2020 Year-End Tax Information Appendices
Appendix I – Independent Contractors
Treatment of workers as independent contractors has come under increasing scrutiny in recent years. In addition, many states have made changes to their definitions of employees in recent years. Many workers who would have been properly treated as independent contractors in earlier years are now properly treated as employees for state law purposes. Although the federal rules have not changed significantly, treating workers as employees for state purposes but independent contractor for federal purposes is administratively difficult.
If a company improperly treats an employee as an independent contractor, there can be significant employment tax penalties. In addition, not reporting the employees can cause significant other problems.
In today’s economy, many businesses receive services from individuals who work out of their homes in other states. If those service providers are deemed to be employees by that state, it creates a physical presence in the state that meets all nexus standards. Now that the company has nexus in that state, it has the following obligations:
- With an employee in the state, the company is treated as doing business in the state. If the business is formed as a corporation, LLC, or other limited liability form of entity, the entity must register with the Secretary of State as a foreign entity.
- The physical presence causes sales tax nexus. The company has a responsibility to collect sales taxes from any sales of taxable items into that state.
- The physical presence causes income tax nexus. The company must file income tax returns in the state.
- The company is responsible for payroll taxes in the state including state income tax withholding and unemployment taxes.
- The company is responsible for worker’s compensation coverage for the employee.
If your business makes use of individuals who are treated as independent contractors, you should speak with us to help you determine your exposure and best course of action.
Appendix II – PPP Loans
Many businesses received PPP loans to help them survive the COVID-19 pandemic. These loans are forgivable if the proceeds are spent on qualified expenditures. These costs must be paid or incurred during the applicable period. The qualified costs are
- Payroll costs
- Rent on pre-existing leases (see below for self-rentals)
- Interest on pre-existing loans
The applicable period is the period that costs can be either paid or incurred to use for obtaining PPP loan forgiveness. The applicable period began on the date that the PPP loan proceeds were deposited to the bank account. Each borrower can elect to use either an eight-week applicable period or a 24-week applicable period.
Rent costs paid to related parties only count toward loan forgiveness to the extent of mortgage interest on the property. If only a portion of the facility is rented by the business, the interest amount is prorated.
Possible Reductions in Qualified Costs
There are two possible reductions in the qualified costs that can be used for PPP loan forgiveness: full time equivalent (“FTE”) reductions, and reductions in pay. Note that a company’s forgiveness is not necessarily reduced if one of these reductions apply. The reductions impact the amount of the company’s costs that can be applied to loan forgiveness. Since most companies have qualified costs substantially greater than the PPP loan, most companies loan forgiveness will not be reduced. The reductions do substantially complicate the loan forgiveness application.
The FTE reductions are based on whether the company has reduced the number of employees from a base period. Companies who have limitations on their operating capacity under COVID-19 related restrictions qualify for an exception to applying the FTE calculations. Companies who have reduced their FTEs from the base period and do not qualify for the exception must reduce their qualified costs by the proportion of reduction in FTEs. Employers can elect whether to treat each part time employee as a partial FTE based on the proportion of their time to a 40-hour week or to treat each part time employee as 0.5 FTEs. Companies have multiple options for selecting the base period for comparisons.
If companies have reduced the salary or hourly pay rate for employees, a reduction in the eligible payroll costs for those employees may apply. Employees who had at least one pay period during 2019 with an annualized pay rate of at least $100,000 and owners are excepted from these calculations. The application of these rules to employees who are not paid on either an hourly rate or straight salary can be very complicated.
PPP Loan Forgiveness Applications
The deadline for applying for forgiveness of PPP loans is 10 months after the end of the applicable period. The process for getting the loan forgiveness involves both the lending institution and the SBA. Each lender has their own procedures for collecting and analyzing loan forgiveness applications. The lender has 30 days to review the application for submitting it to the SBA for approval. The lender then submits the application to the SBA. The SBA has 60 days to approve the application.
The SBA has issued three different forms for businesses to use to apply for loan forgiveness. Form 3508 is the most extensive form and can be used by any business. Form 3508EZ can be used by businesses that do not have an FTE reduction. Form 3508S is the simplest form and can generally be used by businesses with a PPP loan of $50,000 or less. A business will generally want to use the simplest form possible to lower the costs of completing the application and make the process with the lending institution simpler.
