Monthly Archives: December 2021

How Can a Nonworking Spouse Qualify to Fund an IRA?

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Article Highlights:

Spousal IRA
Compensation Requirements
Maximum Contribution
Traditional or Roth IRA?

One of the fallouts of the COVID-19 pandemic is that millions of people have dropped out of the workforce, particularly female workers with families. While they remain unemployed, these women will have lost the opportunity to build up their retirement nest egg through their employers’ retirement plans. However, those who are married have an option to accumulate retirement funds that will help make up for some of their lost retirement savings. This frequently overlooked tax benefit is the spousal IRA. Generally, IRA contributions are only allowed for taxpayers who have compensation (the term ‘compensation’ includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a nonworking or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as his or her spouse has adequate compensation. The maximum amount that a nonworking or low-earning spouse can contribute to either a traditional or Roth IRA (or a combination) is the same as the limit for a working spouse, which is $6,000 for 2021. If the nonworking spouse is 50 years or older, that spouse can also make ‘catch-up’ contributions (limited to $1,000), raising the overall contribution limit to $7,000. These limits apply provided that the couple together has compensation equal to or greater than their combined IRA contributions.
Example: Tony is employed, and his W-2 for 2021 is $100,000. His wife Rosa, age 45, didn’t work during the year after deciding to care for their children at home due to their difficulty finding childcare providers. Since her own compensation of zero is less than the contribution limit for the year, Rosa can base her contribution on their combined compensation of $100,000. Thus, Rosa can contribute up to $6,000 to an IRA for 2021. Even if Rosa had done some part-time work and earned $2,500, she could still make a $6,000 IRA contribution.
The contributions for both spouses can be made either to a traditional or Roth IRA or split between them as long as the combined contributions don’t exceed the annual contribution limit. Caution: The deductibility of the traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:

Traditional IRAs – There is no income limit restricting contributions to a traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the nonparticipant spouse only if the couple’s adjusted gross income (AGI) doesn’t exceed $198,000 in 2021. If the couple’s income is $198,000 to $208,000, only a partial deduction is allowed. Once their AGI reaches $208,000, no amount is deductible.
Roth IRAs – Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $198,000 in 2021. The contribution is ratably phased out for AGIs between $198,000 and $208,000. Thus, no contribution is allowed to a Roth IRA for 2021 once the AGI exceeds $208,000.
Example: Rosa from the previous example can designate her IRA contribution as either a deductible traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $198,000. Had the couple’s AGI been $203,000, Rosa’s allowable contribution to a deductible traditional or Roth IRA would have been limited to $3,000 because of the phaseout. The other $3,000 could have been contributed to a traditional IRA and designated as nondeductible.

Contributions to IRAs for 2021 can be made no later than April 15, 2022. Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning.

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2022 Standard Mileage Rates Announced

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Article Highlights:

Standard Mileage Rates for 2022
Business, Charitable, Medical and Moving Rates
Important Considerations for 2022
Switching Between the Actual Expense and Standard Mileage Rate Methods
Employer Reimbursements
Employee Deductions Suspended
Special Allowances for SUVs
Bonus Depreciation

As it does every year, the Internal Revenue Service recently announced the inflation-adjusted 2022 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, 2022, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

58.5 cents per mile for business miles driven (including a 26-cent-per-mile allocation for depreciation). This is up from 56.0 cents in 2021;
18 cents per mile driven for medical care or by an active member of the armed forces for moving purposes. This is up from 17 cents in 2021; and
14 cents per mile driven in service of charitable organizations.

