Windham Region Chamber of Commerce

IRS Tips

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GIG PERFORMERS-MUST REPORT INCOME

In 2020, many people joined the gig economy to help make ends meet during the pandemic. Whether it’s a side business or a primary source of income, all taxpayers need to understand how their gig work affects their taxes. The bottom line is taxpayers must report gig economy income on their tax return.

Here’s a quick overview of the gig economy:

The gig economy is also referred to as the on-demand, sharing or access economy. People involved in the gig economy earn income as a freelancer, independent worker or employee. They use technology known as online platforms to connect them with customers to provide goods or services. This includes things like renting out a home or spare bedroom and providing delivery services.

Here are some things taxpayers should know about the gig economy and taxes:

• Money earned through this work is usually taxable.
• There are tax implications for both the company providing the platform and the individual performing the services.
• This income is usually taxable even if the:

– Taxpayer providing the service doesn’t receive an information return, like a Form 1099-NEC, Form 1099-MISC, Form 1099-K, or Form W-2.
– Activity is only part-time or side work.
– Taxpayer is paid in cash.

• People working in the gig economy are generally required to pay:

– Income taxes.
– Federal Insurance Contribution Act or Self-Employment Contribution Act tax.
– Additional Medicare taxes.

• Independent contractors may be able to deduct business expenses. These taxpayers should double check the rules around deducting expenses related to use of things like their car or house. They should remember to keep records of their business expenses.
• Special rules usually apply to rental property also used as a residence during the tax year. Taxpayers should remember that rental income is generally fully taxable.
• Workers who do not have taxes withheld from their pay have two ways to pay their taxes in advance. Here are these two options:

– Gig economy workers who have another job where their employer withholds taxes from their paycheck can fill out and submit a new Form W-4. The employee does this to request that the other employer withholds additional taxes from their paycheck. This additional withholding can help cover the taxes owed from their gig economy work.
– The gig economy worker can make quarterly estimated tax payments. They do this to pay their taxes and any self-employment taxes owed throughout the year.

For more information on the gig economy, taxpayers can visit the Gig Economy Tax Center.

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BEWARE OF “GHOST” TAX PREPARERS

“Ghost” tax preparers are a problem and the Chamber receives several complaints every year of this fraud.  Unfortunately we cannot help except to give them information of the process of making a complaint to the IRS.  We do have several members that are reputable and we recommend:  H&R Block (several locations throughout our region-just tell them where you live) 860-423-1076 and Padgett Business Services-Jeff Kreyssig 401-783-4500.  Both companies are wonderful and can meet with you for both your personal or business taxes.  Please read the rest of this story so you are NOT A VICTIM OF GHOSTS!

The Internal Revenue Service reminds taxpayers to avoid “ghost” tax return preparers whose refusal to sign returns can cause a frightening array of problems. It is important to file a valid, accurate tax return because the taxpayer is ultimately responsible for it.

Ghost preparers get their scary name because they don’t sign tax returns they prepare. Like a ghost, they try to be invisible to the fact they’ve prepared the return and will print the return and get the taxpayer to sign and mail it. For e-filed returns, the ghost preparer will prepare but refuse to digitally sign it as the paid preparer.

By law, anyone who is paid to prepare or assists in preparing federal tax returns must have a valid Preparer Tax Identification Number, or PTIN. Paid preparers must sign and include their PTIN on the return. Not signing a return is a red flag that the paid preparer may be looking to make a fast buck by promising a big refund or charging fees based on the size of the refund.

Unscrupulous tax return preparers may also:

  • Require payment in cash only and not provide a receipt.
  • Invent income to qualify their clients for tax credits.
  • Claim fake deductions to boost the size of the refund.
  • Direct refunds into their bank account, not the taxpayer’s account.

The IRS urges taxpayers to choose a tax return preparer wisely. The Choosing a Tax Professional page on IRS.gov has information about tax preparer credentials and qualifications. The IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications can help identify many preparers by type of credential or qualification.

No matter who prepares the return, the IRS urges taxpayers to review it carefully and ask questions about anything not clear before signing. Taxpayers should verify both their routing and bank account number on the completed tax return for any direct deposit refund. And taxpayers should watch out for preparers putting their bank account information onto the returns.

