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.

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.

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.

“Last-Minute” 2020 Year-End Tax-Saving Moves for Individuals

There are only a few days left before the year ends, but here are some actions you can take before the new year to improve your situation for 2020 and beyond.

Consider President-elect Biden’s proposals. As the year comes to an end, it is hard to predict what, if anything, that the Biden Administration has proposed will become law and take effect in 2021. Most experts believe that taxes will need to be increased after the economic effects of the pandemic to help pay for the increased federal spending as a result of the pandemic. But enacting any major tax legislation is likely to be a slow process and may not affect 2021 taxes.

Here are some of the Biden Administration’s most noteworthy tax proposals:

Tax increase proposals

  • Raise the highest individual income tax rate to 39.6% from 37%.
  • Cap itemized deductions for the wealthiest Americans at 28%.
  • End favorable capital gains rates, including those rates on qualified dividends, for anyone with income over $1 million.
  • Eliminate the step-up in basis at death (taxing all appreciated investments at death)
  • Reducing the estate and gift tax exemption to its pre-Tax Cuts and Jobs Act (TCJA) level.

Tax decrease proposals.

  • $8,000 tax credit to help offset the costs of child care.
  • Exclusion from income for student loans that have been forgiven.
  • A refundable tax credit for low- and middle-income workers who contribute to IRAs and employer-provided retirement savings plans.

Solve underpayment of estimated tax/withheld tax issues.

Add an extra amount of withholding from your paycheck to solve an underpayment of estimated tax problem. Employees may discover that their prepayments of tax for 2020 have been too small because, for example, their estimate of income or deductions was off and they are underwithheld, or they failed to make estimated tax payments for unanticipated income, such as gains from sales of stock. Or they may have an underpayment of estimated tax because of the additional 0.9% Medicare tax and/or the 3.8% surtax on unearned income. To reduce an estimated tax underpayment penalty, an employee can ask their employers to increase withholding for their last paycheck or paychecks to make up or reduce the deficiency. If you are significantly underwithheld annually, you can file a new Form W-4 or simply request that the employer withhold a flat amount of additional income tax. If you are unable to add an additional withholding amount on your final paycheck, you can make a final estimated tax payment for 2020 (due on Jan. 15, 2021) to cut or eliminate the penalty for a Q4 underpayment only. It doesn’t help with underpayments for preceding quarters. By contrast, tax withheld on wages can wipe out or reduce underpayments for previous quarters because, as a general rule, an equal part of the total withholding during the year is treated as having been paid on each quarterly estimated payment date.

Charitable donations.

Use IRAs to make charitable donations. Taxpayers who have reached age 70½ by the end of 2020, own IRAs, and are thinking of making a charitable gift should consider arranging for the gift to be made by way of a qualified charitable contribution, or QCD—a direct transfer from the IRA trustee to the charitable organization. Such a transfer (up to $100,000 for 2020) will neither be included in gross income nor allowed as a deduction on the taxpayer’s return. But, since such a distribution is not includible in gross income, it will not increase Adjusted Gross Income (AGI) for purposes of the phaseout of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified level.

Taxpayers who have reached age 72 by Dec. 31 normally must take required minimum distributions (RMDs) from their IRAs or 401(k) plans (or other employer-sponsored retired plans) by Dec. 31. As a result of the CARES Act, there is no such requirement for 2020.

A QCD before Dec. 31, 2020 can still be a good idea for retired taxpayers who don’t need their as-yet undistributed RMD for living expenses. A 2020 QCD will reduce the taxpayer’s retirement account balance and therefore reduce the amount of the RMD that must be withdrawn in future tax years.

Charitable donation by non-itemizers. Non-itemizers can deduct up to $300 of cash charitable donations that they make in 2020 ($600 for married filing joint taxpayers).

Higher limit on charitable contributions. In response to the Coronavirus (COVID-19) pandemic, the limit on charitable contributions of cash by an individual in 2020 was increased to 100% of the individual’s adjusted gross income (AGI). For previous years, the limit was 60% of a taxpayer’s AGI. While this increased limit was extended to 2021 by the CAA, 2021, taxpayers should consider increasing 2020 contributions to take advantage of the increased limit.

Retirement plans.

Establish a Keogh plan. A self-employed person who wants to contribute to a Keogh plan for 2020 must establish that plan before the end of 2020. If that is done, deductible contributions for 2020 can be made as late as the taxpayer’s extended tax return due date for 2020.

Relief with respect to withdrawal from retirement plans. A distribution from a qualified retirement plan is generally subject to a 10% additional tax unless the distribution meets an exception under Code Sec. 72(t).