Effect of Lending Institution on Loan Forgiveness
The SBA is relying on the lending institutions for most of the detail review of loan forgiveness. The lending institutions differ greatly in their approach to that review. The lending institutions and the SBA can accept third party payroll reports to document the wage payments. However, the banks differ in their requirements for the reports to meet that requirement. If a bank does not accept a particular payroll report from your payroll provider, the business may need to tie the payroll detail to its bank statements to support the payments.
Effect of Payroll Providers on Loan Forgiveness
Many payroll providers have provided special reports to use for the PPP forgiveness process. Depending on the provider and the bank, these reports may or may not meet the bank’s requirements. In addition, these reports vary in how well they apply the PPP loan forgiveness rules. Many of the reports do not segregate owners or other employees who are exempt from the wage reduction calculations as required by the SBA forms. In addition, many of the reports do not apply the proper limitations on compensation that the calculations require. The standard payroll reports also vary greatly in their usefulness for documenting PPP forgiveness.
Effect of PPP Loans on Completing Transactions
The SBA has rules that require businesses that take part in certain transactions to complete the loan forgiveness process or establish an escrow account for the remaining balance of the loan to complete the transaction. These transactions include acquisitions, dispositions, joint ventures, and changes in ownership. Contact us if you have a transaction to which these rules might apply and we will guide you through the process.
The Loan Forgiveness Applications Are Complex
The loan forgiveness applications are very detailed and complex. Many business owners are overwhelmed with keeping their business surviving during the COVID-19 crisis and don’t have the time to devote to such an involved process. WhippleWood is experienced at preparing these applications and is only a phone call away if you need help.
Appendix III – W-2 Reporting
The following list contains items that are important to remember when filing Forms W-2 for 2020. Several items may require adjustments to Forms W-2 prior to year-end in order to accurately report fringe benefits. Your payroll company may send you a year-end package regarding certain adjustments; however, unless specifically instructed to, your payroll company may not include these adjustments for the appropriate items listed below. We can assist with any adjustments or questions you may have.
- Federal and State Withholding
a. It is important to ensure that withholding amounts are accurate to avoid the need to prepare corrected Forms W-2.
- Fringe Benefits
a. Any fringe benefit provided to an employee is taxable and must be included in the employee’s pay unless it is specifically excluded under the law. Taxable fringe benefits are reported in Box 1 of Form W-2 as wages, tips and other compensation, and if applicable, in Boxes 3 and 5 as Social Security and Medicare wages.
- Personal Usage of Company-Owned Vehicle
a. If you are operating your business as a corporation and are deducting a vehicle loan payment, lease payment or any vehicle expenses (i.e., gas, lube, wash, etc.), you need to adjust for any personal use of the vehicle by either of the following:
i. Report the personal usage in Box 1 of Form W-2. This option will subject the amount to Social Security taxes; or
ii. Write a personal check to the company to reimburse for personal usage. This option does not subject the reimbursement to Social Security taxes.
b. If company vehicles are provided to employees for any business, the above adjustments must be made. The Social Security tax issue is the same as those listed above. Using the first method, the Social Security tax will be paid by the employee and matched by employer. Using the second method, Social Security tax does not need to be paid.
- Health & Accident Insurance Premiums
a. Health and accident premiums paid by an S-Corporation for a more than 2% shareholder-employee are not deductible by the S-Corporation. The premiums must be included as wages subject to income tax but not Social Security tax. This amount is deductible on your personal return.
b. The Patient Protection and Affordable Care Act requires employers to report the aggregate reportable cost of applicable employer-sponsored coverage under an employer-sponsored group health plan on Form W-2.
i. An employer who was required to file fewer than 250 Forms W-2 for the tax year will be exempt from this reporting requirement.
ii. The aggregate reportable cost generally includes both the portion of the cost paid by the employer and the portion paid by the employee, regardless of whether the employee paid through pretax or after-tax contributions.
1. Contributions to Archer MSAs and HSAs are excluded.
2. Contributions to a health FSA are also excluded, but to the extent the amount exceeds the employee’s salary reduction contributions for the year, it is included in the aggregate reportable cost.
