Many businesses use independent contractors to help keep their costs down. If you’re among them, make sure that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be a costly error.
It can be complex to determine whether a worker is an independent contractor or an employee for federal income and employment tax purposes. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations.
On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).
What are the factors the IRS considers?
Who is an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.
Note: Section 530 doesn’t apply to certain types of workers.
Should you ask the IRS to decide?
Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.
It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.
Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.
If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
These are the basic tax rules. In addition, the U.S. Labor Department has recently withdrawn a non-tax rule introduced under the Trump administration that would make it easier for businesses to classify workers as independent contractors. Contact us if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified.
© 2021 Covenant CPA
If you have minor children, choosing a guardian to care for them should you die unexpectedly is one of the most important estate planning decisions you must make. It’s also one of the most difficult. So difficult, in fact, that avoiding it is one of the most common reasons people put off drafting an estate plan.
If you’re hesitant to name a guardian for your children, consider the alternative: A court will name one, without any prior guidance from you. So it’s important to choose a guardian now, while you still have a say in the matter.
Here are four tips to guide you in making your selection:
1. Take inventory. Make a list of potential guardians — people you trust to love and care for your children. Don’t limit yourself to immediate family members. Extended family members and friends may also be good choices if they have a close relationship with your children and share your values.
2. Make value judgments. Consider the values that are important to you, such as religious and moral beliefs, parenting philosophy, educational values, and social values. Determine which people on your list share these values most closely.
Bear in mind that you’re not likely to find a perfect match, so you’ll need to prioritize your values. For example, is it more important to you that your guardian share your religious beliefs or that he or she share your parenting philosophy? Can educational values take a back seat to social values?
3. Consider age. The age of the guardian as well as the ages of your children are factors to consider. If your children are very young, a grandparent or other older person may not have the energy to keep up with them. And remember, if a guardian becomes necessary it means that something has happened to you. Choosing a younger guardian reduces the risk that your kids will go through the trauma of losing another loved one.
4. Don’t dismiss the possibility of separate guardians. If you have more than one child, it’s generally best for all concerned to keep the siblings together. But sometimes it’s preferable to split them up. This may be the case if you have children from different marriages, if your children are far apart in age or if they have special needs that are better served by separate guardians.
After you narrow your list of potential guardians to a primary choice and one or two alternates, discuss your plans with them. You can’t force someone to act as your children’s guardian, so it’s critical to talk with all the candidates to make sure they understand what’s expected of them and that they’re willing to take on the responsibility. If your children are old enough, get their input as well. Contact us with any questions regarding choosing a guardian.
© 2021 Covenant CPA
The COVID-19 pandemic has affected various industries in very different ways. Widespread lockdowns and discouraged movement have led to increased profitability for some manufacturers and many big-box retailers. The restaurant industry, however, has had a much harder go of it — especially smaller, privately owned businesses in economically challenged areas.
In response, the Small Business Administration (SBA) has launched the Restaurant Revitalization Fund (RRF). It was established under the American Rescue Plan Act (ARPA) signed into law in March. The RRF went live for applications on May 3, and the SBA is strongly urging interested, eligible businesses to apply as soon as possible.
Funds are available for restaurants, of course, but also many other similar types of businesses. Food stands, trucks and carts can apply, as well as bars, saloons, lounges and taverns. Catering companies may also file an RRF application.
In addition, the program is available to snack and nonalcoholic beverage bars, as well as “licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products,” according to the SBA.
For some restaurant-like businesses, on-site sales to the public must comprise at least 33% of gross receipts. These include bakeries; inns; wineries and distilleries; breweries and/or microbreweries; and brewpubs, tasting rooms and taprooms.
How much funding is available?
Under the ARPA, the RRF received a total of $28.6 billion in direct relief funds for restaurants and other similar establishments that have suffered economic hardship and substantial operational losses because of the COVID-19 pandemic.
