Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
In this audio blog. CK Tax Manager Eric Challenger, CPA shares important tax information for independent contractors including:
Listen to Eric outline what you need to know if you are filing taxes as an independent contractor:
Note – To listen to this audio blog, please make sure you are not using Internet Explorer as your browser.
If you are an independent contractor and need help filing taxes, please don’t hesitate to contact Cray Kaiser today.
As an incentive and to help grow the organization’s market value, many companies will offer stock options to key employees. The options give the employee the right to buy a specified number of shares of the company’s stock at a future date at a specific price. Generally, options are not immediately vested and must be held for a specified period before they can be exercised. Once vested, and assuming the stock price has appreciated to a value higher than the option price of the stock, the employee can exercise the options (buy the shares), paying the lower option price for the stock rather than the current market price. This gives the employee the opportunity to participate in the growth of the company through gains from the sale of the stock without the risk of ownership.
There are two basic types of employee stock options for tax purposes, a non-statutory option and a statutory option (also referred to as the incentive stock option), and their tax treatment is significantly different.
The taxability of a non-statutory option occurs at the time the option is exercised. The gain is considered ordinary income (compensation) and is included in the employee’s W-2 for the year of exercise.
The employee has the option to sell or hold the stock he or she has just purchased, regardless of what he or she does with the stock, the gain, or the difference between the option price and market price of the stock at the time of the exercise, is immediately taxable. Because of the immediate taxation and to generate the cash necessary for purchase, most employees who have been granted options will immediately sell their stock when exercising their option. Under that scenario, the W-2 wage income will reflect the profit on the sale. Since the difference between the option price and market price is included in wages, it is also subject to payroll taxes (FICA).
Form 8949 (the tax form used to report sales of stock and other capital assets) will need to be prepared to show the sale, essentially with no gain or loss, so that the gross proceeds of sale are properly reported on the return. Although the W-2 shows the profit, the brokerage will also report the gross proceeds on Form 1099B. If there was a sales cost, such as a broker’s commission, then the result would be a reportable loss, albeit usually a small amount.
If an employee chooses to hold the stock, he or she would have to pay the tax on the difference between the option price and exercise price, plus the FICA tax, from other funds. If the stock subsequently declines in value, the employee is still stuck with the gain reported when the option was exercised. Any loss on the subsequent sale of the stock would be limited to the overall capital loss limitation of $3,000 per year.
In the taxation of a statutory options, no amount of gain is included as regular income when the option is exercised. Therefore, the employee can continue to hold the stock without any tax liability; and, if he or she holds it long enough, any gain would become a long-term capital gain taxed at a preferential rate. To achieve long-term status, the stock must be held for:
However, there is a dark side to statutory options. The difference between the option price and market price, termed the spread, is what is called a preference item for alternative minimum tax (AMT) purposes. If the spread is great enough, that might cause an additional tax liability due to the AMT. The rules surrounding AMT are complex which is why we recommend you seek the guidance of a tax advisor if you are granted incentive stock options.
With an increase in the value of stock options in 2020 and 2021, we’ve received a number of questions regarding the timing of exercising and/or selling options. While we cannot provide investment advice, we can model the tax and cash flow implications of certain actions at different stock valuations. Using a team that includes both your investment and tax advisors will ensure that you are maximizing the financial benefits of stock options.
If you are planning to exercise employee stock options and have questions or wish to do some tax planning contact us at Cray Kaiser so we can help to minimize the tax bite.
DuPage County received approximately $15,000,000 in federal funds made available through the 2021 American Rescue Plan Act (ARPA). Those funds have been approved for use in the Reinvest DuPage Grant Program beginning Monday, June 28, 2021. The grant program will be administered by the nonprofit economic development group, Choose DuPage.
The grant program is available to small businesses, non-profit organizations, and certain independent contractors. The grant awards can be up to $50,000 for small businesses and non-profits, and $15,000 for certain independent contractors. The disbursement of the grant funds will be based upon eligible expenses such as operating costs consisting of payroll, rents, and utilities as well as a determination of revenue decline due to COVID-19. Key eligibility components are as follows:
In applying for the grant funds certain documentation will need to be provided such as:
You will need to complete an application online at www.choosedupage.com. The application will request a description of how your business was impacted by COVID-19 as well as information such as number of employees, NAICS/industry codes, and other business demographics. During the online application process, you will be required to disclose other COVID-19 funding received. As your application moves throughout the process, the documentation noted in the previous section will be requested.
