Many people are unaware that the unemployment aids you receive from federal and state benefits are taxable, leading to a potentially unpleasant outcome on your 2020 tax return. Watch this video to learn more.
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Monthly Archives: September 2020
Ready for the 1099-NEC?
Article Highlights:
1099-NEC Has Been Resurrected
Non-Employee Compensation
Combating Fraudulent Filings
Due Dates
Form W-9
Penalties
1099 Worksheet
The Internal Revenue Service has resurrected a form that has not been used since the early 1980s, Form 1099-NEC (the NEC stands for non-employee compensation). This form will be used to report non-employee compensation in place of the 1099-MISC, which has been used since 1983 to report payments to contract workers and freelancers. Form 1099-MISC has also been used to report rents, royalties, crop insurance proceeds and several other types of income unrelated to independent contractors. The revival of the 1099-NEC was mandated by Congress with the passage of the PATH Act back in 2015. However, there have been some complications with implementing the form, so its use has been delayed. It will now make its return debut in 2021 for payments made in 2020. The reason for the change is to control fraudulent credit claims—primarily for the earned income tax credit (EITC), which is based on earned income from working. Scammers were filing tax returns before the normal February 28 due date for 1099-MISC, which does not give the IRS the time to cross-check the earned income claimed in the returns. As a stopgap measure, 1099-MISC filings that included non-employee compensation were required to be filed by January 31, the same due date as W-2s, another source of earned income. By using the 1099-NEC for non-employee compensation, the IRS will be able to eliminate the problems created by having two filing dates for the 1099-MISC. As a result, the 1099-MISC has also been revised, and Box 7—where non-employee compensation used to be entered—is now a checkbox for ‘Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale.’ Other boxes after Box 7 have also been reorganized. The 1099-NEC is quite simple to use since it only deals with non-employee compensation, which is entered in Box 1, and there are entries for federal and state income tax withholding. If you operate a business and engage the services of an individual (independent contractor) other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, you are required to issue the individual a Form 1099-NEC soon after the end of the year to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. The due date for filing a 1099-NEC with the IRS and mailing the recipient a copy of the 1099-NEC that reports 2020 payments is February 1, 2021. (Normally the due date is January 31, but because that date falls on a weekend next year, the due date becomes the next business day, February 1, 2021.) It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual needed to file a 1099 for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward. IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the vendors’ data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law in case a vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS. The penalties for failure to file the required informational returns are $280 per informational return. The penalty is reduced to $50 if a correct but late information return is filed no later than 30 days after the required filing date or it is reduced to $110 for returns filed after the 30th day but no later than August 1, 2021. If you are required to file 250 or more information returns, you must file them electronically. In order to avoid a penalty, copies of the 1099-NECs you’ve issued for 2020 need to be sent to the IRS by February 1, 2021. They must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s for submission to the IRS. We provide recipient copies and file copies for your records. Use the 1099 worksheet to provide this office with the information needed to prepare your 1099s.
October’s Extended Due Date Is Fast Approaching
Article Highlights:
October 15 extended due date for filing federal individual tax returns for 2019.
Late-filing penalty.
Interest on tax due.
Other October 15 deadlines.
Because of the COVID-19 pandemic emergency, the IRS postponed the original due date for filing 2019 returns to July 15, 2020. If you could not complete your 2019 tax return by July 15 and filed a request for additional time to file, that extension expires on October 15, 2020. Failing to file before the extension period runs out may cost you late-filing penalties. There are no additional extensions available (except in designated disaster areas), so if you do not or will not have all of the information needed to complete your return by October 15, please call this office so that we can explore your options for meeting your extended filing deadline. If you are waiting for a K-1 from a partnership, S-corporation or fiduciary return, the extended deadline for those returns is September 15 (September 30 for fiduciary returns); so you should probably make inquiries if you have not received that information yet. Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month (or part of a month) for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 15 for most states. In addition, interest continues to accrue on any balance due, currently at the rate of 3% per year. This rate is subject to quarterly adjustment. If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date. Please call this office immediately if you anticipate complications related to providing the needed information so that we can determine a course of action to avoid the potential penalties. Additional October 15, 2020 Deadlines – In addition to being the final deadline to file 2019 individual returns on extension in a timely manner, October 15 is also the deadline for the following actions:
FBAR Filings – Taxpayers with foreign financial accounts exceeding an aggregate value of $10,000 at any time during 2019 must file a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Treasury Department. The original due date for the 2019 report was April 15, but individuals have been granted an automatic extension to file until October 15, 2020.
