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Member of Russell Bedford International, a global network of independent professional service firms.
The start of July brings with it fireworks, corn on the cob and yes, the need to start thinking about remaining tax deadlines for 2021. This year, it is also important to start planning for the payroll deferral deadlines that are coming up at year end. For those organizations that chose to defer, there may be significant balances due so it’s important to understand when payments will be required.
Due to the COVID-19 pandemic, employers were allowed to defer the deposit and payment of the employer portion of social security taxes (6.2% rate) that would have otherwise been required for wages paid between March 27, 2020 and December 31, 2020. The deferral also applies to deposits and payments due after January 1, 2021 for wages paid during the quarter ending December 31, 2020.
The IRS is issuing reminder notices for EACH quarter the employer portion of social security taxes were deferred. Employers that deferred amounts in all four quarters of 2020 may receive up to four reminder notices, even though the amounts are all due by the same due dates. The total deferred amount for EACH quarter will be on the reminder notices, however only 50% of the amount must be paid by January 3, 2022. Deferred amounts will be treated as timely deposited and paid according to the following schedule:
An employer can begin repaying the deferred amounts at any time. Any payments or deposits that an employer makes before December 31, 2021, will be first applied against the employer’s payment due on January 3, 2022, and then applied against the employer’s payment due on December 31, 2022.
If you have any questions about the upcoming deadlines or deferred payroll taxes, please call us at 630-953-4900. We are happy to discuss further.
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.
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.
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.
A federal tax credit for the purchase and installation costs of a residential solar system has been extended through 2023. The solar tax credit for 2021 and 2022 is 26% of the cost of the solar installation but drops to 22% for 2023, the final year of the credit (unless extended again by Congress).
When you see TV ads for home solar power, you may get the impression that Uncle Sam is going to pick up 26% of the cost, and you only have to come up with the other 74%. But that is not the whole picture. It’s true that the federal government has a 26% tax credit for the cost of a qualified solar installation (some states also have solar credits or other incentives). However, the federal credit is non-refundable and can only be used to offset your current tax liability. Any excess carries over to future years, as long as the credit still applies in future years. Currently, the credit is allowed through 2023. This means that you may not get all the credit in the first year, as you might have been led to believe.
Consider this example: In 2021, your solar installation costs $25,000. That would qualify you for a solar tax credit of $6,500. But suppose the income tax on your tax return is only $4,000. The credit would reduce your tax liability to zero, and the other $2,500 ($6,500 – $4,000) of the credit is carried over to 2022’s tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or expires.
Compare the cost of the system (and the interest you will be paying, if you are financing it) to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system really worth the cost? Electricity costs can vary significantly according to locale.
Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages, you may simply want to go green, or you may want to go off the grid where electric service is not reliable.
If you plan to move forward with a solar installation, here are some of the tax issues you need to be aware of.
Only the following solar power systems are eligible for the credit:
The credit may be claimed on the tax return of the year during which the installation is completed. For example, if you purchase and pay for a system completed in 2022, the credit will be 26% of the cost. But if the project isn’t completed until 2023, the credit will only be 22%. This becomes an even a bigger issue for systems installed during 2023 that aren’t completed before 2024, when the credit rate will be zero. So, if you plan to purchase a solar system in 2023, the purchase should be made early enough in the year to ensure the installation is completed before 2024.
There is a lot to consider before making the final decision to install a solar system. Is it worth it? Is it the right financial move for you? Please call Cray Kaiser at (630) 953-4900 before signing any contract to make sure a solar system is appropriate for you.
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.
As if this past year has not been stressful enough, the Office of the Inspector General for the Department of Labor has just announced that at least $36 billion, and possibly as much as $63 billion, has been lost to unemployment fraud. In many cases the improper payments are a result of fraudsters who spent the earliest months of the pandemic filing unemployment claims using stolen personal data. What this means is that millions of unsuspecting Americans are about to receive federal forms reporting unemployment benefits that they never received. Not only does this leave them potentially vulnerable to identify theft issues, but in the short term it also means that the federal government may be expecting them to pay income taxes for money somebody else received.
If your identity was stolen, you’ll receive a form known as the 1099-G from the federal government, which treats certain unemployment benefits as taxable income.
There is a solution if you are sent a 1099-G for unemployment benefits that you did not receive. Though it represents a bit of work, the IRS has indicated that it is aware of the problem and is working hard to help. They say that recipients of an incorrect 1099-G need to contact their state’s unemployment agency and ask them to send a corrected, revised form that will reflect the correct amount received. Though this may be difficult if you live in a state where the unemployment agency’s response rate has been slowed by the pandemic, some states have established hotlines dedicated to addressing this specific issue and have increased the number of support staff available to help. Much of this increase in attention is the result of guidance that the IRS issued to states at the end of 2020, notifying them of the identity fraud issue.
If you aren’t able to get a revised form by the tax filing deadline, the IRS indicates that you should simply file a return that accurately reflects the amount that you received. Be sure to discuss with your tax advisor about how they can best document your issue.
It’s completely natural to feel a bit panicked if you receive one of these forms erroneously, but the IRS has said that there is no need to file an Identity Theft Affidavit that is specific to the IRS. The agency says that those affidavits are specifically for taxpayers whose e-filed tax return is rejected as a result of a duplication of the use of their Social Security number for a tax filing. Still, if you are concerned and want to take additional steps to protect your identity then you can ask for an Identity Protection PIN when you file your income taxes. Having this unique number will help keep anybody else from being able to use your Social Security number to file a fraudulent tax return.
Beyond that, you can take the following steps to protect yourself against the impact of unemployment fraud and identity theft:
If you have been a victim of unemployment fraud and received a 1099-G, contact Cray Kaiser immediately. We’re here to help.
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.