The business standard mileage rate 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. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for over 15 years. Important Consideration – The 2022 rates are based on 2021 fuel costs. Given the potential for the continuation of substantially higher gas prices, it may be appropriate to consider switching to the actual expense method for 2022, or at least keeping track of the actual expenses, including fuel costs, repairs, maintenance, etc., so that the option is available for 2022. Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the possibility of higher fuel prices, the bonus depreciation and increased depreciation limitations for passenger autos that were part of the 2017 Tax Cuts and Jobs Act may make using the actual expense method worthwhile during the first year a vehicle is placed in business service. However, the standard mileage rates cannot be used if you have used the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously. Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel. The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, employees may not take a deduction on their federal returns for those years for unreimbursed employment-related use of their autos, light trucks or vans. However, those who are self-employed are eligible to claim expenses for their personal vehicles used in their businesses. Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation; taxpayers with these vehicles can utilize both the Section 179 expense deduction (up to a maximum of $27,000) and the bonus depreciation (the Section 179 deduction must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to income (SE income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered. Consider Bonus Depreciation – Consider using bonus depreciation as an alternative to the Section 179 deduction. Under this provision a taxpayer can elect to claim a deduction of 100% of the cost of a new or used vehicle used for business in the first year it is placed into business service. However, the luxury auto rules impose a maximum annual deduction for depreciation, including the bonus depreciation. For example, in 2021, the maximum depreciation deduction for an auto for which bonus depreciation was claimed was $18,200. This compares to a maximum of $10,200 if bonus depreciation isn’t elected. Of course, if the vehicle is used only partly for business, then only the business-use percentage of the cost is eligible to be deducted. After 2022, the deductible bonus depreciation percentage drops by 20 percentage points a year, until 2027 when, barring an extension by Congress, no bonus depreciation will be allowed. Whether to claim bonus depreciation, Section 179, regular depreciation or a combination of these methods for a business vehicle, or to use the standard mileage rate instead, can be a complicated decision to make. If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give this office a call.

Employers and Self-employed Who Elected to Defer 2020 Social Security Tax, The Payments Are Due Jan. 3

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Article Highlights:

2020 COVID Social Security Tax Deferral Relief
IRS Payment Reminder
Repayment Due Date
How to Make Repayment of the Deferred Amounts

As part of the COVID relief provided during 2020, employers and self-employed people could choose to put off paying the employer’s share of their eligible Social Security tax liability, normally 6.2% of wages. Half of that deferral is now due on Jan. 3, 2022, and the other half on Jan. 3, 2023. Reminder – If you are an employer or self-employed and chose to defer paying part of your 2020 Social Security tax obligation you should have received a reminder from the IRS reminding you that the first payment is due January 3, 2022. Even if you did not receive a reminder from the IRS, you are still responsible for making the payment on time, even if you did not receive a bill. How to Repay Deferred Taxes – Employers and individuals can make the deferral payments through the Electronic Federal Tax Payment System or by credit or debit card, money order or with a check. To be sure these payments are credited properly, they must be made separately from other tax payments. EFTPS has an option to make a deferral payment. On the Tax Type Selection screen, choose Deferred Social Security Tax and then change the date to the applicable tax period (typically, the calendar quarter in 2020 for which tax was deferred). Visit EFTPS.gov, or call 800-555-4477 or 800-733-4829 for details. Individual taxpayers can also use Direct Pay, available only on IRS.gov. Select the “balance due” reason for payment. If paying with a debit or credit card, select “installment agreement.” Apply the payment to the 2020 tax year where the payment was deferred. If you owe deferred 2020 deferred Social Security tax payments and have questions about how to make the payment, please give this office a call.

Using Data to Drive Your E-Commerce Business’ Growth

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If knowledge is power, then the information available to e-commerce business owners provides nearly unlimited potential. The same platforms that host your websites include data collection tools that – if used properly – can guide your decision-making process and inform your business strategies. The metrics offered can easily overwhelm anybody who doesn’t have an MBA, but they don’t have to. Extracting the most valuable information for your particular business relies on identifying your own goals and understanding which key performance indicators (KPIs) tie into those goals. Combining those two lets you take advantage of the information that will help you the most. E-commerce is a unique business model. With that in mind, we have assembled a list of the six e-commerce KPIs we think will most help you assess how your business is measuring up when compared to where you want to be. By reviewing these metrics regularly (and understanding what they mean), you can compare your performance to your goals and make important adjustments to your strategy.