The dollar amount an eligible business can receive under the RRF will equal its decrease in gross revenues during 2020 compared to gross revenues in 2019 — less the amount of any Paycheck Protection Program (PPP) loans received. Other amounts must be excluded from 2020 gross receipts as well, including:
- SBA Section 1112 debt relief,
- SBA Economic Injury Disaster Loans,
- SBA advances (targeted and otherwise), and
- Local small business grants.
Overall, the RFF may provide a qualifying establishment with funding equal to its pandemic-related revenue loss up to $10 million per business and not more than $5 million per physical location. Recipients must use funds for allowable expenses by March 11, 2023.
What will we need to apply?
A timely, properly completed application is critical to acquiring this funding. An applicant business must submit documentation of its 2020 and 2019 gross receipts, as well as at least one of the following:
- A federal tax return,
- A point of sale report, or
- Externally or internally prepared financial statements.
Warning: Internally prepared financials could significantly delay SBA review of your application.
You’ll also need to disclose the amount of any PPP loans you’ve received. However, the SBA’s online application system should provide this information automatically.
Get started now
To get started, register for an account at restaurants.sba.gov. The SBA advises applicants to first download a sample version of the application here. Our firm can help you identify necessary documentation and navigate the process.
© 2021 Covenant CPA
“Tax day” is just around the corner. This year, the deadline for filing 2020 individual tax returns is Monday, May 17, 2021. The IRS postponed the usual April 15 due date due to the COVID-19 pandemic. If you still aren’t ready to file your return, you should request a tax-filing extension. Anyone can request one and in some special situations, people can receive more time without even asking.
Taxpayers can receive more time to file by submitting a request for an automatic extension on IRS Form 4868. This will extend the filing deadline until October 15, 2021. But be aware that an extension of time to file your return doesn’t grant you an extension of time to pay your taxes. You need to estimate and pay any taxes owed by your regular deadline to help avoid possible penalties. In other words, your 2020 tax payments are still due by May 17.
Victims of certain disasters
If you were a victim of the February winter storms in Texas, Oklahoma and Louisiana, you have until June 15, 2021, to file your 2020 return and pay any tax due without submitting Form 4868. Victims of severe storms, flooding, landslides and mudslides in parts of Alabama and Kentucky have also recently been granted extensions. For eligible Kentucky victims, the new deadline is June 30, 2021, and eligible Alabama victims have until August 2, 2021.
That’s because the IRS automatically provides filing and penalty relief to taxpayers with addresses in federally declared disaster areas. Disaster relief also includes more time for making 2020 contributions to IRAs and certain other retirement plans and making 2021 estimated tax payments. Relief is also generally available if you live outside a federally declared disaster area, but you have a business or tax records located in the disaster area. Similarly, relief may be available if you’re a relief worker assisting in a covered disaster area.
Located in a combat zone
Military service members and eligible support personnel who are serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due. This includes taxpayers serving in Iraq, Afghanistan and other combat zones.
These extensions also give affected taxpayers in a combat zone more time for a variety of other tax-related actions, including contributing to an IRA. Various circumstances affect the exact length of time available to taxpayers.
Outside the United States
If you’re a U.S. citizen or resident alien who lives or works outside the U.S. (or Puerto Rico), you have until June 15, 2021, to file your 2020 tax return and pay any tax due.
The special June 15 deadline also applies to members of the military on duty outside the U.S. and Puerto Rico who don’t qualify for the longer combat zone extension described above.
While taxpayers who are abroad get more time to pay, interest applies to any payment received after this year’s May 17 deadline. It’s currently charged at the rate of 3% per year, compounded daily.
We can help
If you need an appointment to get your tax return prepared, contact us. We can also answer any questions you may have about filing an extension.
© 2021 Covenant CPA
Bad faith denials of claims by insurers are illegal, but some dishonest companies or agents attempt them anyway. It’s possible that just when you have the greatest need, you’ll find yourself out in the cold. Unfortunately, there aren’t a lot of great legal remedies. So it’s critical to avoid bad and fraudulent insurance in the first place.
