On Aug. 28, 2020, as part of COVID-19 relief, President Trump issued a presidential memorandum allowing employers to suspend withholding and paying to the IRS eligible employees’ Social Security payroll taxes from September 1, 2020 through December 31, 2020. The IRS then issued guidance on the payroll tax deferral in Notice 2020-65, but some questions still remain, and additional guidance in anticipated. Here’s what we know now.
Notice 2020-65 Provides Basic Guidance
For those implementing the program, the Notice provides barebones components of the payroll tax deferral, which applies to the employee portion of Social Security Tax.
For employees earning less than $4,000 in a bi-weekly pay period, employers would defer withholding/depositing employee share of social security tax on wages earned for payroll periods on or after September 1, 2020.
For employees whose wages fluctuate, the deferral is applicable to wages paid in any bi-weekly pay period during the dates specified in which the employee earns less than $4,000, regardless of wages or compensation paid to the employee for any other pay period. Therefore, the employer may defer to collect the tax in a pay period where the employee earns less than $4,000 but be required to collect it for another pay period where the employee earns more than $4,000.
Though Treasury Secretary Mnuchin announced previously that the deferral program would be optional, the Notice does not specifically address whether it is mandatory or optional.
Departing Employees
One main reason that employers may not be eager to offer the benefit to employees is due to the absence of guidance regarding the situation of an employee’s termination or otherwise leaving employment ahead of paying the deferred amount. The employer and employee can come up with an arrangement (i.e. deducting the amount owed from the final paycheck), but should an employer fail to collect from the employee, the IRS could go after the employer.
To Defer or Not to Defer?
Given that the motive behind the tax deferral program is to get more money into the pockets of employees now in order to make ends meet due to reduced wages and/or hours, employers may think it worthwhile to extend this option to their employees. An average worker who completely defers Social Security taxes until December 31, 2020 would save just under $800, or about $60 per week. Employees must keep in mind that it is a temporary relief in the form of a deferral, not a tax forgiveness, though the President’s Executive Order does encourage Treasury to look into possible avenues for forgiveness. At best the tax deferral is an opportunity for workers to funnel those funds into an emergency savings account, ensuring that the savings will be on hand should Treasury fail to put forth a path for forgiveness and the taxes are consequently deducted from paychecks next year.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for employers on retirement plans, making it easier for employers to offer 401(k) plans and for employees to take part in them. Here’s how.
Multiple Employer Plans
Known as MEPs, multiple employer plans permit businesses to band together to offer employees a defined contribution plan such as a 401(k) or SIMPLE IRA, effectively allowing workers access to the same low-cost plans offered by large employers. While MEPs existed before the SECURE Act, here’s how they are now easier to establish and maintain.
The “one bad apple rule”, where one employer’s failure to comply jeopardized the entire plan, was done away with.
The “common nexus” requirement, which restricted the MEP option to small business employers who operated either in the same industry or same geographic location, was eliminated, permitting an “open MEP” that can be administered by a pooled plan provider (typically a financial services firm).
MEPs with fewer than 1,000 participants (and no more than 100 participants from a single employer) are excluded from a potentially expensive audit requirement.
Small business employers are also eligible for new tax credits for offering retirement savings options to employees.
Changes to Safe Harbor Plans
A provision of the SECURE Act provides more flexibility for employers who offer safe harbor 401(k) plans, which are 401(k) plans with an employer match that allows for avoidance of most annual compliance tests. If a 401(k) includes a Safe Harbor provision, the employer makes annual contributions on behalf of employees, and those contributions are vested immediately. Flexibility offered by the SECURE Act includes:
Increasing the automatic enrollment escalation cap under a qualified automatic contribution arrangement (QACA) 401(k) plan from 10 to 15%.
Removing the notice requirement for nonelective contributions. (The notice requirement is still applicable, however, for plans that implement the safe harbor match.)
Whereas pre-SECURE Act, switching to a safe harbor plan had to be done before the start of the plan year, employers are now allowed to switch to a safe harbor 401(k) plan with nonelective contributions anytime up to 31 days before the end of the plan year. Amendments after that time are approved if (1) a nonelective contribution of at least 4% of compensation is granted for all eligible employees for that year, and (2) the plan in amended by the close of the following plan year.
Automatic Enrollment Credit
The SECURE Act added an incentive for small businesses to feature automatic enrollment in their plans by allowing businesses with fewer than 100 employees to qualify for a $500 per year tax credit when they create a new plan that includes automatic enrollment. Business can also take advantage of this by converting an existing plan to one with an automatic enrollment. The tax credit is available for three years following the year the plan automatically begins enrolling participants.
Part-Time Employee Participation
Previously, employers could exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in January of 2021, the SECURE Act requires employers to include employees who work at least 500 hours in three consecutive years. This means that in order to qualify under this rule, employees would need to meet the 500-hour requirement for three years starting in 2021 in order to become eligible in 2024.