- Limit on Health Flexible Spending Arrangement
a. For 2020 contributions to a health flexible spending arrangement are limited to $2,700 not including any amounts carried over from the prior year.
- Additional Medicare Tax
a. Medicare wages in excess of $200,000 are now subject to a 0.9% additional Medicare tax. Wages up to $200,000 are still taxed at 1.45% for both the employee and employer. Wages over $200,000 are taxed to the employee at 2.35%. This additional tax applies only to the employee and not the employer.
- W-2 Input
a. With the January 31st due date of the W-2s, it is very important to get the payroll information updated in your payroll system. To avoid needing to pay your payroll processor for amended returns, you must make sure these inputs are handled by the payroll processor’s deadline. Following is a list of some items that you should review to make sure they are properly input:
i. S Corporation owner payroll updates.
ii. Fringe benefits including those listed above.
iii. Bonuses and gift cards or gift certificates.
iv. 3rd party sick pay.
v. Manual payroll checks.
vi. Group term life insurance.
vii. Checks that need to be voided.
- W-4 Forms
a. With the late 2017 changes to the tax law, personal exemptions no longer apply to individual taxes. The IRS has a relatively new Form W-4 that more accurately calculates tax withholding under the new rules. Although employees are not required to use the newer form, employers should let employees know that the new form is available for setting their withholding at the proper levels. In addition, some payroll companies no longer accept input of the payroll exemptions from the old W-4 forms. If your payroll company has this limitation, you should encourage your employees to complete a new W-4. Otherwise, their withholding will likely be inaccurate.
Appendix IV – 1099 Reporting
2020 Form 1099
Forms 1099 are required for business payments made to an individual, LLC, attorney or unincorporated business under the following situations:
- 1099-NEC: Payments of $600 or more made to an attorney(s) during the year (Note: The exemption from issuing Forms 1099-NEC reporting payments to corporations does not apply to payments for legal services);
- 1099- NEC: Payments of $600 or more for services (including parts and materials used to perform the service) during the year;
- 1099- NEC: Payments of $600 or more for nonemployee compensation, including fees, commissions, prizes, awards for services performed as a nonemployee and other forms of compensation for services performed for your trade or business by an individual who is not your employee;
- 1099- MISC: Payments of $600 or more for rents during the year. This includes payments made for rental of machinery.
- 1099- MISC: Payments of $600 or more for medical and health care payments during the year (Note: The exemption from issuing Form 1099-MISC to a corporation does not apply to payments made for medical or health care services provided by corporations, including professional corporations. However, payments made to tax-exempt hospitals are not required to be reported);
- 1099- MISC: Payments and other remuneration made to directors, including payments made after retirement; and
- 1099-INT: Payments of $10 or more for interest during the year.
- Note that 1099s are not required for purchasing merchandise for resale.
The Following Information is Necessary to Prepare Form 1099:
- Full name of company and/or individual. If reporting to an individual, both the first and last name is needed;
- Tax identification number (Federal EIN, or SSN). If reporting to an LLC with a social security number, use the format XXX-XX-XXX;
- Address for each recipient; and
- Total amount paid to each recipient.
Please note, you should request and retain a Form W-9 for each Form 1099 recipient. Form W-9 provides the information needed to accurately complete the Form 1099. Otherwise, you may have additional withholding responsibilities.
If you would like WhippleWood CPAs to prepare the Form 1099’s for your business, please provide the required information to our office by January 14, 2021. Please note that the Form 1099 must be postmarkedto the recipients and the IRS no later than February 1, 2021.
1099 B Notices
You may receive correspondence from the IRS notifying you that some TINs reported on your 1099s do not match up with the name shown on the 1099 according to the IRS records. If you receive this correspondence you must send a “B Notice” to the payee and provide a copy of that B Notice to the IRS. The IRS will assess a penalty of $50 per item if the notices are not sent. This penalty applies even if you have no future payments to that recipient. Contact us if you have any questions on these notices.
Our team at WhippleWood CPAs is always up-to-date on the changing tax laws and regulations, and we are here to help. Learn more about our specialized services to meet your individual or business needs this year-end.