2020 legislation provides that the Code Sec. 72(t) 10% additional tax does not apply to any coronavirus-related distribution, up to $100,000. A coronavirus-related distribution is any distribution made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan, made to a qualified individual.

A qualified individual is an individual

  1. Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC),
  2. Whose spouse or dependent (as defined in Code Sec. 152) is diagnosed with such virus or disease by such a test, or
  3. Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.

Other relief also applies to coronavirus-related distributions, including the ability to recognize income over a 3-tax-year period.

Other.

Make year-end gifts. A person can give any other person up to $15,000 for 2020 without incurring any gift tax. The annual exclusion amount increases to $30,000 per donee if the donor’s spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so. Besides avoiding transfer tax, annual exclusion gifts take future appreciation in the value of the gift property out of the donor’s estate, and they shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).

Watch out for the use-it-or-lose-it rule. Unused cafeteria plan amounts left over at the end of a plan year must generally be forfeited (use-it-or-lose-it rule). A cafeteria plan can provide an optional grace period immediately following the end of each plan year, extending the period for incurring expenses for qualified benefits to the 15th day of the third month after the end of the plan year. Benefits or contributions not used as of the end of the grace period are forfeited. Under an exception to the use-it-or-lose-it rule, at the plan sponsor’s option and in lieu of any grace period, employees may be allowed to carry over up to $500 of unused amounts remaining at year-end in a health flexible spending account.

Taxpayers should make sure they understand their employer’s plan and should make last-minute purchases before year end to the extent that not doing so will result in losing benefits. In most cases, a trip to the drug store, dentist or optometrist, for goods or services that the taxpayer would otherwise have purchased in 2021, can avoid “losing it.”

Paying by credit card creates deduction on date of credit card transaction. Taxpayers should consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase their 2020 deductions even if they don’t pay their credit card bill until after the end of the year.

Increase 2020 itemized deductions via a “bunching strategy.” Many taxpayers who claimed itemized deductions in prior years will no longer be able to do so. That’s because the standard deduction has been increased and many itemized deductions have been cut back or abolished. Paying some otherwise-deductible-in-2021 itemized deductions in 2020 can decrease taxable income in 2020 and will not increase 2021 taxable income if 2021 itemized deductions would otherwise have still been less than the 2021 standard deduction. For example, a taxpayer who expects to itemize deductions in 2020 but not 2021, and usually contributes a total of $1,500 to charities each year, should consider making a total of $3,000 of charitable contributions before the end of 2020 (and skipping charitable contributions in 2021).

Please contact our office for additional guidance and tax savings strategies that may be applicable to your personal situation.

5 key points about bonus depreciation

You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.

1. Bonus depreciation is scheduled to phase out

Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years. Keep in mind, we are in an election year, and tax law can change with adminstriations and changes to budget.

For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.

Of course, Congress could pass legislation to extend or revise the above rules.

2. Bonus depreciation is available for new and most used property

In the past, used property didn’t qualify. It currently qualifies unless: 

  • The taxpayer previously used the property and
  • The property was acquired in certain forbidden transactions (generally acquisitions that are tax free or from a related person or entity).

3. Taxpayers should sometimes make the election to turn down bonus depreciation 

Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.

Note that business entities taxed as “regular” corporations (in other words, non-S corporations) are taxed at a flat rate.

4. Bonus depreciation is available for certain building improvements

Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property: 

  • Land improvements other than buildings, for example fencing and parking lots, and
  • “Qualified improvement property,” a broad category of internal improvements made to non-residential buildings after the buildings are placed in service.

The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.

However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has reduced the importance of “Section 179 expensing”

If you own a smaller business, you’ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful.

We can help

The above discussion touches only on some major aspects of bonus depreciation. This is a complex area with tax implications for transactions other than simple asset acquisitions. Please feel free to reach out if you have any questions on this topic.

CARES Act Part 2 – Individual Provisions

On Friday, the President signed into law the CARES Act. This legislation contained very significant tax law changes, the majority of which are temporary and will only be relevant for the 2020 calendar year. We’ve spent the last five days digging through this 880 page legislation to highlight the most relevant changes for you. 

Below is a summary of these provisions, as they relate to individuals:

Tax Deadline Extension

 2019 Tax Returns

As you’re probably aware, the April 15th, 2020 tax deadline has been automatically postponed to July 15th, 2020. This includes all of the following:

  • 2019 Form 1040, Individual tax returns and payments
  • 2019 Traditional or Roth IRA contributions
  • 2019 HSA contributions

2020 Estimated Payments For those of you who make estimated payments throughout the year, the Q1 2020 estimated payments deadline was also extended to July 15, 2020. However, the Q2 2020 estimated payments deadline currently remains at June 15, 2020.

