Early heads up on 2021 W-2s, W-3s, etc.

In 2021, you find not only the percentage method and wage bracket method withholding tables in 2021 Publication 15-T, Federal Income Tax Withholding Method, but also the amount to add to a nonresident alien employee’s wages to determine FITW.

 The 2021 Form W-2, 2021 Form W-3, and 2021 W-2/W-3 instructions include how to handle COVID-19- related employment tax credits. n

·         You may see discrepancies in your 2021 Forms W-2/W-3 v. Forms 941/944 reconciliation if your firm took COVID-19 tax relief in 2020. Qualified sick leave and family leave wages are not subject to the employer share of social security tax. Also, deferred employee social security tax is reported on Forms 941 and 944—but not on the W-2 or W-3. n 

·         With respect to reporting deferred 2020 employee SS tax, under Notice 2020-65, SS tax withheld in 2020 and not reported on the 2020 W-2 will be reported on a 2020 W-2c in Box 4, using Box c to indicate the tax year—in this case, 2020.

 2021 Forms W-2c should be filed with the Social Security Administration, along with a W-3c, as soon as possible after withholding the deferred amounts. For details, see the IRS’s reporting deferred 2020 SS tax under Notice 2020-65

 New form issued to help self-employed obtain COVID tax credits.

 Although coronavirus[1]related tax credits are for wages paid to employees, self-employed can take comparable credits on their income tax returns when they had to take time off work because they or a family member were affected by COVID-19.

 Self-employed can claim the credits on new Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. These credits, scheduled to expire at the end of 2020, were extended through Mar. 1, 2021. Qualified individuals will claim the credits on their 2020 Form 1040 (your client may want to file an amended 1040-X) for leave taken between Apr. 1, 2020, and Dec. 31, 2020, and on their 2021 Form 1040 for leave taken between Jan. 1, 2021, and Mar. 31, 2021.

 To be eligible, a self-employed had to have carried on a trade or business during the year and been eligible for qualified sick leave wages under the Emergency Paid Sick Leave Act or, if the individual was also an employee, would have received qualified family wages under the Emergency Family and Medical Leave Expansion Act.

 For details on how to calculate credits, visit eligible self-employed and self-employed who are also employees. [IR-2021-31]

 

Tax Calendar                                   

May 05     Wed.     Apr. 28 – 30    Fri.

May 07     Fri.        May 1 – 4       Tues.

May 10     Mon.     File 1st q. 941 if all deposits were paid timely and in full.

May 10     Mon.     Form 4070 due from tipped employees

May 12     Wed.     May 5 – 7      Fri.

May 14     Fri.        May 8 –11     Tues

 

• ·         The only acceptable reason for delaying deposit of payroll taxes due is a legal federal holiday.
• ·         Deposits of $100,000 or more must be made within one business day of the day that the tax liability is incurred.

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New IRS audits aim at business owners.

One IRS campaign will focus on high-income self-employed and small-business owners who do not file income tax returns. The IRS will use information returns such as K-1s, W-2s, 1099s, and 1120S and 1065 partnership returns, review foreign-reported data, currency transactions and suspicious activity reports, and whistleblower claims.

 A second campaign will target high-income taxpayers who file complex returns—usually a 1040 that has flow-through income from S corps, partnerships, trusts and other financial interests. Unlike past audits, these will be conducted by teams of auditors simultaneously reviewing all or most sources of income on the return. Each auditor will focus on one part of the return, so that each entity associated with the return will be audited along with the individual taxpayer.

 Both campaigns may refer taxpayers for criminal investigation, but the first one emphasizes criminal referrals more because failure to file returns or report all income was done knowingly. Some audits in the first campaign will be initiated by letter, many will begin with an unannounced visit so the taxpayers’ statements will be on the record before they can consult with a tax advisor or review their records.

 What you should be doing right now… Anyone who might be included in either IRS campaign should be bringing themselves into compliance with tax law before the IRS audits begin.  

 [Tax Notes Today]

T3 Bizz Bookkeeping & Accounting Services can help you get prepared and in compliance – Contact us NOW mailto:t3bizz@gmail.com

 

Is your employees’ withholding still wrong? 