It is recommended that any questions you have for the agency during the application process be directed to reliefgrant@choosedupage.com. Phone inquiries may not be responded to.
The grant program will accept completed applications on a first-come, first-served basis as long as funding is available. Once it is determined that there are more applications than funding, the agency will stop accepting new applications.
Cray Kaiser is available to guide you through the grant application process. Please reach out to us for additional assistance.
The American Rescue Plan that was signed in March 2021 made a few positive changes regarding the Child Tax Credit for taxpayers in 2021, including increased and fully refundable credits. In addition, for 2021, the IRS will make advance monthly payments of 50% of the estimated annual Child Care Credit on the 15th of each month between July and December this year. These payments will come through as direct deposit, physical check or in some cases, debit cards.
The maximum annual Child Care Credit will be $3,000 per qualifying child between ages 6 and 17 and $3,600 per qualifying child under age 6, as of December 31, 2021. In either case, the child must live with the taxpayer in the U.S. for more than half the year.
The maximum credit is available to taxpayers with a modified Adjusted Gross Income of:
$75,000 or less for single taxpayers
$112,500 or less for head of household
$150,000 or less for married couples filing jointly and qualifying widowers
The maximum credit phases out for higher income taxpayers.
The IRS is sending out letters to families who may be eligible based on the information from their 2019 or 2020 return. If eligible, the IRS will send a second letter out with personalized information, including an estimate of the monthly payment.
If no return was filed in 2019 or 2020, the IRS has created a new non-filer sign-up tool to register for the advanced child tax credit payments.
The biggest difference is that the advances received will be reconciled on your 2021 tax return using the actual 2021 modified Adjusted Gross Income. That means, unlike the stimulus payments, if you receive too much in advance payments you will owe the difference on your 2021 tax return. Likewise, if you do not receive enough in advance payments, you will receive the difference when you file your 2021 tax return. This distinction makes paying attention to the advance payments very important.
The IRS will debut a portal later in June for those families who don’t want the enhanced payments.
Cray Kaiser is here to help if you have further questions about the childcare credit and advances for 2021. Please contact us today or call (630)953-4900.
Effective July 1, 2021 certain taxing jurisdictions in Illinois have imposed a local sales tax or changed their local sales tax rate on general merchandise sales. The following taxes are affected:
To be in compliance with the new tax rates, you must adjust your point of sale and/or accounting system to ensure that you will collect and pay the correct sales tax effective July 1, 2021. You may need to contact your software vendor to confirm that they will correct their systems to the appropriate tax rate. Remember that even if you under-collect tax, the tax is still due. That means it will be your responsibility to pay the difference.
To verify your new combined sales tax rate (state and local tax), click here.
Who is impacted?
The sales tax rate change does not affect anyone collecting sales tax in the city of Chicago. However, it does affect some cities in DuPage County, Cook County and other jurisdictions. To see a full list of all the cities impacted and the new rates, please click here.
What is taxed?
These rate changes do not impact what is and is not subject to sales tax. As a reminder, most sales are subject to both the state sales tax and the locally imposed sales tax.
Note that some jurisdictions may impose and administer taxes not collected by the Illinois Department of Revenue. Contact your municipal or county clerk’s office for more information.
If you have any questions regarding the sales tax rate change, please don’t hesitate to contact Cray Kaiser today.
We all know Covid-19 has had a worldwide impact and most businesses have had to re-engineer both their internal processes and resource management, especially cash resources, at some point during the last 18 months. At the onset of the pandemic, business owners grappled with fears surrounding business shutdowns, managing cash flow, and maintaining an established workforce. In addition, they worried about relationships with customers and suppliers. The inability of these key partners to stay afloat during the pandemic could have drastic repercussions on business owners. As a result, many business owners found themselves navigating never-before-experienced rough waters, and they needed someone by their side to help them traverse the storm.
While everyone was reeling from the shock of the COVID pandemic, CK Accounting Services got to work researching how to help our clients. With our recurring accounting and payroll engagements, the CK team has a working knowledge of clients’ industries and companies. We were able to quickly:
As legislation was passed (and subsequently amended with enhancements), CK proactively reached out to clients to ensure they were aware of these programs. In many instances, we were able to determine eligibility and potential opportunities from various funding sources. We were also able to chart the course to successfully apply for and receive the funds.