SEP-IRAs – October 15, 2020 is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2019. The deadline for contributions to traditional and Roth IRAs for 2019 was July 15, 2020, instead of the usual April 15 contribution due date because of the COVID-19 emergency, but no further extension is available.
Special Note: Disaster Victims – If you reside in a presidentially declared disaster area, the IRS and most states provide additional time to file various returns and make payments.
Please call this office for information on extended due dates of other types of filings and payments as well as extended filing dates in disaster areas.
Do You Know Unemployment Benefits Are Taxable?
Article Highlights:
CARES Act
Unemployment Benefits
States Taxation of Unemployment
Will Unemployment Be Taxable?
With the passage of the CARES Act stimulus package earlier this year, the federal government added $600 to the normal state weekly unemployment benefits and increased the number of benefit weeks to a total of 39. In many cases, workers are receiving unemployment benefits for the first time in their lives, and they may not be aware that the benefits are fully taxable for federal purposes. Potentially making matters worse is that most states also tax unemployment benefits. This may come as a surprise with a potentially unpleasant outcome for many when it comes time to file their 2020 tax return next year. Those who received unemployment benefits will be sent a Form 1099-G (Certain Government Payments) from the state that paid the benefits. This tax form shows the amount of unemployment benefits received and the amount of tax withheld, if any. There are several states where unemployment benefits are not taxable. Seven states do not have a state income tax, so obviously, unemployment benefits are not taxable in those states, which are:
Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming
Seven states have state income tax, but do not tax employment benefits. They include:
California
Montana
New Hampshire
New Jersey
Oregon
Pennsylvania
Tennessee
Virginia
Two states exempt 50% of amounts above $12,000 (single taxpayer) or $18,000 (married taxpayers). They are:
Indiana
Wisconsin
If you’ve collected unemployment compensation this year, your benefits’ impact on your tax bill will depend on a number of factors, including the amount of unemployment received, what other income you have, whether you are single or married (and, if married, whether you and your spouse are both receiving unemployment benefits), and whether you had or are having income tax withheld from benefit payments. If you have questions about the taxation of unemployment compensation, please give this office a call.
If You Are Facing Foreclosure, Here Are Tax Issues You Will Confront
Article Highlights:
Mortgage Forbearance
Fannie Mae and Freddie Mac
Penalty Free Pension Plan Withdrawals
Cancellation of Debt Income
As part of the CARES Act, Congress provided temporary relief for homeowners with federally backed mortgages who were financially impacted by COVID-19. For those unable to keep up with their home mortgage payments, the relief provides mortgage forbearance and a moratorium against foreclosures through August 31, 2020. As related to mortgages, the term “forbearance” means an agreement between a lender and borrower to delay foreclosure while giving the borrower time to catch up on overdue mortgage payments. As this pandemic continues to wreak havoc on people’s finances, the Federal Housing Finance Agency said that Fannie Mae and Freddie Mac will extend foreclosure moratoriums to December 31, 2020 and perhaps longer. If, because of the pandemic, you cannot make your payments and have not already done so, you should contact your lender to request forbearance for your loan payments. Your lender may allow temporarily lower mortgage payments or pause payments altogether, helping you deal with the current financial hardship. Along with your financial hardship, you probably should consider the potential tax and financial ramifications. Whether the forbearance reduces or pauses your payments, during that time, your home mortgage interest—the largest tax deduction for most—will be reduced. However, that may not make any difference if your income has been substantially reduced. Although most financial gurus advise not tapping your retirement funds for non-retirement purposes, the CARES Act did eliminate the penalties on up to $100,000 of withdrawals from IRAs and qualified plans, and allows the tax on the withdrawals to be spread over a 3-year period. In addition, the funds can be recontributed within the 3-year period. These funds could be used to make mortgage payments; but of course, you may not want to do that if the home will ultimately go into foreclosure. To be eligible for the special provisions of these distributions, you, your spouse or dependent must have been diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention or have experienced adverse financial consequences as a result of the coronavirus, including:
being quarantined;
being furloughed, laid off or having work hours reduced;
being unable to work due to lack of child care;
closing or reducing hours of a business owned or operated due to the virus or disease;
incurring a reduction in pay (or self-employment income); or
having a job offer rescinded or start date for a job delayed.
