Under the Age of 24
Kiddie Tax
Tax on a Child’s Earned Income
Deduction for the Business
Employment Taxes
IRAs and Retirement Plans
With jobs at a premium during the COVID-19 pandemic, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job. Note, however, that wages paid to children and other relatives aren’t eligible for the Employee Retention Credit created by Congress in 2020 as part of the COVID-19 emergency relief measures for employers. Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. The following are typical situations encountered when hiring family members. Employing a Child – A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child. When a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules if their investment income is upward of $2,200. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $1,100 standard deduction. However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $350 or the regular standard deduction for the year, which is $12,400 for 2020. Assuming that a child has no other income, the child could be paid $12,400 and incur no income tax. If the child is paid more, the next $9,875 he or she earns is taxed at 10%. Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,000 for the year. You reduce your income by $16,000, which saves you $3,840 of income tax (24% of $16,000), and your child has a taxable income of $3,600, $16,000 less $12,400 standard deduction, on which the tax is $360 (10% of $3,600). If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed in an unincorporated business owned by the parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half of these payroll taxes either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced. Use the same example from above. Assuming your business profits are $130,000, by paying your child $16,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $429 (2.9% of $16,000 times the SE factor of 92.35%). And since your net profits for the year are less than the maximum SE income ($137,700 for 2020) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion. So your total SE tax savings would be $2,261. A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.Retirement Plan Savings – Additional savings are possible if the child is paid more (or works part-time past the summer) and deposits the extra earnings into a traditional IRA. For 2020, the child can make a tax-deductible contribution of up to $6,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction $12,400) and the maximum deductible IRA contribution of $6,000 for 2020, a child could earn $18,400 of wages and pay no income tax. However, referring back to our original example, the child’s tax to be saved by making a $6,000 traditional IRA contribution is only $360 (tax rate of 10% of $6,000 would be $600, but the savings is limited to the actual tax of $360). So, it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $360 savings. Of course, some children will not be thinking about retirement at their young age and may object to contributing to an IRA. If that is the case, perhaps you as the parent, or even the grandparents, can make a gift of the IRA contribution, which can grow to big bucks by the time the child reaches retirement age. If you have questions about the information provided here and other possible tax benefits or issues related to hiring your child, please give this office a call.
What Led to Congress Extending the Paycheck Protection Program?
The economic uncertainty created in the outset of the Coronavirus pandemic was unprecedented, to say the least. This is a big part of the reason why, soon after the spread began, Congress took steps that were equally drastic – they passed the Paycheck Protection Program, otherwise known as the PPP, in an attempt to help as many small businesses as possible stay afloat. The PPP was first included in the $2 trillion Coronavirus relief package, the CARES Act, that was itself passed by Congress in March. According to one recent report, more than 4.8 million small businesses have already received in excess of $520 billion from the program up to this point. At its core, the PPP is exactly what it sounds like: a specific type of loan program designed to provide a direct and tangible incentive for small businesses to keep as many workers on their payroll as possible, even during a period when many of them may not be allowed to open to the general public due to lock downs. As of July 2020, two full rounds of the Paycheck Protection Program have been passed. The first, initial wave was depleted extremely quickly – thus leading to a second wave that still has approximately $130 billion in unspent funds remaining at the time of this extension passing. But with so much money still left to be distributed, one has to wonder – why did Congress have to extend the PPP in the first place? What circumstances led to that event, and where does the program stand today? PPP and the Shape of Things to Come The current five-week extension of the Paycheck Protection Program was approved by both chambers of Congress at the end of June 2020. With it, the application window for the program reopened and would remain accessible to SMBs until August 8. As was true with the first round, the loans are intended to help cover payroll and other select costs. Under the terms and conditions of the loan, recipients can see their loan balances forgiven so long as the funds were used for “eligible expenses,” and so long as other criteria was met. The total amount of the loan forgiveness may be reduced, however, based on the percentage of eligible costs attributed to non-payroll-related matters. A decrease in the number of employees a business was keeping on, decreases in salaries and wages, or other factors could also reduce loan forgiveness amounts. But again – what you’re dealing with is a situation where the first round of loans was depleted incredibly quickly, while the second still has a significant sum of money for eligible applicants just waiting to be taken advantage of. Why, then, is there such a significant discrepancy in activity? Part of the reason why the second wave of the Paycheck Protection Program seemed to have lower demand than the first is because by the time of its passing, it became clear that applying for loan forgiveness wouldn’t be quite as simple as a lot of small business owners had hoped. The Small Business Administration and the Treasury Department were both late in releasing specific guidance and rules about the actual loan forgiveness process – leading to business owners who were counting on that money being forgiven that may not be so lucky any longer. Therefore, it’s been reported that a lot of small businesses are either considering returning the money or holding out on the program entirely because they’re not actually sure whether or not they’re going to be required to repay that debt. Also complicating things is the idea of loan duplicates – meaning loans that were essentially identical that were handed out to the same business or entity. The Small Business Administration was supposed to have a system in place to accurately determine whether or not an applicant had already received a loan and if they had, their second loan would be denied. The issue is that because of the chaos created in those early days of the program, many borrowers submitted multiple applications through different lenders. Sometimes, different identification information was even used – thus making it difficult to track these potentially duplicate loans. All told, it’s been said that the agency may have inadvertently approved more than 1,000 duplicate Paycheck Protection Program loans equaling as much as $100 million – a situation that will also need to be addressed to restore people’s faith in the program moving forward. For many small businesses out there, the Paycheck Protection Program literally couldn’t have come along at a better moment. With so many organizations legally unable to open to the public – thus severely limiting the amount of potential revenue they could bring in – they needed something, ANYTHING, to get by. By all accounts, the PPP has done that for many people. But with rules and regulations governing forgiveness that seem to be constantly in flux, coupled with the uncertainty of when the pandemic is going to end in the first place, something of a malaise has set in regarding this second and most recent extension. Small businesses make up the backbone of the United States economy. Make absolutely no mistake about it: they need all the help they can get right now. It’s becoming clearer and clearer, however, that the Paycheck Protection Program as it exists today may not be enough to do it. This, coupled with serious questions as to who is getting the majority of these funds, means that this is one situation people are going to be paying close attention to moving forward.