Here’s an example of how CK’s deep customer knowledge helped one distribution client navigate a particularly challenging journey to maximize COVID relief funds.
In April 2020, we reached out to our client to advise them they had an opportunity to apply for the Paycheck Protection Program Loan and assisted them with the payroll cost calculation for the loan. Using SBA guidelines to help maximize the loan amount, the client received over $860,000 in PPP funds.
Many business owners who tackled the payroll cost calculations on their own often left money on the table. They neglected to include other eligible payroll costs such as employer paid health insurance and retirement contributions which would have resulted in a higher PPP loan.
In October 2020, we provided full-service assistance to help the client with the PPP forgiveness application. We prepared their PPP tracking, calculated their full-time employee equivalent counts, prepared supporting docs, completed the forgiveness application, and submitted forgiveness on the client’s behalf. Within a few weeks the client was notified that their PPP load was forgiven in full.
In January 2021, we acted on our client’s behalf once again when the Federal government extended the PPP to include a second round of funding to certain businesses that received relief under the original PPP. The second round of PPP included an eligibility check that left many companies confused about the ability to apply for funding. Once the eligibility test was met, an employer could calculate the loan amount using either 2019 or 2020 eligible payroll costs. The CK team ran the test and determined that our client was indeed eligible for the second round of PPP. By using 2020 numbers, they stood to receive $1.3 million versus the $860k received in the original PPP. We are proud to say we did all of this proactively. When we advised the client of the opportunity, they didn’t even know a second round of PPP was available, let alone that they qualified.
Finally in April 2021, while preparing our client’s quarterly payroll service, we took a proactive approach to determine their eligibility for 2021 Q1 employee retention tax credit based on changes to the American Rescue Plan Act of 2021. After reaching out to the client to let them know of their eligibility for this credit we proceeded to calculate and include the refundable credit of $265k on their form 941.
Knowing our client and staying current on the ever-changing legislation related to COVID relief programs, CK was able to assist this client in receiving over $2.4 million in much-needed funds. Sometimes it takes more than one approach to help our clients, which is why we live our core mission each day by providing trusted advisor services to empower our clients to financially succeed. In this case, we helped them to weather a (hopefully) once-in-a-lifetime storm by navigating them through the complicated government support programs. Please contact us at Cray Kaiser for more information on how our Accounting Services team can empower you.
Investing in a franchise can be a wonderful opportunity, but it can also involve a completely unfamiliar set of rules when it comes to your taxes. Whether you are considering becoming a franchisee or have recently become involved, it’s important that you seek the right advisor to help ensure you understand your tax obligations and prepare accordingly. Here are just a few of the things that you need to keep in mind:
How you organize your franchise is going to be one of your earliest decisions, and one of your most important. From a tax perspective, your tax advisor can advise on different corporate/unincorporated structures and the tax implications of each. You should also be sure to engage an experienced franchise attorney to review legal documents related to the franchise, lease agreements, and/or bank loans. The attorney can also advise on asset protection strategies based on the organizational structure you choose.
Even though you take direction from the franchise on marketing materials, training methods, employee rules and suppliers, and many other decisions, you are still in charge of the business in ways that the IRS defines as being self-employed. You make your own schedule and establish your own community and business relationships, so the government puts you in the same category as a sole proprietor. That means you need to report your earnings on a Schedule C, just like single-member LLCs and sole proprietors do, and you need to pay the additional 15.3% tax that self-employed people are assessed.
The rules surrounding taxes on self-employed individuals are complicated, and we’ve expanded on this topic in a prior blog.
One of the advantages of being a franchisee is that you can be either an active or a passive participant. Making the decision about whether you are hands-on or simply purchasing the business and handing off the day-to-day operational responsibilities to a partner has important tax ramifications. Establishing whether your earnings are passive or active will be one of the first tasks on your tax professional’s list. By answering questions like the ones below, your advisor will be able to understand what you do and to what extent.
Franchisees that have materially participated in the business in five of the previous ten years can be determined to be active participants, regardless of their answers to the other test questions they will be asked.
If your answer is more than 500 hours, the IRS can consider you a material participant rather than a passive one.
If you worked at least 100 hours on the business and no less than anybody else, then you can be considered an active participant.