Taxpayers can report preparer misconduct to the IRS using IRS Form 14157, Complaint: Tax Return Preparer. If a taxpayer suspects a tax preparer filed or changed their tax return without their consent, they should file Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit.

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US DOL FINAL RULE ON EMPLOYEE TIPS

The US Department of Labor has ruled the following:

Employers cannot keep tips their employees receive, nor can they allow managers or supervisors to keep any portion of those tips.

The agency issued a final rule that addressed changes made to the Fair Labor Standards Act by the Consolidated Appropriations Act of 2018.

It said:  prohibits employers or managers from keeping any part of employees’ tips, regardless of whether the employer takes a credit for tips earned by workers toward its minimum wage obligation to those employees under the FLSA.

“This final rule provides clarity and flexibility for employers and could increase pay for back-of-the house workers, like cooks and dishwashers, who have been excluded from participating in tip pools in the past,” Wage and Hour administrator Cheryl Stanton said in a statement.

“Newly allowed tip sharing may incentivize the inclusion of these previously excluded workers and reduce wage disparities among all workers who contribute to customers’ experience.”

Clarification

By clarifying the rule, the department said it’s helping employers and workers throughout food service industries.

The agency said the final rule also largely codifies its guidance on an employer’s ability to claim the tip credit when workers do tipped and non-tipped duties, clarifying when employers can continue to claim the tip credit while the employee performs duties that do not generate tips.

The guidance clarifies which non-tipped duties are considered related to a tip-producing occupation.

The CAA did not impact established regulations that apply to employers who take a tip credit under the FLSA.

Tip Pools

An employer who claims a tip credit must ensure that a mandatory “traditional” tip pool includes only workers who customarily and regularly receive tips, meaning employees such as cooks or dishwashers aren’t included.

However, the CAA removed the regulatory restrictions on an employer’s ability to require tip pooling when it does not take a tip credit and instead pays tipped employees the full minimum wage in direct wages.

Those employers may now implement mandatory nontraditional tip pools, which can include employees such as cooks and dishwashers.

The final rule takes effect 60 days after publication in the Federal Register.

source:  CBIA

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AS OF 2020 BUSINESS ENTITY TAX IS ELIMINATED

The Business Entity Tax was a $250 tax every 2 years that every business had to file. The last one that you got a bill for was for the years 2017-2018. You will not get a bill for 2019-2020. You do not have to do anything to stop getting billed for this. However, if you owe this tax from previous years, you will still owe it for those years and you should pay it asap. Effective July 1, 2020, the filing fee for annual reports will increase from $20 to $80 for LLCs, LPs, and LLPs. To take advantage of the $20 filing fee, file all past due annual reports prior to July 1, 2020. Because of the elimination of the BET, the filing fee increase still results in a net savings for businesses of $65/annually.

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NEW TAX CREDITS GIVE MONEY TO EMPLOYERS FOR COVID RELATED PAID LEAVE

