You may have seen recent headlines warning that the IRS is tracking certain transactions paid using digital payment services such as Paypal, Cash App, Zelle, and Venmo. Even worse, you may have wondered whether a new law could make these commonplace virtual transactions taxable. With so many people relying on digital payment platforms these days to pay for services, request rent from tenants, or pay for dinner at restaurants, you might think “It’s Gonna Be Me” who has to pay additional taxes when reading these headlines. Say “Bye, Bye, Bye” to those concerns- you can still receive payment for winning the family March Madness bracket (or, perhaps, reimburse a friend for a bottle of “Pop”) without concerning yourself with these new rules.
However, if you run a small business that accepts payment through one or more of the aforementioned digital payment platforms, you should keep reading. You may have heard of the American Rescue Plan Act of 2021 (“ARPA”), which provided emergency grants, lending, and investment to small businesses suffering as a result of the COVID-19 pandemic. One small provision of the American Rescue Plan that quietly went into effect on January 1, 2022, requires businesses to report transactions received from those digital services totaling $600 or more per year.
You may ask yourself- weren’t all transactions required to be reported as income on your tax return anyway? The short answer to this question is, yes, they were. However, the previous threshold for these platforms to issue 1099-Ks to users were when the user’s annual transactions exceeded $20,000 or 200 total transactions. Thus, this new rule under ARPA allows the IRS to crack down on reporting, honing in on the likes of smaller side hustles, Etsy shops, and Airbnb operators that have increased as a result of the pandemic.
What does this mean for your small business? In the short term, it means you may receive requests for additional information from any digital payment platform you use to ensure they have everything needed to issue a 1099-K, such as your social security number or tax ID. Additionally, some of these platforms have indicated that they will alter their payment process so that small business owners can differentiate between business and personal payments. In the long run, beginning when filing 2022 tax returns next year, you should expect to receive a 1099-K from these platforms to reflect the revenue reported on your behalf to the IRS.
Again, all income received should be reported as income to the IRS on annual tax returns as required by Section 61 of the Internal Revenue Code. This new rule created by ARPA not only heightens reporting requirements to ensure compliance, but will also allow the IRS to collect data to be used for a number of purposes, including “new examination and collection approaches.” While it might be “Tearin’ Up [Your] Heart” to do so, it’s time for small business owners to face the music and embrace these new reporting requirements.
The Senate passed President Biden’s $1.9 trillion COVID-19 relief package late Friday night. While the bill must go back to the House of Representatives for reconciliation with the bill they passed in late February, it is a major step forward in getting financial relief to those in need.
Here’s what you need to know about the COVID-19 Relief Bill:
It extended the $300 weekly unemployment benefit through September 6th, thereby avoiding the deadline of mid-March for that benefit established by the December 2020 stimulus bill.
It promises $1,400 in stimulus money to a narrower selection of individuals than had been eligible for prior stimulus checks. Individuals who earn more than $80,000 and married couples earning more than $160,000 combined are excluded.
The $15 minimum wage provision that was a highlight of the House bill did not make it into the Senate’s version.
It allows an individual’s first $10,200 earned through unemployment to avoid taxation. This applies to those who made less than $150,000 in adjusted gross income in 2020. If you earned more than $10,200 and have already filed your 2020 tax returns you may consider amending your return to reflect that information. Talk to a tax professional to see if such an amendment would change your tax liability.
The Senate bill included many other provisions, including a change to the child tax credit, providing further relief to state and local governments, and funding for COVID-19 testing, vaccinations, and contact tracing. We will have to wait for the reconciled bill to see if any of these provisions change, but it is notable that the bill was passed and is heading towards reconciliation. Stay tuned.
Beginning in March 2020, millions of Americans were forced to work from home as a result of the COVID-19 pandemic. While the absence of a commute and the option of wearing sweatpants rather than slacks during meetings were initially welcome changes to the workday, it did not seem likely that we would still be “Zooming” to work from our kitchen tables in 2021. With the pandemic still surging, many Americans have not returned to the office and will have to reckon with possible tax implications stemming from their forced exile.
Physically commuting from home in one state to work in another, such as from New Jersey to Philadelphia or New York City, is not new. Likewise, the tax implications for employees who commute are not surprising. Generally, the employee is taxed in both her home state (residence-based tax) and the state where she works through what is often referred to as a commuter tax (source-based tax), with the home state giving a credit or other accommodation to mitigate the duplicate tax cost.