Choosing the Right Plan for Your Business
Research 401(k) plan options for your business, keeping in mind that retirement plans can be customized to meet the needs of you and your employees.
Carefully read through costs and fees of each plan. Recordkeeping fees, transaction fees, and investment fees are some to be mindful of, and these fees might increase if you add more employees and the plan grows (i.e. low-cost plans upfront might not be the best plan for your business in the long term.)
Look for a 401(k) plan that presents a variety of investment opportunities for employees in terms of stocks, bonds, broad-based international exposure, and emerging markets.
Work with a financial expert who can help you establish and oversee a 401(k) plan. These professionals can include third-party administrators, recordkeepers, and investment advisors and managers.
Entrepreneurs are tasked with not only managing their business finances, but their personal finances as well, and when needs, circumstances, and priorities don’t align with the two, managing it all can feel overwhelming. To keep personal finances from getting pushed to the side, below are some tips to help you handle your own money while overseeing your business’s.
Plan for Rainy Days
Building an emergency fund for rainy days is not novel advice, but business owners might want to stash away even more than the recommended three to six months’ worth of living expenses. Are you prepared for circumstances like irregular fluctuations in cash flow, loss of a major client, or a national pandemic? Keep in mind that the purpose of an emergency fund is not to earn a big yield on this money but to be sure it’s there and accessible, so keep it in an FDIC-insured cash bank account.
Separate Business and Personal Finances
When you first start a business, open a business bank account and apply for a business credit card for business expenses. In addition to helping you build business credit, this will streamline your tax prep during tax season, lend more credibility to your business as an actual business, remove personal liability in case of adversity, and eliminate the burden of your business’s financials from your personal accounts.
Automate Bill Payment Schedules
A common personal financial tip is to automate your bill payment schedule, so consider carrying this practice over to your business finances as well. This will hep to prevent you from getting overwhelmed with both personal and business bills, thereby avoiding late payment fees and knocks to your credit score.
Manage Your Personal Credit
You know how crucial good credit is for your business, so it makes sense to keep your personal credit in check as well. Be sure to pay bills on time even if there are months when you can only make the minimum payment. Also be aware of your credit utilization (the percentage of credit that you’re actually using versus your total available credit limit). Keeping your credit utilization below 30% will keep your credit in good standing for loan approval.
Save for Retirement
Although it’s typical for business owners to invest profits back into their business, you still need to prepare for retirement, and investing and diversifying your savings may help you save more money for retirement than you could as an employee. SEP IRAs, SIMPLE IRAs, Solo 401(k)s, and SIMPLE 401(k)s are all retirement plan options available to small businesses. Research each one to determine which would be the best fit for you and your business. As for diversifying investments, look into options like stocks, bonds, ETFs, and money market mutual funds. Allocating your assets into different funnels will give you some breathing room should your business experience a struggle period.
Look to Tax Professionals
It’s no secret that U.S. tax laws are complex, and different business entities have different taxation rules. An accountant or tax professional can help you determine what your obligations are. To streamline the process, be sure to keep clear and organized records all year long.
With the learning curve of the first tax filing season in the TCJA era behind us, year-end tax planning is a perfect time to incorporate those lessons learned. Here is a general overview of some steps business owners can take in their year-end tax planning.
Depreciation-related Deductions
If your business has acquired a fixed asset or property (one that you don’t intend to sell for at least one year and will be used to earn long-term income), and it’s placed in service before the end of the year, you can typically write off the cost in 2019. Thanks to changes made by the TCJA, this now applies to both new and used assets. The TCJA boosted the deduction limit to $1.02 million with a phase-out threshold of $2.55 million for 2019. It also increased bonus depreciation to 100% for property placed in service after September 27, 2017 and before January 1, 2023.
Travel Expenses
The IRS recently clarified that food and beverage costs are deductible by 50% in certain circumstances and when those costs are stated separately from entertainment on invoices or receipts.
QBI Deductions
One of the most significant changes made by the TCJA affects owners of pass-through entities (partnerships, S corporations, and LLCs) as it authorized a deduction of up to 20% of the owner’s qualified business income (QBI) for the tax years 2018 through 2025. The QBI deduction is reduced for some taxpayers based on the amount of their income, so some individuals may need to consider reducing their taxable income so it falls under the $157,500 threshold ($315,000 for married filing jointly), whether by making contributions to retirement plans or health savings accounts, or even through charitable contributions. Something to keep in mind is that specified service business owners, which includes most personal-service providers, are not eligible for the deduction if their taxable income is above a certain threshold.
Business Repairs
It isn’t a bad idea to complete minor repairs by the end of the year because the deductions can offset taxable business income. However, costs of improvements to business property must be written off over time. If you’re unsure whether a specific renovation or upgrade falls under a repair or an improvement, the IRS recently issued regulations that clarify the distinctions.
Estimated Tax Payments
If your corporation is anticipating a small net operating loss for 2019 but a substantial net income in 2020, you might think about accelerating just enough of the corporation’s 2020 income to create a small amount of net income for 2019. You could also choose to defer some 2019 deductions. This way, rather than having to pay estimated taxes based on 100% of your 2020 taxable income, you will be able to base your estimated tax installments on the comparatively small amount of income shown on your 2019 return.