Stimulus Rebate Checks

Under the CARES Act, eligible individuals are allowed an economic impact payment equal to:

  1. $1,200 ($2,400 for joint return) plus
  2. $500 for each qualifying child of the taxpayer under 17 years old

 The amount of the credit is reduced (but not below zero) by 5% of the taxpayer’s adjusted gross income (AGI) in excess of:

  1. $150,000 for a joint return,
  2. $112,500 for a head of household, and
  3. $75,000 for all other taxpayers

We’ve put together this calculator to help you estimate your stimulus rebate. Please download this sheet to edit. This calculation is based on the CARES Act as of March 27th and may change.

For taxpayers who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. This economic impact payment will be deposited directly into the same banking account reflected on the return filed.

In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail. The IRS will also mail a notice to the taxpayer’s last known address indicating how the payment was made, the amount of the payment, and a phone number for reporting any failure to receive the payment to IRS.

If you would like more information, please see this IRS news release.

If you are due a higher rebate based on your 2020 return next Spring, then you may be able to claim the excess over the amount of rebate already received as a credit on that filing. However, if the rebate received based on 2018 or 2018 was greater than what you would have been entitled to based on your 2020 filing, you will not be required to pay back the excess.

Charitable Contribution Provision

The CARES Act adds a deduction to the calculation of gross income for up to $300 of qualified charitable contributions made during the 2020 tax year by eligible individuals. Qualified charitable contributions must be made in cash to eligible 501(c)(3) non-profits and eligible individuals are those who do not elect to itemize deductions. Prior to the Cares Act, only taxpayers who itemized deductions (rather than taking the standard deduction) were allowed a deduction for charitable contributions.

Student Loan Debt

Employer-Tax Free Reimbursements

Eligible student loan repayments up to $5,250 are excluded from the employee’s gross income. Eligible student repayments are payments made by an employer directly to the employee or lender for principal or interest on any qualified higher education loan before January 1, 2021. This payment must be for the employee – it can’t be for a spouse or a dependent. Note that certain restrictions apply to S-corporation owners and self-employed individuals.

Suspension of Payments

The CARES Act offers a few benefits in relation to federal student loan payments. Note that these provisions only apply to loans that are held through the Department of Education.

  1. Student loan payments are suspended through September 30, 2020.
  2. Interest will not accrue during this time.
  3. Involuntary collection has been suspended. In other words, there is no garnishment of wages, Social Security, and tax refunds for student loan debt collection.
  4. If you are a part of a loan forgiveness program, this period of time will still count as “payments.” For example, those that are in the public service loan forgiveness program are required to make 120 consecutive payments. Although you may not make payments, this period of time will still count as payments toward the 120 consecutive payment requirement.

Student Loan Forgiveness

The CARES Act doesn’t include any provisions for student loan forgiveness. Initial proposals from Senate and House Democrats included student loan forgiveness plans for $10K and $30K but neither proposals were included in the legislation.  

Waiver on Early Withdrawal

The CARES Act provides that the 10% early withdrawal penalty does not apply to any coronavirus-related distribution that is made in 2020, up to $100,000. Note that the requirements for a qualified individual are one:

  1. Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention (CDC),
  2. Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
  3. Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, etc.

This does NOT mean you do not pay tax on the distribution. However to ease the tax burden, the Cares Act includes a provision so that the amount distributed can be included in income ratably over 3 years (unless the taxpayer elects not to). The way the CARES Act is written you can contribute the aggregate amount of the coronavirus-related distribution back to the eligible retirement plan within the 3-year timeframe and treat the contribution amount as a trustee to trustee transfer.

Final Thoughts

I know this is a challenging time and we are working around the clock to stay on top of every detail as legislation changes. We are here to work through this with you and are honored to be a resource for our community during this time. 

Sincerely,

Paul, Mohib, and Jerome 

CARES Act Part 1 – Business Provisions

On Friday, March 27th, 2020 the President signed into law the CARES Act. This legislation contained very significant tax law changes, the majority of which are temporary and will only be relevant for the 2020 calendar year. We’ve spent the last five days digging through this 880 page legislation to highlight the most relevant changes for you. 