Even employees who used the new W-4 may still have the wrong amount of FIT withheld from paychecks. 

And who will they blame when they file their 1040s and get a notice from the IRS? You or your employer —or both. 

Three major causes: 

1. The employee did not submit the new W-4. FITW based on the old W-4 is likely to be wrong if an employee has two jobs or files married filing jointly and the spouse also works. 

2. The employee submitted the new W-4 but did not complete it properly. Here, too, the problem is likely to be that the worker has two jobs or is married filing jointly and the spouse also works. 

3. The employee’s income or circumstances change during the year due to a birth, adoption, marriage, or home purchase or a significant change in income. 

Solution for causes 1 and 2: 

These employees need to complete and submit a new W-4 and make sure to check “Step 2: Multiple Jobs or Spouse Works—and use the IRS Withholding Estimator or the Multiple Jobs Worksheet. The new W-4 also urges such employees to check the box indicating there are two jobs total. Reminder: This box must be checked on each W-4 filed—i.e., your employee’s W-4 and that employee’s spouse’s W-4. 

If either your employee or your employee’s spouse fails to check the box in Step 2, it can result in substantial under withholding. The same applies if your employee holds a second job—the employee must check the box in Step 2 on the W-4 for both jobs. 

Catch 22 …, Checking the box on both W-4s works only if the second job or spouse’s job has similar pay. Otherwise, there can be significant over withholding. 

[Tax Notes Today]

 

Do Nonprofits Ever Pay Taxes?
 
When you think about a nonprofit, the first thing that often comes to mind is that it is tax-exempt. Most nonprofits are not subject to federal, state, and local income tax.
 
Does that mean nonprofits are completely free of ANY tax liability? The answer to this is likely no – there are still some taxes that a nonprofit might be liable for. If you are considering starting a nonprofit organization, you won’t want to be surprised, so we’ll break it down for you. 
 
Taxes That Do NOT Apply to Nonprofits
 Generally a nonprofit is not subject to income tax at the federal, state, or local level on funds raised in direct association with the organization’s mission.  The reasoning behind this exemption is that it allows more resources to be put toward its cause(s).
 
A nonprofit that qualifies for federal tax-exempt status is also exempt from paying property tax in all 50 states, by law. Sales tax is also often waived for certain transactions related to the organization’s mission, but not always. It depends on the nature and amount of sales activities of the nonprofit.
 
Taxes That Do Apply to Nonprofits
 Sales and use tax may also need to be paid. With sales tax, there is a distinction between paying sales tax on purchases, and collecting and remitting sales tax on sales. A nonprofit may need to pay sales tax on purchases from a vendor depending on the rules of its state and other considerations.
 
On the flip side, if a nonprofit is engaged in a business activity unrelated to its charitable mission and/or involved in sales of taxable items or services to customers, it may be obligated to collect and remit sales tax.
 
It is important to distinguish between these two areas and keep in mind that even if a nonprofit is exempted from paying sales tax on purchases, that exemption does not necessarily extend to collecting and remitting sales tax on outside sales.
 
Another area where a nonprofit might be liable to pay tax would be on what is called Unrelated Business Taxable Income (UBTI). This is income that is unrelated to the nonprofit’s core mission. As an example, a fundraising event to sell merchandise to raise money for equipment that will directly help carry out the entity’s cause would NOT be considered an unrelated activity, despite the sale of items to customers, because the money is going directly towards helping to advance the charitable mission.
 
On the other hand, if that merchandise is sold as part of a trade or business that is regularly carried on by the nonprofit and the proceeds are used to fund general operating costs like payroll or office expenses and not specific program expenses, that income could be considered UBTI because it is not substantially related to the organization’s charitable purpose.
 
If a nonprofit has over $1,000 of UBTI it must file Form 990-T and pay tax on that income. If the nonprofit is structured as a corporation, it will pay the flat 21 percent rate on that income, like the 21 percent tax paid by for-profit corporations.  If it’s set up as a trust it will be taxed at trust rates, the highest of which is 37 percent. Because this is a gray area of the law and subject to some interpretation, it is highly recommended that a nonprofit seeks the advice of a tax professional in navigating the rules and determining if it is subject to UBTI reporting and taxation.
 