Employers, Don’t Miss Out on the Work Opportunity Credit
Article Highlights:
Potential Credit
Eligible Employees
Credit Determination
Certification Process
Other Issues
The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended the Work Opportunity Tax Credit (WOTC) allowing employers who are willing to help disadvantaged individuals to benefit from a substantial federal tax credit. The WOTC is typically worth up to $2,400 for each eligible employee, but it can be worth up to $9,600 for certain veterans and up to $9,000 for ‘long-term family assistance recipients.’ The credit is available for eligible employees who begin working for the new employer before January 1, 2021. Generally, an employer is eligible for the WOTC only when paying qualified wages to members of any of the targeted groups listed below. For more details on the required qualifications for each group, see the instructions for IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).
(1) Qualified IV-A recipients – generally, members of a family that is receiving assistance under the Temporary Assistance for Needy Families (TANF) program; (2) Qualified veterans; (3) Qualified ex-felons – generally, those hired within one year of release from prison; (4) Designated community residents – those who are aged 18 through 39 and who are living in an empowerment zone or a rural renewal area*; (5) Vocational rehabilitation referrals – handicapped individuals who are referred by rehabilitation agencies; (6) Qualified summer youth employees – those who are 16 or 17 years old, have never previously worked for the employer and reside in an empowerment zone*; (7) Qualified members of families who participate in the Supplemental Nutritional Assistance Program (SNAP); (8) Qualified Supplemental Security Income recipients; (9) Qualified long-term family assistance recipients – those receiving TANF assistance payments; and (10) Qualified long-term-unemployed individuals. *Both empowerment zones and rural renewal areas are listed in the IRS Form 8850 instructions. The empowerment zone designations expired at the end of 2017. However, the legislation that extended the WOTC through 2020 also provides for an extension of the designations to the end of 2020.
For an employer to qualify for the credit, the employee must work a minimum of 120 hours and receive at least 50% of his or her wages from that employer for working in the employer’s trade or business. Relatives of the employer and employees who have previously worked for the employer do not qualify for the credit. For an employee from most of the targeted groups, the credit is based upon the first $6,000 of first-year wages. If an employee completes at least 120 hours but less than 400 hours of service for the employer, the credit is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, the credit is equal to the wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For the summer youth employees, only the first $3,000 of the first-year wages are taken into account, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000) Two categories allow for higher first-year wages to be eligible when calculating the credit:
Long-term family assistance recipients – For this category, the first-year wage that can be taken into account for the credit is increased to $10,000, thus allowing a maximum credit of $4,000 (.4 x $10,000). In addition, this group qualifies for a credit in the second year (immediately following the first year); this is equal to 50% of second-year wages up to $10,000.
Veterans – The three possible qualifications of veterans have applicable first-year wages for the credit of up to $12,000, up to $14,000 and up to $24,000. Thus, the maximum credit for this group is between $4,800 (.4 x $12,000) and $9,600 (.4 x $24,000), depending upon the qualification.
Certification Process – To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency (SWA) no later than 28 days after an eligible employee begins work. Due to the COVID-19 emergency, the IRS has extended many filing due dates, including if the 28th calendar day falls on or after April 1, 2020, and before July 15, 2020; in that case, employers are allowed to submit Form 8850 to the SWA by July 15, 2020. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit). Other Issues:
No Dual Benefits – No deduction is allowed for the portion of wages equal to the WOTC for that tax year.
Unused Current-Year Credit – The credit is included in the general business credit, and if an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years).
In some circumstances, electing not to claim the credit is more valuable tax-wise for the employer. Please call this office for additional information related to the WOTC and to see if it would be beneficial in your particular tax circumstances.
