Business Tax

There are various federal taxes that may apply to your small business. The type and form of business you operate determines what taxes you must pay and how you pay them. At the federal level, several different taxes may apply.

Excise Taxes

The IRS defines an excise tax as a tax imposed on the sale of specific goods or services, or on certain uses. Federal excise tax is typically imposed on the sale of items such as tobacco, fuel, alcohol, tires, heavy trucks and highway tractors, and airline tickets. Many excise taxes are placed in trust funds for projects related to the taxed product or service, such as highway or airport improvements.

An excise tax may be imposed at the time of import, sale by the manufacturer, sale by the retailer, or use by the manufacturer or consumer. Some excise taxes are collected by a third party, which then must remit the taxes to the IRS in a timely manner. An example of a third-party collector of an excise tax is a commercial airline, which collects the excise taxes on airline tickets that are paid by airline passengers. Businesses that are subject to federal excise taxes must generally file Form 720, Quarterly Federal Excise Tax Return. Certain excise taxes, such as those owed to the Alcohol and Tobacco Tax and Trade Bureau, are reported on different forms.

Income Taxes

Income taxes must be paid on business profits. How that tax is paid depends on how the business is structured. Most small businesses are pass-through entities, which means that the business’s profits or losses are passed through to the owners and reported on their personal income tax returns.

Partnerships and multi-member limited liability companies (LLCs) generally file a partnership business tax return for informational purposes only. The individual partners and LLC members pay income taxes for their share of the income of the business. Note, however, that some LLCs elect to be treated as a corporation for tax purposes.

An S corporation files an S corporation income tax return for the business. Like a partnership, an S corporation’s net income is divided among the owners, who pay tax on their share of that income individually.

A sole proprietor reports business profit or loss on a separate schedule filed with the sole proprietor’s individual income tax return. Unless an election to be treated as a corporation has been made, the owner of a single-member LLC also reports the company’s profit or loss directly on the owner’s return.

Social Security and Medicare Taxes

Employers must generally withhold Social Security and Medicare taxes from their employees’ wages and must pay a matching amount. Employers must also withhold the 0.9% additional Medicare tax on employee wages and compensation that exceeds a threshold amount.

Self-Employment Taxes

Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes paid for other workers.

Federal Unemployment Tax

Employers are required to report and pay the Federal Unemployment Tax Act (FUTA) tax separately from federal income taxes and Social Security and Medicare taxes. FUTA tax is not withheld from wages; employers are responsible for paying the tax.

Business owners should exercise extreme care when it comes to paying taxes since any mistakes on their part could result in significant penalties. For assistance, consult a tax professional.

First time hiring an independent contractor? Here’s what you need to know about taxes.

Two months ago in this column, we explained the differences between employees and independent contractors. The IRS has strict rules that you must follow when you make this distinction because there are very different tax rules for each type of worker.

If you’re hiring an independent contractor for the first time, here’s the good news: Your income tax obligations are much simpler than they’d be if you were bringing on a new employee. You are not responsible for withholding and submitting payroll taxes to the IRS and state agencies. You simply pay the compensation that you and your worker have negotiated.

Here’s a look at the forms you and your independent contractor will need to complete.

The W-9

Independent contractors must complete a W-9 before they can get paid by you.

Where employees have to fill out a Form W-4 form to get paid by their employers, independent contractors are required to enter tax-related data on a Form W-9. This is a very simple document, requiring only the taxpayer’s:

• Name, address, and business name (if different).
• Business entity type (sole proprietor, partnership, LLC, etc.).
• Taxpayer Identification Number (TIN). This will most likely be your contractor’s social security number, though in rare cases, it may be an employer identification number (EIN).
• Signature and date signed.

You or your independent contractor can print out a copy of the W-9 here. He or she can either send you a completed paper copy or scan it and email it to you. As the employer, you’ll use this information to report your independent contractor’s annual income. The IRS advises you to keep this form for four years in case it has questions at a later time.