An insurance policy is a contract. The insured agrees to pay premiums and take reasonable steps to prevent injury or damage, and the insurer agrees to settle legitimate claims according to the policy’s terms. Not only is it good business practice for insurers to cover legitimate claims, but it’s illegal for them to deny them.
There may be times when you and your insurer disagree about what’s covered or what constitutes a reasonable delay or amount in settlement. But errors in judgment and offers of compromise don’t necessarily equal bad faith. Bad faith arises when the insurer sacrifices its insured customers’ interests to enhance its own bottom line — and that can involve fraud.
Bad faith practices
Outright denial of legitimate claims is only one bad faith practice that indicates fraudulent insurance practices. Shady operators may also unreasonably delay investigating a claim or attempt to settle a claim for less than the amount specified by your policy.
Another bad faith tactic is to slow down the claim process by requiring multiple, duplicative proof of loss forms. Or an insurer might fail to settle one portion of a claim to induce you to accept a lesser settlement under another section of the policy. In many cases, fraudulent insurers misrepresent policy provisions related to claims.
Trouble with arbitration
When a claim is denied, one way to avoid legal action is arbitration. But a bad faith insurer might threaten to appeal arbitration awards to pressure you to settle for less than the awarded arbitration amount.
Defending against such practices can be difficult. One problem is that there’s no federal — only state — regulation of the insurance industry. Penalties imposed by states typically aren’t stiff enough to deter fraudulent practices, and they generally do nothing to compensate claimants who were wrongfully denied.
It’s important, therefore, to deal with only reputable insurance companies. Before you buy, check with industry rating services such as A.M. Best or your state’s department of insurance. Ask advisors and colleagues for their recommendations as well. And if you have a claim, be sure to file it promptly and document all correspondence and communication relating to it.
Adequate insurance coverage is a cornerstone of an effective risk management plan. If you’re not sure you have the right insurance by a trustworthy carrier, contact us for help.
© 2021 Covenant CPA
Many businesses provide education fringe benefits so their employees can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.”
For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree.
The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals who (including their spouses or dependents) who own 5% or more of the business.
No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.
If you pay more than $5,250 for educational benefits for an employee during the year, he or she must generally pay tax on the amount over $5,250. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying, the $5,250 exclusion, an employer can satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:
- Maintain or improve skills required for the employee’s then-current job, or
- Comply with certain express employer-imposed conditions for continued employment.
“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.
Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.
In addition to education assistance, some employers offer student loan repayment assistance as a recruitment and retention tool. Recent COVID-19 relief laws may provide your employees with tax-free benefits. Contact us to learn more about setting up an education assistance or student loan repayment plan at your business.
© 2021 Covenant CPA
Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).
The business energy credit equals 30% of the basis of the following:
- Equipment, the construction of which begins before 2024, that uses solar energy to generate electricity for heating and cooling structures, for hot water, or heat used in industrial or commercial processes (except for swimming pools). If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in calendar year 2023; and, unless the property is placed in service before 2026, the credit rate is 10%.
- Equipment, the construction of which begins before 2024, using solar energy to illuminate a structure’s inside using fiber-optic distributed sunlight. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain fuel-cell property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain small wind energy property the construction of which begins before 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain waste energy property, the construction of which begins before January 1, 2024. If construction began in 2020, the credit rate is 26%, reduced to 22% for construction beginning in 2023; and, unless the property is placed in service before 2026, the credit rate is 0%.
- Certain offshore wind facilities with construction beginning before 2026. There’s no phase-out of this property.
The credit equals 10% of the basis of the following:
- Certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.
- Certain cogeneration property with construction beginning before 2024.
- Certain microturbine property with construction beginning before 2024.
- Certain equipment, with construction beginning before 2024, that uses the ground or ground water to heat or cool a structure.
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations.