Below is a summary of these provisions, as they relate to businesses:

Paycheck Protection Program (PPP)

PPP loans are available to small business owners (with under 500 employees) or self-employed individuals (sole proprietorships or independent contractors), intended to be only used for the following operating costs:

  1. Payroll costs (including payments to contractors)
  2. Interest on mortgage obligations
  3. Rent
  4. Utilities
  5. Interest on other debt obligations incurred before the PPP

Eligible entities can borrow up to the lesser of $10 million or 2.5 times the average monthly payroll for the 1-year period before loan application, of which a portion can be forgiven subject to the provisions of the CARES Act. The amount of forgiveness is based on the total of costs 1 to 4 above over the 8-week period after loan grant, subject to reduction based on number of employees laid off and employee pay cuts implemented.  No collaterals or personal guarantees are required for application. PPP loans are expected to be made available through all SBA-approved lenders soon and you’ll have until June 30, 2020 to apply.

These loans are best suited for businesses that intend to bring back employees that have been laid off or furloughed, or employers who need additional capital to retain their existing workforce. 

SBA Loan Debt Relief

The SBA will pay all principal, interest and fees on existing 7(a) SBA loans for six months (disaster loans, PPP loans, 504 loans, and microloans are not eligible).


Economic Injury Disaster Loan (EIDL) and Grants

Small businesses and self-employed individuals can also apply for EIDLs, especially now with the CARES Act providing waivers for some stricter requirements (no available credit elsewhere and must have been in business for at least 1 year).  You can borrow up to $2 million and would just have to provide proof of economic injury for the application. Unlike the PPP loan, EIDL provides more leeway in terms of the type of expenses it can be used for. As a working capital loan, you can use the proceeds to pay for all operational costs, as well as any outstanding debts obligations you were unable to meet due to the disaster.

The CARES Act also allows for a $10,000 emergency grant advance that you can receive within 3 days of an EIDL application. And the kicker? You don’t have to pay any of it back, regardless of whether your EIDL was approved or not.

EIDLs are available until December 31, 2020, directly through the SBA website.

Employee Retention Tax Credit (ERTC)

This provision would allow employers to claim a refundable payroll tax credit equal to 50 percent of a maximum of $10,000 per employee of qualified wages paid (i.e. a maximum credit of $5,000 per employee) from March 13, 2020 to December 31, 2020. The credit is restricted to employers who see a full or partial suspension of operations due to a shutdown order or who see gross receipts decline by more than 50 percent relative to the same quarter the previous year. For employers with more than 100 full-time employees, the credit is restricted to wages paid to employees not providing service due to COVID-19. For employers with fewer than 100 full-time employees, it is applicable to all wages. 

This credit is not available to businesses who receive small business interruption loans and is subject to recapture. 

Payroll Tax Payment Deferral
The CARES Act provides for the deferral of paying certain employer payroll taxes through the end of 2020. Applicable payroll taxes include (1) 50% of the self-employment taxes, and (2) 100% of the employer portion of FICA taxes. Payments for the deferred payroll taxes are expected to be due in two equal installments, with one-half paid by December 31, 2021, and the other by December 31, 2022.
It is important to note that the above provisions are not available for any businesses that take advantage of the loan forgiveness program of the PPP.

Qualified Improvement Property

This provision would correct an error in the 2017 Tax Cuts and Jobs Act preventing businesses, particularly in the hospitality industry, from writing off facility improvement costs immediately rather than over 39 years. This change is intended to allow businesses to amend prior year returns to provide liquidity during the outbreak and to correct the technical issue.

Net Operating Losses (NOLs)

The CARES Act allows for a net operating loss carry-back for losses arising in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021 to offset income in the preceding five (5) years. 


Should I take the PPP, EIDL, or the payroll tax credits?

Finding out the best program to take advantage of ultimately requires a separate evaluation for each individual business, considering industrial, operational, and financial requirements. We at Launch Consulting are always here to help – whether with assessing which loans or credit to take, or even with applying for the loans. Please feel free to reach out if you need assistance.

Looking for more information? Here’s a link to the Senate Committee on Small Business & Entrepreneurship’s Guide for Small Business Owners.  

The SECURE Act – What You Need to Know

Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that affects the rules for creating and maintaining employer-provided retirement plans. Whether you currently offer your employees a retirement plan, or are planning to do so, you should consider how these new rules may affect your current retirement plan (or your decision to create a new one).

Here is a look at some of the more important elements of the SECURE Act that have an impact on employer-sponsors of retirement plans. The changes in the law apply to both large employers and small employers, but some of the changes are especially beneficial to small employers. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact. Please give me a call if you would like to discuss these matters.

It is easier for unrelated employers to band together to create a single retirement plan. A multiple employer plan (MEP) is a single plan maintained by two or more unrelated employers. Starting in 2021, the new rules reduce the barriers to creating and maintaining MEPs, which will help increase opportunities for small employers to band together to obtain more favorable investment results, while allowing for more efficient and less expensive management services.