Telecommuting, however, is not commuting. Employees who telecommute work from their home states. Thus, it would be reasonable for those employees to expect to only be taxed in their home state because they’re not physically crossing state lines, right? Not so fast! If Pennsylvania, New York or Delaware are involved, both employees and employers might find surprising tax results from telecommuting, even when they are simply complying with mandatory work–from-home orders. For employees of employers in these states this means that dutifully working from home across state lines in accordance with the law, they may still be subject to tax in a state they have not set foot in for nearly a year as if they were physically commuting. In turn, this may create an unintended connection between the employer and the state where the employee lives, thereby subjecting the employer to taxation there. This conundrum also underscores the internecine struggle between the states over tax dollars derived from wages earned while telecommuting.
Employees: While most employees in the country are not currently impacted by this kind of law, a problem arises for employees of employers located in Pennsylvania, Delaware and New York because they have enacted the “convenience of the employer” rules. If an employee works remotely because her employer requires it, perhaps because that is where a customer is located, the employer’s state would not tax the employee on the income earned from that work. However, if the employee works outside of the employer’s state for any other reason, the employer’s state can tax that employee’s income regardless of where it was actually earned. The convenience of the employer rule in the current environment begs this question: is a mandatory work-from-home order a requirement or a convenience? This is a question that has yet to be answered. Some states, such as New Jersey, have offered credits for its residents who are adversely impacted by this rule for the length of the pandemic.
Employers: It is uncontested that states and municipalities can impose income taxes on businesses that have a physical location in the state or have employees who work in the state. These connections create tax nexus. The question that comes up when an employer has employees working from home in another state is whether telecommuting across state borders alone creates tax nexus to a state to which they were not otherwise connected. If nexus is created for the employer with the employee’s home state, the employer is subject to that state’s taxes. However, the universal nature of the COVID-19 pandemic has motivated some states to address this issue, at least in the short-term. New Jersey’s Division of Taxation has stated that nexus for corporate tax and sales and use tax purposes will not be imposed on out-of-state employers during the pandemic through telecommuting employees. Likewise, Pennsylvania’s Department of Revenue indicated it will not impose Corporate Net Income Tax nexus or Sales and Use Tax nexus on non-Pennsylvania businesses based solely on employees working from home in the state. The state of New York, on the other hand, has declined to issue guidance on this topic, meaning that non-New York employers of New York residents may find themselves unexpectedly exposed to New York State (and potentially City) tax.
States without the convenience of the employer rule might become envious as out-of-state employees continue working from home even after the conclusion of the pandemic and the tax dollars associated with their wages remain home with them. Perhaps a harbinger of things to come, one state, Massachusetts, reacted to this tax conundrum created by the pandemic by enacting a temporary “convenience of the employer” policy. This new rule states that employees who work for Massachusetts-based employers and are working remotely outside the state because of a work-from-home order in a neighboring state are still required to pay income tax in Massachusetts. This arrangement is slated to remain in place until ninety days after the governor of Massachusetts ends the state of the emergency created by the pandemic.
Although this measure is temporary, Massachusetts has experienced backlash from other states and numerous tax organizations. In October 2020, New Hampshire petitioned the United States Supreme Court for relief, requesting that it strike down this law as an unconstitutional tax on its citizens who telecommute. The lawsuit also raises questions as to whether such convenience of the employer rules violate the Dormant Commerce Clause, which bars states from unduly burdening interstate commerce, even in the absence of federal legislation regulating the activity. This lawsuit has attracted a lot of attention in the tax community, with over a dozen amicus briefs filed in the matter, including those from Connecticut, Hawaii, Iowa, and New Jersey, as well as public policy groups such as the National Taxpayer Union, the Tax Foundation, the Cato Institute, and Americans for Tax Reform. The states joining New Hampshire did so because many of their citizens are directly impacted by “convenience of the employer” rules subjecting them to taxation in a state to which they have no physical connection and thereby draining tax revenue from the residence state. The Court has not determined whether it will hear the case, but the controversy is generating interest as other states might follow suit.
With many employees likely to continue teleworking even after COVID-19 vaccinations permit safe return to the office, it is critical to fully appreciate the impact these decisions may have on where tax is owed by telecommuters and their employers.
David S. Neufeldhas practiced law for more than 35 years, advising individuals and businesses around the globe on sophisticated federal income and estate tax planning, state tax residency planning and audits, asset protection, and insurance and investment planning. In addition, he helps business clients engaged in both inbound and outbound transactions (most notably involving China and India) as well as the individual tax issues that arise from cross-border business transactions. He can be reached at email@example.com or 856.382.2257.
Unquestionably, 2020 was a year full of unforeseen challenges. As much as we may want to put last year completely behind us, we need to file our 2020 tax returns before completely letting go. Although we speak about the challenges and frustrations of the past twelve months broadly, a few specific events will present unusual tax considerations for some Americans.