The Families First Coronavirus Response Act provides tax credits to reimburse employers for the costs of providing paid sick leave and paid family and medical leave to employees unable to work because of the coronavirus (COVID-19). These credits are refundable. That means if the amount of the credit exceeds the amount of tax owed, the remainder is refunded to the business or organization.
The law is intended to allow employers to keep employees on their payrolls, while at the same time making sure employees aren’t forced to choose between their paychecks and public health measures needed to combat COVID-19.
These credits are available to eligible employers beginning April 1, 2020, for qualifying leave they provide between April 1, 2020, and Dec. 31, 2020.
Covered employers
Eligible employers are businesses and tax-exempt organizations with fewer than 500 full-time and part-time employees within the United States or any U.S. territory or possession and that have to meet employer paid leave requirements. The Questions and Answers and regulations issued by the U.S. Department of Labor have more information about the 500-employee threshold and the paid leave requirements.
The law allows equivalent credits for self-employed individuals in similar circumstances. For details, see specific provisions related to self-employed individuals in the COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs.
Paid sick leave requirement and credit
Employees of eligible employers who are unable to work or telework because they’re quarantined or experiencing COVID-19 symptoms and seeking a medical diagnosis can receive up to 80 hours of paid sick leave. This pay is at their regular rate of pay or, if higher, the applicable minimum wage, up to $511 per day and $5,110 in total.
Employees can receive up to 80 hours of paid sick leave at 2/3 of their regular pay or, if higher, the applicable minimum wage, up to $200 per day and $2,000 in total. Employees can receive this benefit if they need to care for:
  • an individual subject to quarantine,
  • a child whose school or place of care is closed, or
  • a child whose child-care provider is unavailable,
due to COVID-19 or because they’re experiencing similar conditions as specified by the U.S. Department of Health and Human Services.
An employee is eligible for paid sick leave, regardless of length of employment.
The eligible employer is entitled to a fully refundable tax credit equal to the required paid sick leave wages. Eligible employers can also get an additional credit for the employer’s share of Medicare tax imposed on the qualfied sick leave wages and the cost of maintaining health insurance coverage for the employee during the sick leave period. The employer is not subject to the employer portion of Social Security tax on those wages.
Paid family and medical leave requirement and credit
In addition to the paid sick leave credit, an employee who is unable to work or telework because of a need to care for a child whose school or place of care is closed or whose child-care provider is unavailable due to COVID-19, is entitled to paid family and medical leave equal to 2/3 of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted toward the paid family leave credit.
An employee qualifies for paid family and medical leave if they’ve been on an employer’s payroll for 30 calendar days or more.
The eligible employer is entitled to a fully refundable tax credit equal to the required paid family leave wages. Eligible employers can also get an additional credit for the employer’s share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the family leave period. The eligible employer isn’t subject to the employer portion of Social Security tax on those wages.
Example
An employee’s child-care provider is unavailable indefinitely due to the COVID-19 outbreak, leaving the employee unable to work or telework because of the need to care for their child. For up to the first 80 hours of any period of leave to care for their child, the employee is entitled to qualified sick leave wages, up to $200 per day and $2,000 in total. After that, the employee is entitled to qualified family leave wages for up to 10 weeks of additional leave needed, up to $200 per pay and $10,000 in total.
How to claim the credits
Eligible employers report their total qualified leave wages and the related credits for each quarter on their federal employment tax return, usually Form 941, Employer’s QUARTERLY Federal Tax Return. They can receive the benefit of the credits by reducing their federal employment tax deposits for that quarter by the amount of the qualified leave wages, allocable qualified health plan expenses, and the employer’s share of Medicare tax on the wages. They’ll account for the reduction in deposits due to the leave credits on the Form 941 they file at the end of the quarter.  The IRS recently posted Frequently Asked Questions about the ability both to reduce deposits for the credits and to defer the deposit of all of the employer’s portion of Social Security tax due before January 1, 2021 under a separate provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
If employers don’t have enough federal employment taxes to cover the amount of the credits, after they have deferred deposits of employer Social Security taxes under the CARES Act as discussed in the Frequently Asked Questions, they may request an advance payment of the credits from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. They may fax their completed forms to 855-248-0552.
Examples: An eligible employer is entitled to a credit of $5,000 for paying qualified sick leave wages and qualified family leave wages (and allocable health plan expenses) and is otherwise required to deposit $8,000 in federal employment taxes withheld from all of its employees for wage payments made during the same quarter as the $5,000 in qualified leave wages. The employer may keep up to $5,000 of the $8,000 of taxes it was going to deposit, and it will not owe a penalty for keeping the $5,000. The eligible employer will claim the credit and reflect the reduced liability for the $5,000 when it files Form 941.
An eligible employer is entitled to a credit of $10,000 for paying qualified leave wages (and allocable qualified health plan expenses) and is otherwise required to deposit $8,000 in federal employment taxes withheld from all of its employees on wage payments made during the same quarter. The employer can keep the entire $8,000 of taxes that it was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on Form 941. The employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.
Keep records to substantiate claims
Eligible employers claiming the credits must keep records and documentation supporting each employee’s leave. The COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs has more information about the documents needed to support the employee’s leave and the employer’s credit.
An employer should keep all employment tax records for at least four years.
The Questions and Answers issued by the U.S. Department of Labor have more information about the leave requirements.