So, as you can see, taxes are not completely off the table just because an organization is exempt from federal income tax. Several different types of tax could come into play for a nonprofit, depending on whether it has employees, the nature of its activities, and other considerations.

 If a nonprofit organization hires employees, it will be subject to payroll taxes. Just like employees of for-profit entities, these individuals are required to pay tax on their earnings, and the organization is liable for the employer’s share of the payroll taxes.

 

Recent California Uber IC referendum does not affect small biz.

Uber and Lyft funded a ballot referendum in November’s election that exempts them from a recent state law classifying most workers as employees instead of independent contractors (ICs). The referendum passed by a wide margin.

Changes in IC v. employee classification in one state are often a bellwether for firms in other states. But in this instance, most other employers do not benefit.

The referendum narrowly applied to companies that employ drivers through apps. When certain conditions are met, those companies can treat the drivers as independent contractors.

Other employers in California still must classify most workers using the ABC test, the test used in various versions by most states, which requires employers to prevail on tests A, B and C for a worker to be treated as an IC, as follows:

A.  The worker must clearly be free from the hiring entity’s direction for the work, both in the terms of the contract and in the conduct of the relationship.

B.   The worker does work that is outside the hiring entity’s usual business—e.g., truck drivers who work for a trucking company do not do work outside the scope of the hiring entity’s business, so they are employees. A plumber doing work at a retail store is performing work outside the hiring entity’s usual business.

C.  The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

 

Works Cited

Bookkeepers, A. I. (2021). Recent California Uber IC referendum does not affect small biz. The General Ledger, Vol. 38, No. 1.

 

 

 

The Concept of Independence in Accounting

 

Independence is a key concept in accounting, especially in the assurance or auditing area of accounting. Assurance services are services where a licensed CPA reviews an organization’s financial statements and accounting records and provides an opinion about them. This opinion takes the form of a report that can be shared with third parties such as banks and shareholders. Auditing services are one of many forms of assurance services. 

 

Only a licensed CPA can provide assurance services; this is regulated by the states. A CPA who provides certain assurance services must be independent from the business that it is writing an opinion for. Essentially, independence means that the auditor must be able to do their work objectively and with integrity. And it goes farther. The auditor must not be perceived as having any kind of bias or connection with the business it is auditing. There must be no perception of any impropriety. 

 

To this end, the auditor must not have a relationship with the company’s executives. A CPA cannot, for example, audit her brother’s company.  A CPA cannot be an investor in the company and also be the auditor because of the financial relationship. The audit opinion must not be influenced in any way by a relationship between the auditor and anyone in the company. The CPA must be able to provide an honest, professional, and unbiased opinion when auditing financial statements.

 

Being independent also means the CPA must have a healthy dose of skepticism.  A common phrase in the accounting profession is “Trust, but verify.”

 

Numerous rules abound to protect auditor independence. For example, an auditor cannot be paid on a contingent or commission basis. All practicing CPAs must complete ethics courses every few years, and these almost always include independence scenarios and case studies.

 

If you have any questions about independence, assurance, or auditing, please feel free to reach out any time. 

 SSA letters should get immediate action.

The Social Security Administration (SSA) is just now mailing letters to employers that filed 2019 Forms W-2 with employee names/SSNs that did not jibe with SSA records. Because a mismatch can be caused by typos, unreported name changes, inaccurate or incomplete employer records, or other problems, the SSA letter says:

“This letter does not imply that you or your employee intentionally gave the government wrong information about the employee’s name or SSN. This letter does not address your employee’s work authorization or immigration status. Do not take adverse action against an employee, such as laying off, suspending, firing, or discriminating against that individual, just because this letter identifies a mismatch between his or her SSN or name as reported to us. Those actions could violate state or federal law and subject you to legal consequences.”

