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Tax Planning & Preparation

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2020 Unemployment Benefits Tax Exclusion: IRS to Issue Automatic Refunds for Those Who Qualify

The legislation, signed on March 11th, allows taxpayers who earned less than $150,000 in modified adjusted gross income to exclude unemployment compensation. Those who are married and filing jointly can exclude up to $20,400, and all other eligible taxpayers can exclude up to $10,200. The legislation excludes only 2020 unemployment benefits from taxes. Unemployment benefits are generally treated as income. The new tax break is an “exclusion” — meaning workers can exclude jobless benefits from their 2020 taxable income. Individuals should receive a Form 1099-G (find the form here: 1099-g form), showing their total unemployment compensation last year.

Because the change occurred after some people filed their taxes, IRS will recalculate taxes on 2020 unemployment benefits and automatically issue refunds. The first refunds are expected to be made in May and will continue into the summer. For those who have already filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.

For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married and filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns. There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.

The IRS strongly encourages people who have not already filed their federal income tax returns to do so electronically. It has worked with the tax return preparation software industry to incorporate the tax implications of the American Rescue Plan “so people who choose to file electronically simply need to respond to the related questions when electronically preparing their tax returns.

Watch President Biden’s interview regarding the legislation here:
benefits-tax-exempt-10200-explained

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Has Your Information Been Compromised? Are You at Risk of Falling Victim to Identity Theft

If you think your information has been compromised, you are not alone! Identity theft and fraud continue to be major problems. Prevalent categories of fraud are employment or tax-related fraud, and phone or utility fraud. Credit card fraud remains the highest reported (86% of global consumers fall victim to identity theft), followed by employment or tax-related fraud. If you think your identity has been compromised, the first place you should visit is https://www.irs.gov/identity-theft-central.

Identity theft has been on the rise for years, and 2020 was no different. In fact, because of the Covid-19 restrictions, many of us found ourselves relying on the internet for all kinds of shopping. We were online more than ever, creating a significant up-tick in identity theft claims. Thanks to Covid, hackers found another opportunity to wreak havoc on people’s lives. Because of the stimulus checks, thieves began conspiring ways to direct those payments to themselves. “Economic Impact Payments were designed to reach the neediest, not to line the pockets of criminals.  The Eastern District of Texas is committed to fighting fraud and criminal activity related to the COVID-19 pandemic,” read more here: https://www.justice.gov/. Some states, such as Pennsylvania, have recommended filing your taxes early to avoid identity theft.

If you are a taxpayer and want to protect your identity when filing your federal tax return, you can request an identity protection PIN from the IRS.  An Identity Protection PIN is a six-digit number that prevents someone else from filing a tax return using a taxpayer’s Social Security number. The IP PIN is known only to the taxpayer and the IRS, and this step helps the IRS verify the taxpayer’s identity when they file their electronic or paper tax return.

Don’t know if your information has been hacked? Find out how to check. If you find out it has been hacked, here are your next steps.

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Attention New Businesses! Common Payroll Mistakes That You Should Avoid at all Cost

With user-friendly payroll programs, such as QuickBooks, it can be easy to feel confident in your payroll accuracy. Although the software has come a long way, it is vital as a business owner to remember that the program is only as good as the information you put into it. You probably won’t be getting a reminder call from the QuickBooks headquarters to let you know it’s time to send those 1099 forms, which is unfortunate because those fines range from $50-$280 per 1099. Those who do utilize QuickBooks, or other similar programs, will find a plethora of videos & articles online to help keep your business on the right track. For example, a quick google search landed me this nifty article: https://www.inc.com

But that’s not why you’re here. Let’s go over the most common (in our opinion) costly payroll mishaps.

This one is often overlooked and yet, potentially the most expensive mistake. Not properly handling garnishments, levies, or child support. Your employees depend on you to maintain these transactions. If you fail to do so, your employee may find a new employer that they can depend on.  As any seasoned business owner knows, employee turnover is more than just a headache, it’s a high-priced reality of owning a business. Although not heard of often, if you’re not withholding child support as required, you may find yourself in contempt of court. We won’t get into the tax liability you will incur for not responding to employee levies, but let’s just say, it’s not something you want to miss.

Don’t be late! Penalties are 15% of taxes due for deposits still unpaid more than 10 days after the date of the first notice Depositing employment taxes late. For the State of Montana you’re looking at a $50 minimum, or. 5% of the outstanding tax per month. Up to a maximum of 25% of the tax due (might want to keep this bookmarked: https://mtrevenue.gov/taxes/penalty-and-interest).