These are just a few of the IRS’s material participation tests that are used to make this important determination that impacts the way that passive losses are handled. If you are identified as passively involved, then any losses you realize as a franchisee can only be offset by other passive income. The losses can be carried forward if you don’t have enough income to offset them, but you will never be able to take the deduction of passive losses against wages, active business earnings, or other ordinary income.
It’s important to note that the passive loss rules apply whether you decide to incorporate your franchise, operate as a partnership, or as a self-employed individual.
Different types of businesses are eligible for specialized tax incentives, and if you are new to franchising you may not be fully aware of them. Here are a few that your advisor may be able to help identify for you:
As you can see, the opportunities that come with being a franchisee come with a host of tax regulations that may be unfamiliar and confusing. To set yourself up for success and avoid both confusion and the potential for penalties, contact us at Cray Kaiser so we can help you navigate and plan for this new world.
In Cray Kaiser’s Employee Spotlight series, we highlight a member of the CK team. We couldn’t be more proud of the team we’ve grown and we’re excited for you to get to know them. This month we’re shining our spotlight on Kathleen Glavac.
Kathleen is a Senior Administrative Assistant at CK, providing key communication between the firm and its clients. As part of the administrative team, ensuring that completed documents are assembled and prepared to be delivered to clients and contacting clients for delivery instructions to ensure a timely and secure delivery of their documents is on the daily agenda. Through this process, Kathleen has developed strong client relationships. In addition, Kathleen supports the staff by proofreading reports, managing the professional staff CPE hours, tickler logs, annual file purges, has been a part of the “PEEPS” committee, organized CK events, handled supply orders, and of course answering phones and assisting clients and staff.
Kathleen and her husband started a masonry construction business in 1983. During this time Kathleen was responsible for bookkeeping while her husband was out on the job. She also worked for the Plainfield Police Records’ Department which led to a position with the Plainfield Police Commission as an administrative assistant. Going back to school, she earned her Associate’s degree in Business Management and Supervision, with certifications in Human Resources and Entrepreneurship. During this time, she held many volunteer positions, from classroom mom to PTO President, Band Booster volunteer, and religious ed teacher.
Kathleen started working at CK ten years ago. After being brought in as a temp, she was hired full time within a month. Coming to work at an accounting firm in February with little knowledge of what tax season entailed for the firm had its challenges, but the experience opened Kathleen’s eyes to CK’s operations.
The past ten years have flown by for Kathleen, which she attributes to loving the work she does and its evolution over the years. Of the CK team, Kathleen said, “The people are the best, the admin team is amazing, the partners and staff are always willing to answer a question, help with a problem, and share a laugh!”
When asked about her favorite CK core value, Kathleen chose “People”. She explained that everyone has something to offer and while she may not prepare tax returns or financial statements herself, being in reception has still allowed her to build relationships with clients. She feels that clients return to CK each year because they are valued as people. She added, “Our staff is awesome, not only do they take great pride in their work, but they genuinely care about each other, and the clients they service.”
When multiple business entities make a decision to start a new business together as a cooperative arrangement, they are creating what is known as a joint venture. In forming a joint venture, each of the involved entities agrees to what assets they will contribute, how they are going to distribute income and share expenses, and how the new entity will move forward.
Even though a joint venture represents a cooperative between two or more business entities, each of those original entities retains its original legal status, whether as companies or corporations or as an individual or group of individuals. Not all joint ventures involve the actual formation of a new business entity, but if a new entity is created it will be required to pay its own taxes. The tax liability will be based on the form of business that is adopted: if an unincorporated joint venture, the tax on profits will belong to the entities who originally joined the agreement, while as a corporation it will have its own tax responsibility.
A joint venture can exist solely as an agreement between the original cooperating entities. Whatever form a joint venture takes, it is best arranged via a detailed, comprehensive contract that specifies the assets each participating entities will contribute, how the new entity will be managed, who will be in control of important decisions, and how the distribution of profits and losses will be accomplished.
There are numerous advantages to forming a joint venture, including combining distinct talent and background from two separate entities to create a novel product or service, or taking advantage of one entity’s strength in marketing with another’s innovation. A good example of a successful joint venture can be found in BMW Brilliance Automotive, Ltd, which was formed between BMW Group and Brilliance China Automotive Holdings. The two companies created a new entity to sell BMW vehicles in China, leveraging Brilliance China’s geographic presence to sell BMW’s products.