© 2021 Covenant CPA
In a society increasingly conscious of well-being, with the costs of health care benefits remaining high, many businesses have established or are considering employee wellness programs. The Centers for Disease Control and Prevention (CDC) has defined these programs as “a health promotion activity or organization-wide policy designed to support healthy behaviors and improve health outcomes while at work.”
Yet there’s a wide variety of ways to design and operate a wellness program. How can you ensure yours fulfills objectives such as reducing absenteeism and controlling benefits costs? Build it on a solid foundation.
Clearly, many business owners believe in wellness programs. Well before the COVID-19 pandemic, a 2017 study of 3,000 worksites by the CDC and researchers at the University of North Carolina found that almost 50% of those employers offered some type of health promotion or wellness program.
Since the pandemic hit, the focus of many wellness programs has begun to shift away from physical health to overall well-being. This means helping employees with improving their mental health, managing their finances and adjusting to remote work. (Some research has found that wellness programs don’t significantly improve short-term physical health or medical outcomes.)
Total leadership commitment
Whether it’s an existing wellness program or one you’re just starting, ask yourself a fundamental question: Who will champion our program? The answer should be: leaders at every level.
If a business takes a “top down” approach to wellness — that is, it’s essentially mandated for everyone by ownership — the program will likely struggle. Likewise, if a single middle manager or ambitious employee tries to lead the effort alone, while the rest of management looks on lackadaisically, the effort probably won’t meet its objectives.
Successful wellness programs are driven by total management buy-in — from the C-suite to middle management to leaders in every department.
A wellness program needs to be a natural and appropriate extension of your company’s existing culture. If it feels forced or “tone deaf,” employees may ignore the program or reflexively push back against it rather than approach it enthusiastically or simply with an open mind.
For example, if your business culture tends to be low-key and you engage a wellness vendor (such as a speaker) who shows up with a loud, flamboyant presentation, your staff may not appreciate what you’re trying to accomplish. Your wellness program’s materials and content should match the tenor and feel of your existing internal communications.
Ultimately, look to establish a “culture of wellness” at your company. For businesses that have never emphasized (or perhaps even discussed) healthy habits and lifestyles, doing so can present a great challenge. Be patient and persistent, bearing in mind that a cultural shift of this nature takes time.
Risks vs. benefits
These are just some of the foundational elements of an employee wellness program to bear in mind. We can help you estimate the costs and assess the risks vs. benefits of establishing or revising such a program.
© 2021 Covenant CPA
Although much of estate planning deals with what happens after you die, it’s equally important to have a plan for making critical financial or medical decisions if you’re unable to make them for yourself.
Carefully designed financial and health care powers of attorney allow you to designate a trusted person to make financial and medical decisions on your behalf in the event an illness or injury renders you unconscious or otherwise incapacitated. They also allow you to provide your designee with guidance on making these decisions, including your preferences regarding the use of life-sustaining medical procedures.
Review and revise as needed
Powers of attorney can provide peace of mind that your wishes will be carried out, but it’s important not to get lulled into a false sense of security. You should revisit these documents periodically in light of changing circumstances and consider executing new ones.
Possible reasons you may need new powers of attorney include:
- Your wishes have changed.
- The person you designated to act on your behalf has died or otherwise become unavailable.
- You’re no longer comfortable with the person you designated. (For example, perhaps you designated your spouse, but have since divorced.)
- If you’ve moved to another state, your powers of attorney may no longer work the way you intended. Certain terms have different meanings in different states, and states don’t all have the same procedural requirements. Some states, for example, require durable powers of attorney to be filed with the local county recorder or some other government agency.
Honoring your powers of attorney
Even if your circumstances haven’t changed, it’s a good idea to execute new powers of attorney every few years. Why? Because powers of attorney are effective only if they’re honored, and — because of liability concerns — some financial institutions and health care providers may be reluctant to honor documents that are more than a few years old.
Contact us with any questions regarding powers of attorney. We’d be pleased to further explain how they work or, if your estate plan already includes powers of attorney, help determine if you need to revise them or execute new documents.
© 2021 Covenant CPA