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IRS raises mileage rates effective July 1, 2022

Effective July 1, 2022, the business standard mileage rate for use of an automobile (including vans, pickup trucks and panel trucks) increases from $0.585 to $0.625, and the rate for medical and relocation mileage increases from $0.180 to $0.220. Mileage related to charity is set by law and remains at $0.14 per mile. (Notice 2022-03; Announcement 2022-13.)

It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee (W-2) travel expenses. Taxpayers also cannot claim a deduction for moving expenses incurred after December 31, 2017 at the federal level, except members of the Armed Forces on active duty moving under orders to a permanent change of station. Some non-conforming states still allow for this deduction.

Luxury vehicle limit for 2022 unchanged

The luxury vehicle limit announced for 2022 in Notice 2022‑03 remains unchanged. Pursuant to the vehicle valuation limit that applies to use of the optional fleet-average and vehicle cents-per-mile valuation methods, the maximum fair market value of the vehicle (including trucks and vans) first made available to employees in calendar year 2022 increased from $51,100 to $56,100.

Federal mileage rates January 1, 2022 and July 1, 2022

Type of mileageEffective July 1, 2022Effective January 1, 2022
 Business standard$0.625$0.585
Charity$0.140$0.140
Relocation and medical$0.220$0.180

IRS interest rates increase for the third quarter of 2022

On May 20, 2022 the Internal Revenue Service announced that interest rates will increase for the calendar quarter beginning July 1, 2022. The revised rates are as follows: 

  • 5% for overpayments (4% in the case of a corporation).
  • 2.5% for the portion of a corporate overpayment exceeding $10,000.
  • 5% for underpayments.
  • 7% for large corporate underpayments. 

This is the second straight quarter where we have seen an increase in the underpayment rate, which had remained at 3% for individual taxpayers from July 1, 2020 March 31, 2022.

If you are not current with estimated tax payments, this may be a good opportunity to review changes to your income and revise your plan for estimated tax payments.

Revenue Ruling 2022-11 announcing the rates of interest will appear in Internal Revenue Bulletin 2022-23, dated June 6, 2022.

Should You Be Withholding Taxes for your Nanny or Babysitter?

Many people have taken on a nanny or babysitter to help with childcare.  If you have a nanny, you may have more than a casual contractor engagement, you may have a household employee and you have become an employer.  Employers of household employees must obtain an employer identification number, pay Social Security, Medicare, and unemployment tax for any employee wages.  Your state may require you to pay unemployment insurance as well.

How can I tell if I have a household employee?

In Publication 926, the IRS considers anyone who is an ongoing household helper to be a household employee, not an independent contractor.  If you control not only what work is done, but how it is done, you have an employee.  Whether part time, full time, or hired through an agency, hourly, salaried, or paid by the job, you have an employee.

If the worker controls how the work is done, without direction from you, the worker is self-employed.  A self-employed person is often one who offers their services to the general public in an independent business.

The IRS excludes spouses and related children under 21 years old as household employees.  Grandparents are not considered household employees unless meeting the following exception: they are caring for a child under 18 who has physical or mental conditions requiring adult care for at least 4 continuous weeks in a quarter and the paying party has a marital status meeting one of these conditions: divorced and still unmarried, a widow, or are living with a spouse whose physical or mental conditions prevents them from caring for the child for 4 continuous weeks in a quarter. Additionally, individuals who are under age 18 at any time during the year are also excluded, unless performing household work is that individual’s principal occupation. If he or she is a student, providing household work isn’t considered to be his or her principal occupation.

What are the taxes I must pay if I have an employee?

Federal unemployment taxes (FUTA) must be paid if gross wages are over a threshold, which the IRS has set to be $1,000 in any calendar quarter.  After the threshold is reached, FUTA must be paid on the first $7,000 of gross wages for that year. 