If you receive this letter, review it, then verify and correct the inaccurate data. The letter will include an attachment with instructions on how to register for and use Business Services Online (BSO) to view name/SSN mismatches and how to file a W-2C with the IRS.
 
Why “immediate” action?
To make sure your 2020 W-2s are correct so you do not have to file a 2020 W-2C.
 
IRS penalties, too
The SSA shares its data with the IRS, which can impose penalties for:  
·        failure to file timely (information returns with errors are considered information returns not filed);
·        failure to include required information on a W-2
·        incorrect W-2 information (a name and/or SSN that does not match government databases); and for
·        files on paper when required to file electronically.
 
Penalties.
 $280-$560 per inaccurate W-2 (there can be multiple penalties for the same mistake on a W-2).
 
Works Cited
SSA Letters Should Get Immediate Action, American Institute of Professional Bookkeepers. 2021, The General Ledger,Vol. 38, No. 1.

 The 13-Week Cash Flow Forecast

 

One of the best tools to forecast cash requirements is the 13-week cash flow forecast. It can help a business owner predict what their cash balance will be 13 weeks in the future. It helps to answer whether there will be enough cash to cover payroll and bills for a particular week. If you’re having significant ups and downs in your cash balance, it’s the perfect tool to help gain clarity around your cash needs. 

 

Thirteen weeks may sound like an odd length to select, but it’s the length of a calendar quarter. This is the length of a financial projection that is typically used when a business is in financial distress; however, it’s also useful when a company is going through some ups and downs or simply wants to get a better handle on its cash requirements.    

 

The forecast computations start with entering cash receipts and cash disbursements into a spreadsheet. Start with actual spending and receipts for the first week, then use estimates for the remaining weeks. Include planned expenditures such as overhead, payroll, and loan payments. Add in inventory purchases. Project your receipts based on history or recent changes in your business.

 

Once you’ve completed your forecast, you can make changes and do what-if scenario planning.  For example, if the forecast shows that you will run out of cash in week seven, you have some time to decide what you need to do to remedy the shortfall. Options might be:

 

• Accelerate the collection of 30 percent of your receivables.
• Dip into your line of credit to cover a portion the shortfall.
• Furlough 10 percent of your workers.

 

Plug your selected scenario into the forecast to see how much that relieves your shortfall. 

 

The benefits of creating a 13-week cash flow forecast are many. You can see what actions need to be taken and when to take them well ahead of time. You can also see how much of an action you need to take. For example, instead of furloughing 50 percent of your staff, you may only need to furlough 25 percent.  Or instead of borrowing $50,000, you might only need $20,000.

 

The cash flow forecast can also save time when developing your annual budget. Budgets are especially useful when business conditions are volatile or when business owners need all the clarity they can get. 

 

Try your hand creating a 13-week cash flow forecast for your business, or reach out to us for help any time. 

 

Business Owners—Taking Money Out of a Business

When taking money out of a business, transactions must be carefully structured to avoid unwanted tax consequences or damage to the business entity. If the loan and repayments are not set up and processed properly, the IRS can reclassify the funding as nondeductible capital contributions and classify the repayments as taxable dividends, resulting in unexpected taxation. A weak loan structure can also create a danger zone where a court can “pierce the corporate veil,” resulting in personal liability for the business owner.

Intermingling Funds

One of the most dangerous financial mistakes a business owner can make is to intermingle funds, such as paying personal expenses from the business checking account, or paying business expenses from the owner’s personal account.  This behavior can leave openings for the IRS or courts to question the integrity of the business entity. Failure to maintain complete financial separation between a business and its owners is one of the major causes of tax and legal trouble for small businesses.

Sole Proprietorships

A sole proprietor is taxed on self-employment income without regard for activity in the business bank account. A sole proprietor should never pay himself or herself wages, dividends, or other distributions. A sole proprietor may take money out of the business bank account with no tax ramifications.

   Taking Money Out - Wages

One way for a business owner to take money out of a corporation is through wages for services performed. Wages are appropriate only for C corporations and S corporations, not for sole proprietorships or partnerships.