Net sales – As much as gross sales numbers may give you a warm fuzzy feeling about how well you’re doing, the truth is that it is your net sales number that tells the real story. That’s because it reflects the deductions and losses that are a cost of doing business and selling your services, whether online or anywhere else. Net sales are your real revenue number, and it not only tells you how much money your sales efforts have brought in, but also can give you a snapshot of how your business performed during a specific period of time. This is not only useful for your profit and loss statement, but also as a way to assess the success of marketing campaigns and to forecast future performance.
Basket size – If you run an ecommerce business, knowing how much money your customers are buying and how many items they buy with each visit is essential. This metric provides you with an average of both for a specific period of time and allows you to analyze the impact of a sales campaign, the appeal of products being sold, and other information to guide future promotions.
Sales dilution rate – This metric helps you see where you lost revenue as a result of returns, discounts, and allowances. Though it is easy to just write the difference between total revenue and net sales off, doing so misses an opportunity to improve performance and eliminate inefficiencies. Taking a deeper dive into the merchandise that was most frequently returned or for which you had to offer discounts helps you identify and eliminate or improve products that are not only losing profit for you, but also disappointing your clients.
Customer Retention Cost (CRC) – Once you’ve attracted a customer to your e-commerce store, it is important to hold onto them because it costs less money to keep a customer than to attract a new one. The amount of money that you spend on inspiring loyalty is your Customer Retention Cost, and though it will differ for each customer and with each time you spend money on retaining them, it can also be averaged out across all of your customers to see whether the expense is warranted, needs to be cut back, or even expanded.
Customer Lifetime Value (CLV) – Your Customer Lifetime Value is the average amount that a consumer is likely to spend on your business from the time that they first discover your store to the last dollar they spend. Knowing this number helps you project the number of clients you’ll need to make your business a success and achieve your long-term goals. To make this KPI truly valuable it needs to be combined with other indicators such as cost of goods sold and the costs to attain and retain the client. Otherwise, you’re only measuring revenue and not profitability.
Contribution margin – This measure of how much you’re spending on marketing and selling your goods or services is absolutely essential. It can not only tell you whether you need to keep your selling costs in check, but also the converse – whether you might be smart to put a bit more money into them. The contribution margin gets added to costs of goods sold and other operational costs as a way to determine your net profit. If the margin is too high then you need to cut back on your efforts, as they may not be doing you enough good to justify the amount you’re spending. By the same token, a low margin in combination with not meeting your engagement goals can be an indication that you need to spend more to drive greater brand awareness.

As always, we are here to help you grow and manage your ecommerce business. If you have any questions, feel free to ask.

Video tips: A Quick Reminder about Forms 1099-NEC & 1099-MISC

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Businesses are required to file Form 1099-NEC if they pay an independent contractor more than $600 this year. Watch this quick video for some other details you may want to know.
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January 2022 Individual Due Dates

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January 3 – Time to Call For Your Tax Appointment – January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you to do so before the calendar becomes too crowded.January 10 – Report Tips to Employer – If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.January 18 – Individual Estimated Tax Payment Due – It’s time to make your fourth quarter estimated tax installment payment for the 2021 tax year.
January 31 – Individuals Who Must Make Estimated Tax Payments –
If you didn’t pay your last installment of estimated tax by January 18, you may choose (but aren’t required) to file your income tax return (Form 1040 or Form 1040-SR) for 2021 by January 31. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of the last installment. If you can’t file and pay your tax by January 31, file and pay your tax by April 18 (April 19 if you live in Maine or Massachusetts).