The IRS has set the 2021 annual requirement threshold for when to start paying Social Security and Medicare taxes to $2,300 ($2,400 for 2022).  The 2021 withholding amount for Social Security taxes was set at 6.2%, and Medicare taxes at 1.45%, for a total of 7.65%.  Employees and employers are responsible for paying 7.65% each on all cash wages.  An employer may choose to pay the employee’s share of these taxes on their behalf..

States also have unemployment taxes.  Here in Texas, unemployment is regulated by the Texas Workforce Commission, (TWC), which has specific rules relating to nannies, which they call domestic employment.  The threshold for unemployment tax liability is $1,000 gross wages in a quarter.  Once passing that threshold, wages must be reported and taxes are owed on all wages starting from January 1 of the same year, for the entire year.  TWC allows employers of domestic staff to pay either quarterly or annually.  The annual option requires the filing of an Annual Election Form C-20 by December 31st of the following year.

What about income tax withholding?

It is not required that federal income tax is withheld for household employees.  Employees should be informed that you will be reporting wages and issuing a W-2 for their taxes at the end of the year.  If you choose to withhold federal income tax, IRS publication 15-T will have the current tables used for withholding.  State income tax requirements will vary.  Luckily, here in Texas we don’t have to worry about state income tax.

What else must I do as an employer?

When you have a household employee, you must collect their information and determine if they can legally work in the United States, including Form I-9. This information will be necessary to issue a W-2 to your employee by January 31 of the following year.  The employee gets copies B, C, and 2 of the W-2.  The Social Security Administration gets copy 1 along with a Form W-3.  By April 15 of the following year, Schedule H should be filed along with your income tax return.  If you would not be required to file a return that year, Schedule H still needs to be filed.  Records must be kept for at least 7 years.

This seems like a lot for childcare help!

It’s true, once you become an employer there are more steps involved.  For this reason, some parents choose to use a service to help source nannies or do the payroll for them.  For a processing fee, they will inform parents how much to pay.  The processor then takes the money and does the work of withholding and paying federal and local taxes for parents, passing the appropriate net wages on to the nanny.  These providers give parents a report at the end of the year for their accountant.  Such service providers often also allow the nanny to have their federal income tax withholding done as well.

If you have any additional questions, please contact our office so we may assist.

IIJA’s New Digital Asset Reporting Requirement

The Infrastructure Investment and Jobs Act of 2021 (IIJA) was signed into law on Nov. 15, 2021. One major provision of the IIJA includes a requirement that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions to the IRS. This will will require that cryptocurrency exchanges perform intermediary Form 1099 reporting for cryptocurrency transactions for all digital assets starting in 2023.

Existing reporting rules. As might already be aware if you have a stock brokerage account, whenever you sell stock or other securities you receive a Form 1099-B at the end of the year reporting your security gains and losses. This Form 1099-B reports the details of transactions, such as sale proceeds, relevant sale or purchase dates, your tax basis for the sale, and the character of gains or losses (long-term, short-term, etc.). Additionally, if you were to transfer stock or securities from one broker to another, your old broker is required to provide your new broker with information on the holdings that were transferred, such as tax basis or date acquired.

Digital asset broker reporting. The IIJA expanded the definition of brokers to include Crypto Exchanges and other service providers that are providing transfers of digital assets on behalf of another person. This means that any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS at the end of each year.

Transfer reporting. Sometimes you may have a transfer transaction that is not a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one Crypto Exchange to your wallet at another Crypto Exchange, the transaction is not a sale or exchange. For that type of transfer, as with stock, the old Crypto Exchange will be required to furnish relevant basis and other information to the new Crypto Exchange. Additionally, if the transfer is to an account maintained by a party that is not a Crypto Exchange (or broker), the IIJA requires the old Crypto Exchange to file a return with the IRS. We expect that this filing will include generally the same information that is furnished in a broker-to-broker transfer.

What are Digital assets. For the reporting requirements, a “digital asset” is any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. The IRS can (and may) modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting. Historically, when a business receives $10,000 or more in cash in a transaction, that business is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA now requires that businesses treat digital assets like cash for purposes of this reporting requirement, for reporting that is due after December 31, 2023.