As a business owner, you can expect to be audited at some point. Having disorganized, inaccurate, or inadequate records may result in significant penalties. Both federal and state agencies can charge interest on those penalties, which is a major cause of businesses going under. If you ignore the IRS, they won’t forget about the audit. It’s worth reading up on:
https://www.hrblock.com/tax-center/irs/ignore-audit-will-go-away-right/
https://k2radio.com/irs-delays

Time is of the essence! Miscalculating or failing to pay overtime is easy to do, and a pain to fix. Guidelines must be followed when managing overtime pay. Basic miscalculations can be costly…100% of overtime pay owed, civil penalties of up to $1,000 per violation, and any additional state penalties. Over recent years, litigation has been increasing claiming that employees who were treated as “exempt” employees and therefore not entitled to overtime were misclassified. A simple tip, make sure you are calculating overtime weekly, instead of every 2 weeks. The Montana Department of Labor and Industry has a great reference guide available here: https://erd.dli.mt.gov/labor

Does your contractor have a time-card? Does he/she wear your company logo? If they do, they are not a contractor, they are your employee! Mis-classifying employees and contractors is a major blunder to make. Here’s why: The penalty for classifying an employee as an independent contractor: 1.5% of all wages paid to the employee, $50 fine for failure to file Form W-2, 40% of employee FICA taxes, and 100% of employer FICA taxes. Penalty if the misclassification is determined to be intentional: Up to 20% of all wages paid to the employee, 100% of employee and employer FICA taxes, and criminal penalties of up to $1,000 and/or one year in PRISON.
The penalty for classifying a non-exempt employee as exempt: 100% of unpaid overtime owed to the employee dating back three years from the employee claim. I’ll leave you with this: https://www.irs.gov/newsroom

Payroll doesn’t need to be stressful. Stay informed, and when in doubt, call https://aps-peo.com/

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Stimulus Checks & Tax Season

With tax season in full swing and the next stimulus payment hitting bank accounts, you may want to know if the payments received in 2020 have an impact on your filings. The stimulus payments are not considered income by the tax agency and not tax-deductible. Because the payments are not considered income, they can be treated like a refundable tax credit. To put it simply, you can treat your stimulus check as an advance on money you would have received anyway as part of your tax refund in 2021. Keep in mind, this may not be the case when filings in 2022.

Did you qualify for a payment in 2020 but didn’t receive one or both? If for some reason, you didn’t get any stimulus payment last year, you can get it this year when you file your 2020 tax return by claiming the Recovery Rebate Credit.

Those who opted in for Direct Deposit will receive the current round of stimulus payments first (deposits began on March 12th. Checks will begin to be issued on March 17th. You can check the status of your payment by going to https://www.irs.gov/coronavirus/get-my-payment.

To qualify for the third round, individual taxpayers must be earning less than $75,000 and joint filers earning under $160,000.

The Treasury Department will use your 2019 federal return or your 2020 return if you have filed one already. This can make things a bit complex for a couple of reasons. For one, the IRS will be including makeup stimulus money from the first two checks with your tax refund this year. It also means the IRS will likely use whichever tax return it has on file most recently. If your income was too high for a payment based on your adjusted gross income for 2019 but you think you may be eligible based on your circumstances from last year, you should file your tax return as soon as you can.

 

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941 Federal Tax Deposit Deadline Approaching

941 Federal Tax Deposits are due quarterly, to avoid penalties, make sure yours is filed by Monday, March 15th!

What are they?

Employer’s Quarterly Federal Tax Return, or for short, IRS Form 941. The 941 consists of income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks. Every employer uses this form to report federal income tax withheld from employees (including withholding on sick pay and supplemental unemployment benefits). Although the 941 Form is not incredibly complex, it does require a lot of care and precision to do it correctly. 

What happens if you forget to pay?

Don’t forget! The penalties are high. 

Penalty Charged for…

2% Deposits made 1 to 5 days late.

5% Deposits made 6 to 15 days late.

10% Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due.

10% Amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return. But see Payment with return, earlier in this section, for exceptions.

15% Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

 

Do you know when to deposit your payroll taxes?

IF the total taxes you reported in the lookback period were…

$50,000 or less, THEN you are a monthly schedule depositor.

more than $50,000 THEN you are a semiweekly schedule depositor.

 

What is the lookback period?

If you’re a Form 941 filer, your deposit schedule for a calendar year is determined from the total taxes reported on Forms 941, line 12 (Total taxes after adjustments and nonrefundable credits), in a 4-quarter lookback period.

 

(Information source IRS Publication 15)

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