Among the reasons for forming a joint venture are:
Though many joint ventures are formed with an eye to the future, some are created to accomplish short-term goals and then quickly disband upon those goals being achieved.
A joint venture can take the shape of any type of business entity, including a partnership or corporation. Whatever type of entity the founding entities land upon, decisions need to be made regarding division of stock if a corporation, who will be on the board of directors, and how much responsibility for the new entity’s management each original entity will carry.
In some cases, a joint venture is established under a unique federal income tax arrangement called a qualified joint venture that allowed a married couple greater simplicity in filing their joint return than they would find if a business that they operate together were to be established as a partnership.
Though similar, a consortium is not the same as a joint venture, as it is a more casual business arrangement that does not involve the creation of a new entity. Rather, in a consortium, distinct entities remain separate but make the decision to cooperate.
Though it is conceivable that multiple entities would be willing to enter a joint venture on a casual basis or via an oral agreement (and there’s no legal requirement that a joint venture register with a state or federal government), it’s still better to involve an attorney who can craft a document requiring the signatures of all parties involved. A well-formulated joint venture agreement may include:
Once a joint venture is formed, there are additional tax considerations that may come into play. If you have any questions about forming a joint venture or a joint venture that you are already involved in, please contact Cray Kaiser.
As part of the CARES Act, the requirement for older taxpayers to take required minimum distributions from their retirement plans was waived for 2020. This primarily was due to the anticipated drop in value for most investments as a result of the economic effects of the COVID-19 pandemic, which did not end up materializing. So, barring any extension of the 2020 moratorium by Congress, required minimum IRA distributions must resume for the 2021 tax year.
Required minimum Distributions (RMDs) are required distributions from qualified retirement plans and are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to keep funds indefinitely in their qualified retirement plans. Eventually, these assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, then he or she may have to pay a 50% penalty on the amount that is not distributed but should have been.
If you turned age 70½ before 2020 or turned 72 in 2020, you are already subject to the RMD requirement and must take a distribution in 2021. If you turn 72 in 2021, you must begin taking RMDs in 2021. However, the first year’s distribution for 2021 can be delayed to no later than April 1, 2022. The downside to this means you would have to take two distributions in 2022, which may or may not be beneficial to your taxes.
The amount you are required to withdraw is based upon the value of your IRA account on December 31 of the prior year divided by the “distribution period” (your life expectancy), which generally is found in the Uniform Lifetime Table for the year of distribution. Historically, the Uniform Lifetime Table – created by the IRS – has remained unchanged. But beginning with distributions in 2022, the IRS has developed a new table that reflects a longer life expectancy. In addition to the Uniform Lifetime Table, there is a Joint and Last Survivor Table, which can be used when the spouse is the sole beneficiary and is more than 10 years younger than the IRA account owner (this will result in a smaller RMD).
If you have more than one IRA, the RMD for each one is figured separately, but you may add up all of the RMDs and take the total amount required for the year from any one or a combination of your IRAs.
There is no maximum limit on distributions from a traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.
Because traditional IRA contributions are tax-deductible, distributions from these IRAs generally will be fully taxable. However, in some circumstances, the taxpayer may have basis from nondeductible contributions. In these situations, a portion of each year’s IRA distributions will be nontaxable.
Another method to reduce your tax resulting from RMDs is to donate the RMD directly to charity. A taxpayer may donate up to $100,000 of his or her IRA funds to a charity by directly transferring the IRA funds via a trustee-to-charity transfer. In doing so, (1) the transfer counts toward the RMD requirement, (2) the amount transferred is not taxed as income, and (3) no charity deduction is claimed. An advantage of this provision is that a taxpayer can take the standard deduction and still benefit from the charitable donation. It also prevents the IRA distribution from being included in the taxpayer’s AGI; meaning it would not affect certain tax items such as the taxability of Social Security income and the cost of Medicare premiums.
Even though an IRA owner whose total income is less than the return-filing threshold is not required to file a tax return, he or she is still subject to the RMD rules and could be liable for the under-distribution penalty, even if no income tax would have been due on the under-distribution.
In many cases, advance planning can minimize or even avoid taxes on traditional IRA distributions. Often, situations will arise in which a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., and taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any taxes. If you need help with planning your required minimum IRA distributions, please contact Cray Kaiser.
Please note that this blog is based on tax laws effective in March 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