Closing. Some things to keep in mind: First, if you use a Crypto Exchange, and it has not already performed a KYC (Know Your Customer), expect it to do so soon. Second, the transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. Third, a reporting intermediary does not always have perfect information, especially when it comes to an entirely new type of reporting. Expect the first information reporting cycle for this reporting requirement to be a bit bumpy.

Remember that as your trusted CPA advisors, we are here to help you and can provide solutions for any challenges that may develop.

IIAJ Retroactively Terminates Employee Retention Tax Credits

The Infrastructure Investment and Jobs Act (IIAJ) (to be signed by President Biden on November 15, 2021), retroactively ended the Employer Retention Tax Credit (ERTC) to apply only through September 30, 2021 (rather than through December 31, 2021), unless the employer is a recovery startup business. As a result of retroactive termination of the ERTC, you may need to review your payroll tax compliance (including tax deposits) to make sure that it conforms with these changes.

Background. Congress originally enacted the ERTC in the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020 to encourage employers to retain employees during the pandemic. Congress later extended and modified the ERTC to apply to wages paid before January 1, 2022.

Eligible employers could claim the refundable ERTC against the employer’s share of Medicare (1.45% rate) taxes equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.

For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERTC. Under pre-IIAJ law, a recovery startup business was defined as a business that

  1. Began operating after February 15, 2020,
  2. Had average annual gross receipts of less than $1 million and
  3. Didn’t meet the eligibility requirement, applicable to other employers, of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.

However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.

IIAJ retroactive termination. The ERTC was retroactively terminated by the IIAJ to apply only to wages paid before October 1, 2021 unless the employer is a recovery start up business. Thus, for wages paid in the fourth calendar quarter of 2021,

  1. The credit applies only to recovery startup businesses and
  2. Other employers can not claim the credit.

In connection with the continued availability of the ERTC for recovery startup businesses in the fourth quarter of 2021, the IIAJ also modified the definition of a recovery startup business so that a recovery startup business is one that

  1. Began operating after February 15, 2020, and
  2. Has average annual gross receipts of less than $1 million.

The pre-IIAJ prerequisite that a recovery startup business must not have otherwise met the requirements for an eligible employer qualifying for the ERTC, i.e., having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order, no longer applies. Thus, because of the modified definition, an employer that was not a recovery startup business in the third quarter of 2021 might qualify as a recovery startup business in the fourth quarter of 2021 and be able to claim the ERTC for the fourth quarter of 2021.

If you retained payroll taxes in anticipation of receiving the ERTC based on post-September 30, 2021 payroll taxes, we need to review your situation and determine how and when to repay those taxes and address any other compliance issues. We anticipate IRS will issue guidance to assist employers in handling any compliance issues.

If you have additional questions or concerns about how the retroactive termination of the ERTC will affect your business, please let us know.

How-To Plan Now to Make Filing Your Taxes Easier in 2022

This tax year will be another complex year as many taxpayers received stimulus payments or advance Child Tax Credit payments and will need to take steps now to make filing their tax returns easier in 2022.

Planning will help ensure you are able to file an accurate return and avoid any delays with the IRS processing your return or refund.

Here some steps that you can take now:

Gather and organize tax records. Collecting and organizing all necessary documents and information will help you to avoid filing errors that lead to processing and refund delays. A list of important tax forms that you should be gathering can be found here.

It is especially important that you also keep record of any virtual currency transactions for any purchases, sales, trades, or exchanges of digital assets such as Bitcoin, Ethereum, Litecoin, etc.

In addition, if you also received an Advance Child Tax Credit (ACTC) and/or Premium Tax Credit (PTC) or an Economic Impact Payment and want to determine your eligibility for a Recovery Rebate Credit, should also keep the following documents on hand:

Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance Child Tax Credit payments,
Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage, and
Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit.