Most taxpayers think they have to itemize their deductions to claim them on their tax return. However, that is not entirely true! There are certain deductions that can be claimed while still using the standard deduction. Here is a list of those tax deductions you can take without itemizing:
For 2020, non-itemizers can deduct up to $300 of cash contributions above-the-line. The $300 limits apply both to single and married taxpayers. Donations to donor-advised funds and private foundations aren’t eligible for the above-the-line deduction (2020 and 2021). The term “above-the-line” is a shorthand way of saying that the deduction reduces gross income when figuring adjusted gross income (AGI).
For 2021, non-itemizers filing a joint return can deduct up to $600 of cash contributions, while taxpayers using the other filing statuses continue to be limited to $300. Unlike the 2020 version of this deduction, which is an above-the-line deduction, the 2021 deduction is claimed after the AGI is determined.
A qualified educator can annually deduct above-the-line to a maximum of $250 of qualified unreimbursed classroom expenses. These expenses include:
Note that a qualified educator is generally considered a kindergarten through grade 12 teacher, instructor, counselor, principal or aide and works in a school at least 900 hours during the school year.
Contributions to Health Savings Accounts (HSA) are also an above-the-line deduction. HSAs can only be established by eligible individuals who are covered by high-deductible health plans and generally not covered under any other health plan. There are statutory limits to the amounts that can be contributed to an HSA. Subject to statutory limits, eligible individuals may make tax deductible contributions to HSAs, and employers as well as other persons (e.g., family members) may contribute on behalf of eligible individuals. Since an employer’s contributions to an employee’s HSA are excludable from the employee’s income, the employee can’t also claim a deduction for those contributions.
Amounts in HSAs accumulate tax-free, and distributions are tax-free if used to pay for or reimburse qualified medical expenses. Some individuals use HSAs as supplemental retirement plans when they are maxed out on other available tax beneficial retirement plans.
A taxpayer can deduct up to $2,500 above-the-line of interest paid by the taxpayer on a student loan on behalf of the taxpayer, spouse or dependents. The deduction is phased out for higher-income taxpayers.
This above-the-line deduction is allowed for qualified tuition and related expenses only to the extent the expenses are in connection with enrollment at an institution of higher education during that tax year. The expenses are limited to $2,000 or $4,000, depending upon the taxpayer’s AGI. The same expenses can’t be used for this deduction and the American Opportunity Credit or the Lifetime Learning Credit, and 2020 is the last year for this deduction.
A self-employed taxpayer can deduct one-half of the self-employment tax computed on Schedule SE for the year.
A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) may be able to deduct 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse and dependents as an above-the-line expense. The deduction is limited to the amount of the individual’s net SE income. Additionally, the individual, spouse or dependent cannot participate in an employer subsidized health plan.
For divorce or separation instruments entered into before 2019 that haven’t been modified to include the tax law change effective for post-2018 instruments, an individual may be able to claim an above-the-line deduction for alimony payments made during the year, if certain requirements are met. Effective for divorce or separation instruments entered into after December 31, 2018, alimony payments aren’t deductible by the payer and aren’t taxable to the recipient.
As part of the 2018 tax reform, certain businesses are allowed a deduction that is generally equal to 20% of their qualified business income (QBI). This deduction is most commonly known as a pass-through income deduction because it applies where the business income passes through to the individual’s, partner’s, or stockholder’s 1040 income tax return. While not an above-the-line deduction because it doesn’t reduce gross income, this pass-through deduction, like the standard and itemized deductions, is subtracted from AGI to figure taxable income.
Contributions to traditional IRAs, self-employed SEPs, SIMPLEs, and other qualified retirement plans are above-the-line deductions. However, the deduction for some of these contributions for an employee won’t appear as a line item on the tax return because the tax benefit has already been applied by reducing their taxable wages. The most common example of this treatment is 401(k) plan contributions in which the employee designates a percentage of their wage that is contributed to the plan and their gross wages are reduced by the contribution amount, leaving the balance of the wages as taxable.
If you have questions about tax deductions you can take without itemizing or how any of these deductions might apply to your tax return, please contact Cray Kaiser today. We’re here to help!
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.
The Internal Revenue Service announced on March 17 that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days. Here’s what the extended tax deadline for individuals may mean for you:
The postponement applies to individual taxpayers filing their 2020 income tax return. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.
Individuals with estimated tax requirements do not have an extension on the first quarter 2021 estimated tax payment date. These payments are still due on April 15. We expect that individuals who usually file an extension with a payment that is specifically meant to cover the first quarter estimated tax payment will need to send two payments – the first quarterly payment on April 15, and the extension payment on May 15. If the IRS specifies otherwise, we will let you know.
The announcement did not indicate that calendar year estate/trust income tax filings received an extension of time to file. Estates/trusts appear to have the same April 15 due date.
The announcement did not indicate that calendar year C corporation tax filings received an extension of time to file. C corporations appear to have the same April 15 due date.
As the guidance seems geared specifically to individual 2020 tax returns, we do not expect that other tax filings will be extended from April 15, 2021, to May 17, 2021.
As the IRS extended the individual tax deadline, states have begun to react.
Notably, on March 18, Illinois announced that the 2020 individual income tax deadline was similarly extended from April 15, 2021, to May 17, 2021. The extension only applies to the 2020 individual income tax return; it does not apply to individual tax estimates, corporations, or estate/trust tax returns, which remain due on April 15, 2021.
Earlier this year, the IRS announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 does not affect the June 15 deadline.
In short, the extended tax deadline for individuals seems to have limited application, especially for those individuals with estimated tax requirements. At Cray Kaiser, we continue to push ahead with tax season accordingly. If you have questions on how the extension may affect you, please contact us today at 630-953-4900.
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.