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January 2022 Business Due Dates

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January 3 – Payment of Employer Share of Social Security Tax from 2020 –
If you are an employer that deferred paying the employer share of social security tax or the railroad retirement tax equivalent in 2020, pay 50% of the deferred amount of the employer share of social security tax by January 3, 2022. The remaining 50% of the deferred amount of the employer share of social security tax is due by January 3, 2023. Any payments or deposits made before January 3, 2022, are first applied against the payment due by January 3, 2023.
January 3 – Payment of the Deferred Employee Share of Social Security Tax from 2020 –
If are an employer that deferred withholding and payment of the employee share of social security tax or the railroad retirement tax equivalent on certain employee wages and compensation between September 1, 2020, and December 31, 2020, you should have withheld and paid those taxes ratably from wages paid to the employee between January 1, 2021, and December 31, 2021. The employer is liable to pay the deferred taxes to the IRS and must do so before January 3, 2022.
January 18 – Employer’s Monthly Deposit Due –
If you are an employer and the monthly deposit rules apply, January 18 is the due date for you to make your deposit of Social Security, Medicare, and withheld income tax for December 2021. This is also the due date for the nonpayroll withholding deposit for December 2021 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.
January 18 – Farmers and Fishermen –
Pay your estimated tax for 2021 using Form 1040-ES. You have until April 18 (April 19 if you live in Maine or Massachusetts) to file your 2021 income tax return (Form 1040 or Form 1040-SR). If you don’t pay your estimated tax by January 18, you must file your 2021 return and pay any tax due by March 1, 2022, to avoid an estimated tax penalty.
January 31 – 1099-NECs Due to Service Providers & the IRS –
If you are a business or rental property owner and paid $600 or more to individuals (other than employees) as nonemployee compensation during 2021, you are required to provide Form 1099-NEC to those workers by January 31. ‘Nonemployee compensation’ can mean payments for services performed for your business or rental by an individual who is not your employee, commissions, professional fees and materials, prizes and awards for services provided, fish purchases for cash, and payments for an oil and gas working interest. To avoid a penalty, copies of the 1099-NECs also need to be sent to the IRS by January 31, 2022. The 1099-NECs must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. A business or individual who is required to file 250 or more information returns (i.e., 1099s and W-2s among others) must file those forms electronically. Please call this office for preparation assistance.
January 31 – Form 1098 and Other 1099s Due to Recipients –
Form 1098 (Mortgage Interest Statement) and Forms 1099, including 1099-NEC (see above) are due to recipients by January 31. The IRS’ copy, other than for 1099-NECs, is not due until February 28, 2022, or March 31, 2022, if electronically filed. These 1099s may be reporting the following types of income:

Dividends and other corporate distributions
Interest
Rent
Royalties
Payments of Indian gaming profits to tribal members
Profit-sharing distributions
Retirement plan distributions
Original issue discount
Prizes and awards
Medical and health care payments
Debt cancellation (treated as payment to debtor)

January 31 – Employers – W-2s Due to All Employees & the Government – EMPLOYEE’S COPY: All employers need to give copies of the W-2 form for 2021 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting. GOVERNMENT’S COPY: W-2 Copy A and Transmittal Form W-3, whether filed electronically or by paper, are due January 31 to the Social Security Administration.
January 31 – File Form 941 and Deposit Any Undeposited Tax – File Form 941 for the fourth quarter of 2021. Deposit any undeposited Social Security, Medicare, and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
January 31 – File Form 943 –
All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2021. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
January 31 – W-2G Due from Payers of Gambling Winnings –
If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2021.
January 31 – File Form 940 – Federal Unemployment Tax –
File Form 940 (or 940-EZ) for2021. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
January 31 – File Form 945 – File Form 945 to report income tax withheld for 2021 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit or pay any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

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Do You Need a New IRS Identity Verification?

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Article Highlights:

IRS Identity Verification
Access to Online Tools and Applications
About ID.me
How to Create an ID.me Account

In November of 2021, the Internal Revenue Service launched an improved identity verification and sign-in process that enables more people to securely access and use IRS online tools and applications. Taxpayers using this new mobile-friendly verification procedure can gain entry to existing IRS online services such as the:

Child Tax Credit Update Portal,
Online Account,
Get Transcript Online,
Get an Identity Protection PIN (IP PIN) and
Online Payment Agreement.