The IRS will mail Letters 6419, 6475 and Form 1095-A to you, so be sure to notify the IRS of any change of address.

If you don’t receive, or can’t find your Letters 6419, 6475 or Form 1095-A, you can can retrieve the information on these letters using your online account.

Check tax withholding and/or estimated payments. Finally, we recommend that you check your tax withholding if you owed taxes or received a large refund last year. If you owed taxes last year, you might want to consider having additional amounts withheld or making estimated tax payments to avoid an underpayment penalty. This is especially important if you got married or divorced, had a child, or took on a second job.

You may also need to consider if you need to make estimated tax payment. If you received a substantial amount of non-wage income, such as self-employment income (including non-wage gig income), investment income, taxable Social Security benefits or pension and annuity income, you should make quarterly estimated tax payments or increase your wage withholding to cover the taxes on this type of income.

Please contact our office if you’d like for us to prepare an analysis of projected taxable income and related tax liability.

IRS announces 401(k) limit increases to $20,500

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has been increased from $19,500 to $20,500 beginning with the 2022 calendar year.

Additionally, the income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit have also all increased for 2022.

Below are the updated phase-out ranges for IRA contributions in 2022:

Single Taxpayers

For single taxpayers covered by a workplace retirement plan (even if only for a portion of the year), the phase-out range is increased to $68,000 to $78,000, up from $66,000 to $76,000.

Married Filing Jointly Taxpayers

If the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.

If the spouse making the IRA contributor is not covered by a workplace retirement plan but is married to someone who is covered, the phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.

Married Filing Separately Taxpayers

If a taxpayer is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRAs

The income phase-out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for single and head of household taxpayers, up from $125,000 to $140,000. For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Simple IRAs

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.

Key employee contribution limits that remain unchanged

The limit on annual contributions to an IRA (Roth or Traditional) remains unchanged at $6,000. The IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000, for a maximum contribution amount of $7,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000.

Details on these and other retirement-related cost-of-living adjustments for 2022 are in Notice 2021-61, available on IRS.gov.

Advance Child Tax Credit: Should You Opt-Out?

The American Rescue Plan Act (ARPA) included a provision that allows for the IRS to begin making advanced payments of the Child Tax Credit next month. This credit, up to $3,600 per child under the age of 6 and $3,000 per children ages 6 to 17, is typically received as a credit applied against your total tax when you file your tax return.

The Child Tax Credit advance payments, which are scheduled to be made on the 15th of each month, were established to create financial certainty for families to plan their budgets. The first monthly payment is slated to begin on July 15, unless a taxpayer opts-out

Should you opt out of advance payments?

Everyone’s individual situation is different, but many individuals rely on these credits at year-end upon filing to reduce their tax burden, especially individuals and entrepreneurs that have factored these credits into their withholding and estimated tax payments. If you want to avoid any unwanted surprises at tax time, it may be beneficial to opt out of the advance payments unless you need the funds to make ends meet. If you chose to opt out, you will still be able to claim the full Child Tax Credit upon filing of your 2021 tax return. Otherwise, any payments received in advance are not allowed to be claimed as a credit on your 2021 tax return.

Receiving these advance payments will likely complicate your tax return next filing season and result in a lower tax refund or larger balance due than usual.

If you received advances of the Child Tax Credit that you were ultimately not eligible for based on 2021 income, you may also be required to pay these amounts back. Since the advanced credit is based on 2019 or 2020 information, if you earn or receive more income in 2021 than you did in 2020 or 2019, or if your child turns 18 by January 1, 2022, you may be on the hook to repay this advance with your 2021 tax return.

How much are the Child Tax Credit payments?

Most eligible taxpayers will receive $300 per month for each child under 6 years old and $250 per month for each child aged 7-18. However, higher earners will receive reduced payment amounts.