Reasonable Wages

Both C corporations and S corporations are required by law to pay “reasonable wages,” which approximate wages that would be paid for similar levels of services in unrelated companies.  In a C corporation, wages are deductible by the corporation but dividends are not, creating incentive for a C corporation shareholder to inflate the wages for higher deductions. In an S corporation, wages are subject to payroll taxes but flow-through income is not, creating an incentive for artificially low wages.

Guaranteed Payments

Guaranteed payments to partners are the partnership counterpart to corporate wages. With guaranteed payments, there is no withholding for payroll taxes or income tax. These amounts are computed and paid on the partner’s individual Form 1040.

Dividends

Dividends are generally the means by which a C corporation distributes profits to shareholders. Amounts up to the C corporation’s “earnings and profits” are taxable to the shareholder.

Flow-Through Income—S Corporations and Partnerships

Income from S corporations and partnerships flow through to the shareholder or partner’s individual tax return.  Distributions of cash to an S corporation shareholder or partner are not taxable to the individual until the person’s cost basis reaches zero.

Loans

A corporation or partnership can receive loans from shareholders or partners, and can give loans to shareholders or partners. There is generally no taxable event when a corporation or partnership repays a loan from a business owner, and no taxable event when a corporation or partnership makes a bona-fide loan to a shareholder or partner.

Limited Liability Companies (LLCs)

A single-member LLC owned by an individual is considered a “disregarded entity” and is taxed as a sole proprietorship by default. If the LLC makes an election to be taxed as a corporation, either C corporation or the S corporation rules apply. An LLC owned by more than one individual is taxed as a partnership by default. As with a single-owner LLC, a multiple-owner LLC may make an election to be taxed as a corporation.

 

Five Expenses to Cut During Tough Times

 

If revenue hasn’t come back as fast as you expected it to, it may be time to review your budget and determine if some planned expenses can be cut. Here are five places to look to do just that.

 1-      Travel

 Since most events have been moved online or cancelled altogether, you can likely redirect any money you’ve budgeted for travel this year to other more urgent expenses. And if you have prepaid these items, you may be able to get a refund. Hotels have flexible refunds up to the date of the stay unless you took a prepaid deal.  And airlines have begrudgingly provided refunds, although in some cases, it did take time to get them. 

 Now that so many employees are familiar with Zoom and other videoconferencing tools, you may want to rethink any future travel requirements that could easily be accomplished virtually with a much lower budget.

2-      Training

  While it’s never a good idea to cut training, there may be ways to deliver it more affordably. You may be able to purchase subscriptions to online courses that include an “all-you-can-eat” component to them.  A good example is Lynda.com, now owned by LinkedIn. 

 Any unnecessary training that can be delayed is another way to free up funds. 

 

3-      Dues and Subscriptions

If money is tight, evaluating your memberships is one area where you may be able to free up money. Especially since many in-person events have been cancelled, this might be a good time cancel any renewals you are not able to fully utilize. 

Subscriptions are also something you can review.  Can any of these be cancelled to free up cash?  You can always re-subscribe when things get better.

 

4-      Employee Perks

 If you provide your employees with benefits and times are extremely lean, cutting them is an option to keep from laying off workers.  Some of the options might be: 

• Eliminating perks like movie day, free car washes, or onsite chair massages
• Stopping coverage of paid volunteer hours
• Cutting education expenses if you are paying college tuition for some employees
• Cancelling employees’ memberships and subscriptions as described above
• Slashing training budgets as described above
• Converting event attendance and sales meetings to online versions
• Disallowing overtime work
• Holding off on employee bonuses
• Reducing vacation or holiday pay
• Cutting down on health care options such as vision and dental plans
• Reducing 401(k) matches on a temporary basis (watch out for plan requirements, though)
• Cutting regular hours

 All of these are steps you can take to avoid having to reduce your workforce.

 

5-      Layoffs

 One painful place to look for more cash is your workforce. If work has slowed due to demand, you can raise cash by furloughing or laying off workers.  Unfortunately, many businesses have already had to do this.

 By looking deeply at all of your business expenses, you can find places to cut spending so that you will be in a better position for the future.