Taxation of Unemployment Compensation Income
More than 25 million Americans became unemployed during the pandemic and relied on unemployment benefits. Unemployment benefits are includable in gross income and, therefore, are subject to tax. This may come as a surprise, especially to the thousands of Americans who applied for unemployment benefits for the first time this year. Withholding tax from one’s unemployment income is voluntary through the completion of a form referred to as a W-4V and submission to the agency paying the benefits. If their withholding amount is too low to cover their tax liability or if they did not authorize withholding, taxpayers can make quarterly estimated tax payments. Given the economic instability and uncertainty we are experiencing, many taxpayers relying on unemployment benefits are unlikely to have the financial wherewithal to withhold any portion of that income. Even worse, they may have no means available to pay the tax when due. If they were unaware of the tax impact when receiving unemployment benefits, they should be prepared for the unexpected tax now.
On the flip side of the employment coin, another tax quirk created by the COVID-19 pandemic comes in the form of working from home. Many taxpayers spent time working from home last year (and some of us still are!). Had this pandemic occurred before the 2017 enactment of the Tax Cuts and Jobs Act (“TCJA”), millions of Americans would be eligible for a deduction for expenses incurred creating and operating a home office. However, the TCJA limited deductions for home office expenses to those who are self-employed and whose home office areas are a “room or separately identifiable space” used “regularly and exclusively” for work. Thus those of us who have properly designated home offices as a result of the pandemic that might otherwise qualify, but receive W-2s as employees are ineligible for such deductions.
Similarly, many Americans received government aid in the form of stimulus checks through the CARES Act. These payments are tax-free and are not required to be included in gross income on one’s federal tax return. Rather, they are treated as advances of 2020 tax credits and must be reflected that way on our 2020 tax returns. Some tax professionals anticipate many taxpayers will have discarded or misplaced documentation related to those distributions, which, in turn, increases the likelihood that returns will be inaccurate, which may delay refunds. Additionally, some tax professionals have recommended that the IRS setting up an online portal for taxpayers to look up the exact amounts they received in government aid under the CARES Act to ensure their 1040s are accurate, but no such portal has been created as of the writing of this post. Thus, it is important for taxpayers to locate and organize their documentation relating to any stimulus check payments.
On top of these challenges presented to individuals filing their 2021 tax returns, some businesses face the uncertainty of whether business expenses paid for with loans received from the Paycheck Protection Program (PPP) will be wholly or partially deductible on their 2020 returns. Under the PPP, certain small businesses whose operations were directly impacted by the COVID-19 pandemic were able to secure loans to fund specified expenses, including eligible payroll costs, payments on business mortgage interest payments, rent and utilities during a period of 8 or 24 weeks after disbursement. Borrowers may apply for forgiveness of these loans within 10 months of their issuance, to the extent they are used for these purposes in the year the expenses are incurred. It was unclear under the original CARES Act whether the expenses paid with the forgiven loan proceeds would be deductible. In December 2020, Congress passed the Consolidated Appropriations Act, which finally clarified that business expenses paid with forgiven PPP loans are, in fact, tax deductible. This act supersedes prior guidance from the IRS, issued as recently as November 2020. While this came as a welcomed holiday gift to many, there may be S corporation shareholders and partners in partnerships with a lump of coal thrown in; the benefit may be somewhat less timely than anticipated given the quirks of pass-through entity taxation, effectively deferring the tax benefit another year.
Carefulness has always been key when completing a tax return, but even more so when filing returns for tax year 2020. Any taxpayer who received a stimulus check should start looking for that piece of paper now — tax time will be here before you know it! As the COVID-19 pandemic persists while we await widespread distribution of the vaccine, the IRS has emphasized the need for taxpayers to complete their tax returns from the safety of home, and provides a number of services to assist taxpayers in doing so. If you encounter any legal issues regarding your taxes, Flaster Greenberg can help; give us a call.
For more information on any of the information contained in this post, contact any member of Flaster Greenberg’s Taxation Practice Group.
As the year is quickly coming to an end, it is especially prudent to review compensation arrangements from an Internal Revenue Code section 409A perspective. Generally, Section 409A applies to “deferred compensation” arrangements between a “service recipient” and a “service provider.” The service recipient and service provider relationship may include the employer-employee relationship, and an employer’s relationship with its independent contractors.