Form 1099-NEC

Before tax year 2020, nonemployee compensation was reported in Box 7 of the Form 1099-MISC. Now, though, there is a separate form for it: the Form 1099-NEC. If you paid someone who is not your employee $600 or more during the tax year, you must complete this form. You’ll need to submit one copy to the IRS, one to state taxing agencies, and one to the contractor by January 31 of the year following the year the income was earned.

You’ll need several copies of the 1099-NEC for distribution.

In addition to the taxpayer’s name, address, and TIN, and your TIN (account number is optional), you must include the following information on the Form 1099-NEC:

• Box 1 should contain the total that you paid the independent contractor during the tax year (nonemployee compensation)
• If the Box 2 is checked, it signifies that you sold $5,000 or more in consumer products to the contractor for resale, on a buy-sell, a deposit-commission, or other basis. The contractor should report income from these sales on the Form 1040’s Schedule C.
• Box 3 is not currently being used by the IRS.
• If you withheld federal income tax from the contractor’s payments, as is required when he or she does not supply a TIN, you must report it in Box 4.
• Boxes 5-7 would only be used if you withheld state income tax.

You can see an example of the Form 1099-NEC here, but you can’t just print or scan and email all of the copies needed. Copy A goes to the IRS, and the other copies go to state tax departments and the independent contractor. You must have an official IRS version of Copy A because it needs to be scanned by the agency. The other copies can be downloaded and printed.

The Form 1099-NECs that you send to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. We’ll tell you more about acquiring and preparing all of these forms as the deadline for the 2021 tax year gets closer. Your relationship with your independent contractor should be fairly uncomplicated where taxes are concerned. But if you’re dealing with a situation that causes you to question your handling of it, please let us help. We can also advise you on your classification of your new hire (independent contractor vs. employee), a distinction that the IRS takes very seriously. As always, we’re available to help with year-round tax planning and eventual preparation and filing.

Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

• An officer or an employee of a corporation
• A member or employee of a partnership
• A corporate director or shareholder
• Another person with authority and control over funds to direct their disbursement
• Another corporation or third-party payer
• Payroll service providers

The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax professional if you need to know more about the requirements.

Eligible employers are entitled to an Employee Retention Tax Credit (ERTC) of up to 70 percent of the first $10,000 in wages and certain health care plan expenses paid per employee for each of the first two quarters of 2021 according to the New Stimulus Act.

What is the Employee Retention Tax Credit (ERTC)?

Designed to incentivize businesses to keep employees on the payroll during the pandemic, the ERTC is a fully-refundable tax credit that is part of the federal government’s COVID-19 relief plan. As part of this plan, the New Stimulus Act includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which became effective January 1, 2021. This Act amends and extends the former ERTC and the availability of advance payments of the tax credits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Is My Company Eligible for the ERTC?

Previously, employers could only take advantage of the Paycheck Protection Program (PPP) OR the ERTC, so the ERTC was not widely used. However, Congress revised this provision to make both plans available to qualifying businesses.

As of December 2020, small businesses (with 500 or fewer employees) that suffered a revenue reduction in 2020 can claim the ERTC. A revenue reduction specifically means a business experienced a decline in gross receipts by more than 20 percent in any quarter of 2020 compared to the same quarter in 2019. (Note this is a change from the previous ERTC rule that required a gross receipts decline of at least 50 percent.)

Further, the tax credit applies to employers, including tax-exempt organizations, that conducted business during 2020 and were forced to fully or partially suspend operation during any quarter due to government orders related to COVID-19, according to the Internal Revenue Service (IRS).

How is the Maximum Amount of ERTC Determined?

As mentioned, under the New Stimulus Act, eligible employers are entitled to a tax credit equal to 70 percent of the first $10,000 in wages and qualifying health plan expenses paid per employee for each of the first two quarters of 2021 (up to $14,000).

Note that the combined maximum $14,000 credit for the first two quarters of 2021 is available even if the employer previously received the $5,000 maximum credit for wages paid in 2020.

In addition to the aforementioned changes to the ERTC, the wage period has been extended. Under the New Stimulus Act, qualified wages are those paid after March 12, 2020 up until July 1, 2021. The previous cutoff date was January 1, 2021.

What are Qualified Wages?