The IRS will transition additional IRS applications to the new method over the next year. Identity verification is critical to protect taxpayers and their information and is the reason the IRS has been making improvements in this area, and this new verification process is designed to make IRS online applications and tools as secure as possible. This new process can reach more people through the expanded use of identity documents and increased help desk assistance for taxpayers who encounter a problem when attempting to verify their identity online. To provide this verification service, the IRS is using ID.me, a trusted technology provider. The new process is one more step the IRS is taking to ensure that taxpayer information is provided only to the person who legally has a right to the data. When accessing the tools listed above, taxpayers will be asked to sign in with an ID.me account. People who already have IRS usernames may continue to use their credentials from the old system to sign-in until summer 2022 but are prompted to create an ID.me account as soon as possible. Anyone with an existing ID.me account from the Child Tax Credit Update Portal, or from another government agency, can sign in with their existing credentials. Create an ID.me Account – If you do not already have an ID.me account and wish to create a new ID.me account, you’ll be asked to verify your email address, create a password, and secure your account. Afterward, you will be presented with steps to verify your identity. To verify your identity with ID.me, you’ll need to provide a photo of an identity document such as a driver’s license, state ID, or passport. You’ll also need to take a selfie with a smartphone or a computer with a webcam. If you need help verifying your identity or to submit a support ticket, you can visit the ID.me IRS Help Site. If you need further registration assistance, a support request can be submitted on the help site by selecting the ‘Contact Us’ option in the Support page header. Fill out the form as instructed on the page to submit a support request. If you have multiple identity verification failures, ID.me may send you to a ‘Trusted Referee’ process where you can upload alternative identity documentation, take a selfie, and then talk to an ID.me Trusted Referee via a video call. Video calls are offered in American Sign Language if requested. If you have questions about your need for an ID.me account, please contact this office.

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Does Your Business Need to File Forms 1099-NEC or 1099-MISC?

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Article Highlights:

1099-NEC Filing Requirements 
Independent Contractor Filing Threshold 
Form W-9 
Form 1099-MISC 

If you use independent contractors to perform services for your business, for each one that you pay $600 or more for the year, you are required to issue the worker and the IRS a Form 1099-NEC no later than January 31, 2022, for 2021 payments. Generally, a 1099-NEC is not required to be issued if the independent contractor or service provider is a corporation. However, payments to attorneys for legal fees of $600 or more must be reported, even if the attorney operates as a corporation. To properly complete the form, you’ll need the individual’s name and tax identification number. But it isn’t unusual to, say, hire a repairman early in the year to whom you pay less than $600, and then use the repairman’s services again later and have the total for the year exceed the $600 limit. If you overlooked getting the information, such as the individual’s complete name and tax identification number (TIN), needed to file the 1099-NEC for the year, you may have difficulty getting the information after-the-fact. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. IRS Form W-9 is provided by the government as a way for you to obtain the data required to file the 1099s for your contract workers and service providers. This data includes the person’s name, address, type of business entity and TIN (usually a Social Security number or an Employer Identification Number), plus certifications as to the ID number and citizenship status, among others. It also provides you with verification that you complied with the law should the independent contractor provide you with incorrect information. We highly recommend that you have a potential independent contractor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen on the IRS’ website and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS. The W-9 was last revised by the IRS in October 2018, so if you have older blank W-9s that you give to your service providers, you may want to print copies of the latest version (including the instructions) and discard the older unused forms. To avoid a penalty, the government’s copies of the 1099-NECs must be sent to the IRS by January 31, 2022, along with transmittal Form 1096. They must be submitted on magnetic media or on optically scannable forms. However, a business that files more than 250 information returns (such as 1099s, W-2s, and 1095s) in a calendar year is required to file them electronically. The 250-return requirement may be lowered to 100 if proposed regulations are finalized by the IRS, but the change wouldn’t be effective until 2023. In some cases, for payments of $600 or more, you may need to file Form 1099-MISC, which is used to report rents, certain prizes and awards, and income your business paid other than that includible on Form 1099-NEC or payable to employees. The 2021 Form 1099-MISC must be provided to the income recipient by January 31, 2022, and to the IRS by February 28 (March 31 if filed electronically) accompanied by transmittal Form 1096. This firm provides 1099 preparation services. If you need assistance or have questions, please give this office a call.

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