New small employer automatic plan enrollment credit. Automatic enrollment is shown to increase employee participation and retirement savings. Starting in 2020, the new rules create a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to an existing plan start-up credit, and is available for three years. The new credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.

Increased credit for small employer pension plan start-up costs. The new rules increase the credit for plan start-up costs to make it more affordable for small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of

  1. $500, or
  2. The lesser of:
    1. $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan, or
    2. $5,000.

The credit applies for up to three years.

Expand retirement savings by increasing the auto enrollment safe harbor cap. An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs and meets certain other requirements. One of the safe harbor plans is an automatic enrollment safe harbor plan.

Starting in 2020, the new rules increase the cap on the default rate under an automatic enrollment safe harbor plan from 10% to 15%, but only for years after the participant’s first deemed election year. For the participant’s first deemed election year, the cap on the default rate is 10%.

Allow long-term part-time employees to participate in 401(k) plans. Currently, employers are generally allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans—like a 401(k) plan—to their employees. As women are more likely than men to work part-time, these rules can be especially harmful for women in preparing for retirement.

However, starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year. For employees who are eligible solely by reason of the new 500-hour rule, the employer will be allowed to exclude those employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Looser notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans. The actual deferral percentage nondiscrimination test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or nonelective contributions under either of two plan designs (referred to as a “401(k) safe harbor plan”), as well as certain required rights and features, and satisfies a notice requirement. Under one type of 401(k) safe harbor plan, the plan either

  1. Satisfies a matching contribution requirement, or
  2. Provides for a nonelective contribution to a defined contribution plan of at least 3% of an employee’s compensation on behalf of each nonhighly compensated employee who is eligible to participate in the plan.

For plan years beginning after Dec. 31, 2019, the new rules change the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption. The new rules eliminate the safe harbor notice requirement, but maintain the requirement to allow employees to make or change an election at least once per year. The rules also permit amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time are allowed if the amendment provides

  1. A nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and
  2. The plan is amended no later than the last day for distributing excess contributions for the plan year (i.e., by the close of following plan year).

Expanded portability of lifetime income options. Starting in 2020, the new rules permit certain retirement plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan, or IRA, of a lifetime income investment or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.

Qualified employer plans barred from making loans through credit cards and similar arrangements. For loans made after Dec. 20, 2019, plan loans may no longer be distributed through credit cards or similar arrangements. This change is intended to ensure that plan loans are not used for routine or small purchases, thereby helping to preserve retirement savings.

Nondiscrimination rules modified to protect older, longer service participants in closed plans. Starting in 2020, the nondiscrimination rules as they pertain to closed pension plans (i.e., plans closed to new entrants) are being changed to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer-service employees as they near retirement.

Plans adopted by filing due date for year may be treated as in effect as of close of year. Starting in 2020, employers can elect to treat qualified retirement plans adopted after the close of a tax year, but before the due date (including extensions) of the tax return, as having been adopted as of the last day of the year. The additional time to establish a plan provides flexibility for employers who are considering adopting a plan, and the opportunity for employees to receive contributions for that earlier year.

New annual disclosures required for estimated lifetime income streams. The new rules (starting at a to-be-determined future date) will require that plan participants’ benefit statements include a lifetime income disclosure at least once during any 12-month period. The disclosure will have to illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant s surviving spouse and a single life annuity.

Fiduciary safe harbor added for selection of annuity providers. When a plan sponsor selects an annuity provider for the plan, the sponsor is considered a plan “fiduciary,” which generally means that the sponsor must discharge his or her duties with respect to the plan solely in the interests of plan participants and beneficiaries (this is known as the “prudence requirement”).

Starting on Dec. 20, 2019 (the date the SECURE Act was signed into law), fiduciaries have an optional safe harbor to satisfy the prudence requirement in their selection of an insurer for a guaranteed retirement income contract, and are protected from liability for any losses that may result to participants or beneficiaries due to an insurer’s future inability to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a plan.

Increased penalties for failure-to-file retirement plan returns. Starting in 2020, the new rules modify the failure-to-file penalties for retirement plan returns.

The penalty for failing to file a Form 5500 (for annual plan reporting) is changed to $250 per day, not to exceed $150,000.

A taxpayer’s failure to file a registration statement incurs a penalty of $10 per participant per day, not to exceed $50,000.

The failure to file a required notification of change results in a penalty of $10 per day, not to exceed $10,000.

The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.