With the downturn in the economy, many taxpayers find themselves in debt over their heads and end up settling their debts for less than what is owed or have their property repossessed or foreclosed upon. All of those actions will result in the individual being relieved of debt. In the eyes of the tax code, debt relief is treated as income, and the banks, lenders, etc. are required to issue a Form 1099-C reporting the debt relief income attributable to the taxpayer. That debt relief income is taxable to the taxpayer unless they qualify for relief provided under other provisions of the tax code. One of those provisions is the insolvency exclusion. A taxpayer is insolvent to the extent the taxpayer’s debts exceed their assets at the time of the debt relief. Another provision is the principal residence acquisition debt relief exclusion, which applies through 2020. However, that exclusion will generally not provide any benefit for homes going into foreclosure due to COVID-19, since those foreclosures will take place in 2021 (unless Congress extends the exclusion, as they’ve done in the past). This can all become quite complicated. If you wish to tax strategize, please call this office.
Is the Temporary Deferral of Employee Payroll Tax Worth It?
Article Highlights
Withholding of Social Security Tax Deferred
IRS Guidance
Employer Responsibility
Unresolved Issues
President Trump issued a Presidential Memorandum on August 8, 2020, that directs the Treasury Secretary to use his authority to defer the withholding, deposit and payment of employees’ portions of Social Security taxes from September 1 through December 31, 2020. The goal is to put more money in the pockets of workers during the COVID-19 pandemic emergency. The deferral applies to the 6.2% tax on wages or compensation paid for a bi-weekly pay period of less than $4,000 or the equivalent threshold amount for other pay periods. In other words, employees with annual wages up to $104,000 are generally eligible for the deferral. Just a few days before the start of the deferral period, the IRS has issued guidance explaining that the due date for withholding and paying Social Security taxes has been postponed; they are now due between January 1, 2021 and April 30, 2021. This means that Social Security taxes not withheld in the last 4 months of 2020 are to be ratably withheld from employees’ wages during the first 4 months of 2021, along with the required withholding on the 2021 wages. So, deferred withholding will increase employees’ take-home pay in September through December of this year, but their winter and early spring 2021 paychecks will be smaller because the Social Security tax withholding will be twice the usual amount. For example:
An employee (who lives in a state without income tax) is paid weekly; his wages in 2020 are $1,000 per week. Normally, $62.00 in Social Security (6.2%), $14.50 in Medicare (1.45%) and $120 in federal income taxes are withheld from his wages by the employer, who adds $76.50 (the employer’s matching amount for Social Security and Medicare tax) before paying the withheld amount to the government. Thus, the employee’s take-home pay is $803.50. Under the deferral arrangement, nothing would be withheld for the Social Security tax, so the employee’s take-home pay for the week would go up by $62.00 to $865.50. The amount transmitted to the government would be $62.00 less per week. Fast forward to 2021: The employee’s wages are still $1,000, and for as many pay periods in 2020 as the deferral occurred, the Social Security tax withholding in 2021 will be $124, made up of the deferred 2020 withholding and the 2021 withholding. For these pay periods, the take-home pay will be $741.50.
The IRS Notice places the responsibility on the employer to make payment of the deferred payroll taxes by May 1 of 2021. Otherwise, the employer may owe penalties, interest and additional tax. This may create a problem if an employee no longer works for the same employer in 2021 as in 2020. Obviously, the employer can’t withhold the makeup tax, since the worker has no wages from that employer. According to the IRS notice, if necessary, the employer may make other arrangements to collect the total deferred taxes from the employee, but it doesn’t specify what those arrangements should or could be. Not addressed in the guidance is whether an employer must stop withholding the Social Security tax from September 1 through the end of the year (although Treasury Secretary Mnuchin is reported to have said that he can’t force employers to stop withholding). Also not covered is if an employee may decline to have the tax deferred (which some large employer organizations have said is logistically unworkable). The president has indicated that he would like the deferred taxes permanently forgiven, but it would take congressional approval to change the law, and given the highly charged political climate in Washington, that may not happen. If you have questions about the payroll tax deferral and how it would affect you, please give this office a call.
Video: Watch Out for Tax Penalties
Most taxpayers don’t intentionally incur tax penalties, but many who are penalized are simply not aware of the penalties or the possible impact on their wallets. Watch this video to look at some of the more commonly encountered penalties and how they may be avoided.
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