With additional guidance and regulations released consistently since President Trump signed the Tax Cuts and Jobs Act of 2017 into law, one thing remains clear: strategic tax planning is key to lowering a business’s total tax liability. Read on for some moves on lowering your 2019 business tax bill.
Establish Tax-Favored Retirement Plan
Current tax rules allow for significant deductible contributions, so if your business doesn’t already have a retirement plan in place, it’s worth considering. Small business retirement plan options include 401(k), SEP-IRA, SIMPLE-IRA, and the defined benefit pension plan. Some of these plans can be established up until December 31 and allow for a deductible contribution for the 2019 tax year, except for the SEP-IRA and SIMPLE-IRA, which mandate a set-up deadline of October in order to make a contribution for the same year.
Review Your Reports
The end of the year is typically a time for businesses to begin goal setting for the next year, so it’s crucial to have a firm grasp on how your business performed financially this year. Make sure your books are up to date and accurate so you have a clear picture before diving into next year’s plan.
Defer Income If It Makes Sense
Depending on where your income level is, you can potentially cut your tax bill by postponing any end-of-the-year income until January 1 or later. Ask your accountant if shifting receivable income to the new year makes sense for your business.
Purchase Business Essentials to Take Advantage of Deductions
Upgrade equipment and furniture, stock up on office supplies, take care of repairs, and make vendor payments in advance in order to maximize deductions. And thanks to the TCJA, you can claim 100% bonus depreciation for qualified asset additions that were acquired and put in place in 2019.
Make Charitable Contributions
Tis the season for giving…and claiming a deduction for the fair market value of your donations. In addition to money, think outside the box and contact a program that sponsors families for the holidays. They often need food, bedding, toys, cookware, and clothing. It’s a great way for employees to feel like they’re making a difference too. Just don’t forget to get the necessary documentation and receipts to keep with your records.
Start Preparing for Next Year
If you put these tips into action, you’ll be better prepared at this time next year. For instance, you’ll already have a retirement plan in place. By going through the process of tax preparation this year, you have the opportunity to create systems for organization that will expedite the process next year.
Most small businesses have limited financial resources, so managing funds wisely and intentionally is crucial to the success of the business. Below are ways in which your small business may be throwing away money that could be needed elsewhere.
Having Overheads that Exceed Profit
It might be common sense, but if you’re not making enough profit to cover your expenses, trouble is on the horizon. Even entrepreneurs can be financially-challenged, so it might be worth it to enlist the help of an accounting professional. Additionally, you should identify the most profitable aspects of your business as well as the ones that are draining resources, and make adjustments however needed.
Staffing Issues
Consider whether your full-time staff is absolutely needed. Could some positions be just as effective in part-time, seasonal, or freelance roles? Too, make sure you’re tapping into your employees’ full potentials. Get to know their interests and individual areas of expertise in order to increase productivity, propel your business forward, and offer new ways to motivate employees to take a vested interest in the success of your business.
Advertising and Marketing Expenses
As a small business owner, you likely don’t have money to waste on untargeted marketing or costly advertising campaigns. Your best bet is probably content marketing, a.k.a. blogging on your website. Brush up on SEO – or tap into the unidentified skills of your employees – to make sure your posts are keyword-optimized and pop up in search engines. Not a writer? Again, tap into the skillset of your employees, or hire a freelance writer. Lastly, think about finding someone to manage your company’s social media accounts and Google ad campaigns.
Trade Shows and Conferences
Though they’re a great way to network while promoting your products or services, they’re often expensive. When funds are tight it’s wise to be choosy about which ones you attend. If one or two specific trade shows or conferences have proven to produce sales and benefit business, just concentrate on having a presence at those venues and forgo the ones that might not be worth the cost.
The Latest Technology
In most instances you really don’t need the latest and greatest that technology has to offer. For example, if you buy a sophisticated software program that requires outsourced labor at a significant cost just to maintain simple records, you might want to rethink whether such a costly program is worth it. Cloud-based services are available to small businesses at low to no cost.
Weak Expense Tracking
If your love as an entrepreneur is building new products, or networking and finding new clients, tracking expenses is likely something that falls on the back burner. Finding a detail-oriented and trustworthy employee to handle this task will benefit your company’s bottom line – and free you up to focus on your strengths. And on your employees’ end, if they know someone is keeping tabs on their spending, they’re likely to be more frugal with company expenses.
Credit Cards and Insurance
Routinely keeping credit card balances in check might seem like a menial housekeeping task, but with interest rates almost always greater than 20 percent, failing to pay your credit cards in full each month is a costly mistake for a small business. Likewise, be sure you’re getting the lowest possible insurance rate for your company to avoid excessive costs. You might also benefit from an independent insurance agent who can go to bat for you when you’re hit with a claim.