The annual credit can be reduced to $2,000 per child if your modified AGI (adjusted gross income) in 2021 exceeds:

  • $150,000 if you’re married filing jointly
  • $112,500 if you’re filing as a head of household
  • $75,000 if you’re single or married filing separately

The annual credit can be reduced to below $2,000 per child if your modified AGI in 2021 exceeds:

  • $400,000 if you’re married filing jointly
  • $200,000 for all other filing statuses

You can opt-out of receiving this credit here.

You can check your eligibility here.

The American Rescue Plan Act of 2021 – Individual Provisions

Below we have assembled a brief summary of some of the individual taxpayer provisions of the American Rescue Plan Act of 2021 (ARPA), passed on March 11, 2021.

A Third Round of Stimulus

Recovery rebate credits (stimulus checks). ARPA provides a third round of nontaxable stimulus checks directly payable to individuals. These payments are structured as refundable tax credits against 2021 taxes but will paid in 2021 and reconciled on your 2021 tax return.

This round of stimulus offer’s a maximum payment of $1,400 per eligible individual ($2,800 for married joint filers) and $1,400 for each dependent.

The income phase out limitations for this round set in quicker than previous predecessor payments. For this round of payments, the phase outs will occur between the following Adjusted Gross Income (AGI) amounts:

  • Single – $75,000 – $80,000
  • Head of Household: $112,500 – $120,000
  • Married filing joint: $150,000 – $160,000

Eligibility is based on information from 2020 income tax returns (or 2019 returns, if 2020 returns haven’t been filed when the advanced credit is initially issued). For households whose payment was based on 2019 income data, and who would be eligible to receive a larger payment based on 2020 data, no need to worry, as there is a provision that allows for the IRS to issue a supplementary payment.

Changes to the Child Tax Credit and Dependent Care Credit

Child tax credit. For 2021, the child tax credit has been increased significantly from $2,000 per qualifying child to $3,000 per child or $3,600 for children under 6 years of age.

Additionally, the IRS will begin making advanced payments of a taxpayer’s estimated 2021 tax credit during the later part of this year. These advances are expected to be 50% of the anticipated credit a taxpayer would receive on their 2021 return.

Child and dependent care credit. For 2021, the amount of expenses taken into consideration for the child and dependent care credit has been increased from $3,000 to $8,000 for taxpayers with one qualifying dependent and from $6,000 to $18,000 for taxpayers with two or more qualifying dependents. This is a massive increase to a credit that was historically insignificant to high-earners.

Dependent care assistance programs. For 2021, the amount excludible under a dependent care assistance program has been increased to $10,500 (or $7,500 for a married taxpayer filing a separate return).

Change in Taxability of Unemployment Benefits

Income exclusion for unemployment benefits. For 2020, taxpayers with modified AGI less than $150,000 can exclude from gross income $10,200 of their unemployment benefit. As of the date this was written, this limit inconveniently applies to taxpayer’s of all filing statuses, whether married filing joint, separate, head of household, or single.

We hope you find these updates useful. If you have any questions, please don’t hesitate to contact our office.

The American Rescue Act of 2021 – Business Provisions

Below we have assembled a brief summary of some of the business taxpayer provisions of the American Rescue Plan Act of 2021 (ARPA), passed on March 11, 2021.

Extension of the paid sick and expanded family and medical leave tax credits

Payroll tax credits. Paid sick leave and family leave credits are extended to apply to apply to wages paid through September 30, 2021. This credit had previously only applied to wages paid up to of March 31, 2021.

Self-employment sick and family leave credits. These credits, which are creditable against the income tax for self-employed individuals, have also been extended to apply to eligible days through September 30, 2021.

Other notes. Both of these credits now expand eligible leave to include obtaining and recovering from COVID-19 immunization.

Tax-Free Treatment of Restaurant Revitalization Grants

Taxability of Restaurant Revitalization Grants . ARPA allows for tax-free treatment of the SBA Restaurant Revitalization Grants. Under ARPA, these advances aren’t included in income and taxpayers are allowed a deduction for expenses paid with these tax-free grants.

We hope you find these updates useful. If you have any questions, please don’t hesitate to contact our office.