Wealthy Taxpayers May Want to Strategize for Potential Tax Increases
Article Highlights:
Skyrocketing Government Spending
Federal and State Deficits
Tax Increases in Our Future
Tax Strategies
The outcome of the November elections could have a significant impact on taxes for the wealthy. The COVID-19 pandemic has wreaked havoc on the economy, as the government’s tax revenues have declined while government spending has soared. Although the President has not revealed his tax policies for the future, Joe Biden, his presumptive opponent in November, has, and that is why the wealthy are strategizing for potential increases. Regardless of who wins the November election, with rising deficits at the state and federal levels, government spending skyrocketing, and revenue dropping due to the COVID-19 pandemic, it is sure that taxes will go up in coming years, and the likely focus for generating this additional tax revenue is the wealthy. Biden has already said that the wealthy will be targeted and has proposed the following changes:
Return the statutory tax rates to what they were before the 2017 tax reform enacted in the Tax Cuts and Jobs Act (TCJA), which means for higher-income taxpayers, the top tax rate will increase from 37 to 39.6 percent.
Tax long-term capital gains and qualified dividends as ordinary income for taxpayers making over $1 million.
End the step-up in basis for inherited assets, which will result in increased taxes on beneficiaries when those assets are sold.
Phase out the Sec 199A pass-through deduction for households with taxable income in excess of $400,000.
Reinstate an overall limit (often referred to as the Pease limit) on itemized deductions. When itemized deductions are subject to the Pease limit, the itemized deductions begin to phase out when a taxpayer’s adjusted gross income (AGI) exceeds a threshold amount. In 2017, the last year the Pease limit was in effect, the phase-out threshold was $261,500 for single filers and $313,800 for married taxpayers filing jointly.
Limit the tax benefit of itemized deductions to 28%.
Resume the 12.4% Social Security payroll tax once earnings reach $400,000. Currently, for 2020, this tax only applies to the first $137,700 of compensation. Employees pay half and their employers pay half; self-employed individuals also pay into this program. The amount subject to this tax is inflation-adjusted each year. If Biden’s plan were currently in effect, this payroll tax would apply for the first $137,700 of earnings and resume when a worker’s earnings reach $400,000, creating a gap between $137,700 and $400,000 in which this tax wouldn’t apply.
Some strategies higher-income taxpayers are contemplating in preparation for tax increases include:
Sell appreciated stocks that have been held for over one year to take advantage of the lower capital gains rates in 2020 as a hedge against not qualifying for the capital gains rates in the future. If a taxpayer wants to maintain a position in the stock, it can always be repurchased immediately, since wash sale rules only apply to losses, not gains.
If you are considering selling a rental property or other real estate that you’ve owned for over a year, it might be appropriate to close the sale in 2020, when the top capital gains tax rate is 20%, as a hedge against the gain being subject to the proposed ordinary income rates of 39.6%.
Although not mentioned by either presidential candidate, estate tax will be a likely target, and during the last election, the Democratic ticket proposed dropping the lifetime estate tax exclusion to $3 million. It is currently at $11.58 million ($23.16 million for couples). The wealthy should consider gifting money to family members and friends to utilize the current lifetime exemption and avoid the 40% estate tax. This could just be the motivation to give gifts that were already planned for the future.
If possible, wealthy owners of private businesses should look for ways to accelerate income into 2020 and shift expenses to 2021 to avoid potentially higher income tax rates in 2021.
As a result of the COVID-19 pandemic, many taxpayers have found they can do their work at home, and that shift in lifestyle combined with potentially higher state taxes has many people considering relocating to a state with no income tax. Taxes in states such as CA, NY and NJ are exceptionally high; CA, for example, is even considering reinstating a state estate tax.
Everyone’s circumstances are unique. Please call if you would like to review your tax situation to determine if there are actions you can take in 2020 to avoid the potentially higher federal and state taxes that could begin in 2021.
Loan Application Period for the Paycheck Protection Program Extended
Article Highlights:
Loan Application Period Extended
Paycheck Protection Program
Qualifying Expenses
Loan Forgiveness
If you missed the opportunity to apply for a Paycheck Protection Program (PPP) loan before the program expired at the end of June, you have another chance. Congress has overwhelmingly voted to extend the application period for a PPP loan through August 8, 2020, giving you an additional 5½ weeks to apply. If you are unfamiliar with this program, Congress created the PPP as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and authorized the use of the SBA’s small business lending program to provide forgivable loans of up to $10 million per qualifying business. The loans are to support small businesses in dealing with the economic hardships created by the coronavirus pandemic and primarily to assist them with continuing to pay employee salaries. Small businesses are those with 500 or fewer employees, including those filing Schedule Cs (self-employed, sole proprietorships, or independent contractors), as well as non-profits and veterans’ organizations. The loans are forgivable to the extent that the funds are used to pay for certain specified expenses, including payroll, rent, lease payments, mortgage interest, and utilities during the 24-week period following the loan being funded or by December 31, 2020, if earlier. To qualify for full forgiveness, a borrower must use the loan proceeds for eligible expenses and meet certain other criteria. The forgiveness may be reduced if an employer does not maintain their employee head count or reduces the pay per employee. There is approximately $130 billion left in the fund, and the loans are doled out on a first-come, first-serve basis. For more information or assistance, or to determine if your business qualifies for a PPP loan, please give the office a call.