Qualified wages are wages, compensation, and qualified health plan expenses paid by an eligible employer after March 12, 2020 and before July 1, 2021 for time that the employee did not provide services due to a full or partial COVID-19-related government suspension of operations OR a 20 percent or greater decline in gross receipts.

For specific determinants, see sections 3121(a) and 3231(e) of the Internal Revenue Code.

The determination of qualified health plan expenses is the same as qualified health plan expenses for the Family and Medical Leave Tax Credit under the Families First Coronavirus Response Act.

Number of Employees Matters

Under the CARES Act, companies with 100 or fewer employees were eligible for the ERTC; however, under the New Stimulus Act, the threshold increased to 500 employees. In other words, for the first two quarters of 2021, a company with 500 or fewer employees is eligible for the ERTC. This is true whether those employees are working or not.

Other Notable Changes to the ERTC

• Previously, governmental entities were not eligible for the ERTC under the CARES Act; however, under the New Stimulus Act this tax credit is available to state or local run colleges, universities, and organizations providing medical or hospital care.
• While the New Stimulus Act allows businesses with a PPP loan to qualify for the ERTC, the tax credit may not be claimed on wages paid with the PPP loan that has been or will be forgiven.

As always, seek counsel from your trusted accountant, tax preparer, or CPA to be certain your business is in compliance with current laws related to the ERTC or any tax matter.

We offer a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call us at 404-459-4174 and request a free initial consultation to learn more.

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

An employer’s SUTA tax rate is susceptible to fluctuation. If yours is escalating, contrary to popular belief, you actually might be able to reduce it! Check out these five strategies to curb your SUTA tax rate.

Because the State Unemployment Tax Act – or SUTA – tax is mandatory, you may think you have no control over your SUTA rate. But to some extent, you do. The first thing to remember is that each state sets its own criteria for state unemployment tax, and rates vary by employer.

Typically, new employers are assigned a standard “new employer” rate. Over time, they receive an “experience rating,” which can be higher or lower than the new employer rate. The experience rating mainly depends on how many former employees have drawn unemployment benefits on the employer’s account. The more benefits claimed on an employer’s account, the higher its SUTA tax rate. Other determinants may include whether the employer is in the construction industry and the employer’s payroll size.

You may be powerless against some of these influencers – such as your business’s age and industry — but there are other ways to lower your SUTA rate. Here are five tactics.

1. Hire only when needed

Letting employees go because you don’t need them anymore likely renders them eligible for unemployment benefits. If they file for unemployment benefits, your SUTA rate is likely to increase. So, make sure you truly need an employee before hiring him or her.

2. Help your employees succeed

Employees terminated for gross misconduct typically do not qualify for unemployment benefits. However, employees fired for poor performance – such as due to lack of skills – may be eligible. To reduce the likelihood of terminating employees for poor performance, give them the resources they need to succeed, including proper tools and training.

3. Use independent contractors

You can avoid unemployment claims by legally hiring independent contractors instead of employees. If you decide to take this route, ensure all mandatory requirements for independent contractor status are met, including the Internal Revenue Service’s “right-to-control” test and applicable state tests.

4. Contest dubious unemployment claims

Dubious unemployment claims may involve former employees providing the state workforce agency with false information to obtain benefits or filing a claim even though they were rightfully terminated for gross misconduct. Before you fight an unemployment claim, consult with an unemployment benefits expert to gauge the strength of your case. Also, make sure you have supporting documents to back up your version of events.

5. Make voluntary contributions

Many states allow employers with an experience rating to voluntarily make a “buydown” payment, which cancels all or part of the benefits charged to their account, thereby reducing their SUTA tax rate.

More tips

Consider alternatives to layoffs, such as reducing employees’ work hours via your state’s work-sharing program.

Offer departing employees a solid severance package as well as outplacement services to help them quickly find a job. This way, they will be less inclined to rely on unemployment benefits.

Keep an eye on your SUTA tax rate. If it’s spiking for unknown reasons, contact your state’s workforce agency for an explanation.

We offer a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call us at 404-459-4174 and request a free initial consultation to learn more.