Background. Section 409A’s impact can be very broad and all-encompassing. Effectively, any compensation arrangement where an employee (or other service provider) earns compensation by providing services to an employer in one taxable year, but is paid such compensation in a later taxable year, constitutes “deferred compensation” subject to Section 409A. Types of compensation arrangements that may be subject to Section 409A include (but are not be limited to) the following:
Annual or other multi-year bonuses earned in one year (g., 2019), but will be paid in a later year (e.g. 2020 or later)
Fringe Benefits provided by means of reimbursement of employee-incurred expenses if reimbursements occur in a later year than they were incurred
Severance arrangements paid (including health benefits) in years later than the year in which the employee separated employment
Non-qualified equity compensation plans that may provide for the grant of discounted equity (stock option plans, stock plans, phantom equity plans, etc.) with delayed vesting and exercise schedules
To be clear, “deferred compensation” arrangements are permitted under the Tax Code; however, such arrangements must be compliant with the complex rules underlying Section 409A. In general, an election to defer compensation must be made in the year prior to which the compensation is earned, it must be in writing, and such compensation may then only be payable on “permitted distribution events” (i.e., death, disability, a specific date, change in control event, and separation of service) or within the “short-term deferral period.” The “short-term deferral period” consists of the 21/2 month period following the end of the tax year in which an employee vests in compensation.
Section 409A Penalty. If subject to a Section 409A violation, the employee (or service provider) will be required to pay a current tax on any vested amounts of deferred compensation whether or not such compensation has been actually paid to the employee. Additionally, the employee will be subject to an additional tax equal to 20% of the applicable deferred compensation amount, plus another interest-based tax amount (i.e., underpayment tax). Deferred Compensation arrangements must be compliant from a documentary perspective as well as an operational perspective.
Not too late to correct potential issues Section 409A for 2019. Employers and employees should review their compensation arrangements – from a documentary and operational perspective – to determine if they may be paying “deferred compensation.” If employees earning their compensation in 2019 will be paid such compensation in 2020, then a deferred compensation arrangement may exist unless it is paid within the “short-term deferral period.” Employers and their employees should review these plans or consult with an attorney to ensure these arrangements are compliant with Section 409A. It is important for employees to review their compensation arrangements as well because the Section 409A penalty is assessed on the employee, and not the employer.
Additionally, employers and service recipients who intend to pay deferred compensation based on services being provided in 2020, (i.e., compensation earned during 2020 will be paid in 2021 or a later year), should make sure that such arrangements are compliant with Section 409A. As previously mentioned, elections to defer compensation must be in place in the tax year prior to the year in which the compensation is earned – this would mean that compensation being deferred on account of services performed during 2020 should generally be in place by the end of the 2019 tax year.
If you have any questions or need more information about IRC Section 409A, please contact Eric Loi, member of Flaster Greenberg’s Taxation and Employee Benefits & Executive Compensation Departments.
The Tax Cuts and Jobs Act of 2017 enacted the most sweeping changes to the federal tax code since 1986. Many people assume that due to the increase in the basic exclusion amount (BEA) to $11,180,000 per individual, only the wealthiest need now estate planning. That is just not true!
Certainly, many fewer federal estate tax returns will be required to be filed. However, it is still important to periodically review your documents and your estate plan. Most clients should review their existing wills and trusts. Particularly where a formula bequest was incorporated, the estate plan must be reviewed to ensure consistency with the client’s legacy goals. This is due to the increase of the BEA. The BEA functions like a sponge to limit or prevent a decedent from any federal estate tax liability at death. The BEA soaks up the decedent’s aggregated lifetime gifts and the assets remaining in the decedent’s estate at the moment of death, allowing the donor’s wealth up to the BEA limit to be transferred free of federal estate and gift taxes. Beyond the BEA, the estate will incur federal estate transfer tax liability. When the BEA was significantly lower, it was very common for estate planners to draft formula bequests, which allocated all of the decedent’s assets up to the decedent’s basic exclusion amount, to a “credit shelter trust” for the benefit of the surviving spouse and/or the descendants of the decedent. The remaining assets would pass outright to or in trust for the surviving spouse. With the doubling of the BEA and with credit shelter trusts which do not name the surviving spouse as a trust beneficiary, those estate plans will now disinherit the surviving spouse, and the surviving spouse will then be entitled to a one-third elective share of the decedent’s augmented estate in New Jersey. The solution is to update the estate planning now, possibly with a disclaimer formula. The new law sunsets on December 31, 2025.
At least until the new law sunsets, under the current regime, family limited partnerships remain a viable planning strategy, with the possibility of discounts for lack of marketability and lack of control. Trusts will continue to be useful for non-tax reasons, including privacy by avoiding the probate process, creditor protection, curbing spendthrift children, centralizing asset management, fostering family harmony through controlled asset disposition, and preserving a fund for a special needs beneficiary while protecting the beneficiary’s Medicaid and SSI eligibility.
Jane Fearn-Zimmer is a shareholder in the Elder and Disability Law, Taxation, and Trusts and Estates Groups. She dedicates her practice to serving clients in the areas of elder and disability law, special needs planning, asset protection, tax and estate planning and estate administration. She also serves as Chair of the Elder & Disability Law section of the NJSBA.