What to Know about Tax Brackets and How They May Change

What are the income tax brackets and how do they work? Here is an overview.

Key takeaways:

  • There are seven tax brackets currently ranging from 10% to 37%
  • You don’t pay the same percentage on all your income; each portion of income is taxed at a different rate
  • The Biden Administration has said it wants to increase taxes for the wealthy, so it’s important to be prepared if this applies to you
  • You may be able to fit into a lower tax bracket by claiming credits and deductions

Paying taxes each year requires that you plan in advance for what you’ll owe, especially if you run your own business. A big part of a tax strategy is understanding the current tax brackets and how they may change in the future. These brackets mean that every American does not pay the same percentage of tax on their income each year; those who make less pay less, and those who make more pay more.

So, what are income tax brackets, and which one do you fall under? Here’s an overview of what tax brackets are, rates for 2021, what could change with the new Biden Administration, and how to get into a lower bracket. 

What are income tax brackets?

Tax brackets outline what percentage of income Americans have to pay based on their annual income. They were first created in 1913, when the top tax bracket was just 7 percent and the lowest was 1 percent. 

Today, there are seven total tax brackets. For tax year 2021, these range from 10% to 37%, according to the below guidelines, which have slightly higher income limits than 2020:

  • 10%: individual filers with income between $0 and $9,950; joint filers with income up to $19,900; and heads of household with income up to $14,200
  • 12%: individual filers from $9,951 to $40,525; joint filers between $19,901 to $81,050; and heads of household between $14,201 and $54,200
  • 22%: individual filers between $40,526 and $86,375; joint filers between $81,051 and $172,750; and heads of household between $54,201 and $86,350
  • 24%: individual filers between $86,376 and $164,925; joint filers between $172,751 and $329,850; and heads of household from $86,351 to $164,900
  • 32%: individual filers from $164,926 to $209,425; joint filers between $329,851 and $418,850; and heads of household between $164,901 and $209,400
  • 35%: individual filers between $209,426 and $523,600; joint filers from $418,851 to $628,300; and heads of household between $209,401 and $523,600
  • 37%: individual filers and heads of household making $523,601 or above and joint filers with $628,301 or more

This tax bracket system is a “progressive tax” approach, again meaning that people making more money pay more in federal income taxes. However, keep in mind that just because you fall into one of these tax brackets doesn’t mean that you are taxed that rate on every penny you make. Each portion of income is taxed at the corresponding rate.

For example, if someone makes $60,000 in 2021, the first $9,950 of that income is taxed at 10%, the portion from $9,951 to $40,525 is taxed at 12%, and the rest is taxed at 22%.

What could change under the new administration?

With each new U.S. administration comes potential new tax laws and priorities. The Biden Administration has indicated that it will implement higher taxes on wealthier Americans, so if you make over $400,000 in income each year, you may see an increased rate. This may mean that top rate could get a boost up to 39.6% from 37%.

This online tax calculator can help you plan for taxes if Biden’s plans go into effect in the near future.

The new administration has also proposed other tax changes outside of brackets, including an increase to the child tax credit (up to $3,000 from $2,000), and an increase in the child and dependent care credit (up to $8,000 from $3,000).

How to fit into a lower tax bracket

If you’re worried about paying a lot when tax season rolls around again, there are a few ways you can reduce your burden. First, deductions lower taxable income, so with enough of them, you may be able to get down into a lower bracket. Common deductions are charitable donations, medical expenses, mortgage interest, home office expenses, vehicles, and student loan interest, among others.

The other option is taking advantage of tax credits. These don’t impact which bracket you’re in, but they reduce the amount you must pay. Credits you may be eligible for include the child tax credit, the earned income tax credit, or the residential energy credit, though there are many others. 

You can potentially lower your tax burden significantly with these strategies. This is why it’s crucial to work with a tax professional who can help you claim all credits and deductions you’re eligible for.

Work with a tax professional to save more money

Each year, there are new laws and guidelines to know and implement while planning. Make sure you never miss anything by working with a tax professional who knows each new regulation or legislation, in addition to what might be coming next. 

The team at Provident CPA and Business Advisors is ready to help you with everything tax-related. Contact us to learn more about our business growth and strategic tax services.

A Basic Guide to Depreciation for Small Businesses

As a small business owner, you can deduct depreciation that your assets experience over time. Here’s what to know about depreciation and how to calculate it.

Key takeaways:

  • Depreciation is the loss of value an asset experiences over time
  • Small businesses can deduct depreciation from assets like cars, property, and equipment
  • There are three methods to calculate depreciation: straight-line, accelerated, and Section 179, all with pros and cons
  • Discuss your options with a tax expert at Provident CPA and Business Advisors

You have many concerns when you’re doing your taxes as a small business owner. You have to gather your expenses and records, report income properly, and ensure that you’re taking all the right credits and deductions. This is all on top of paying quarterly estimated taxes and managing your finances. 

Tracking depreciation is one way to significantly reduce a tax burden each year. It may sound like a confusing concept initially, but once you understand the essentials, it’s pretty straightforward. 

Here is a basic guide to depreciation as a small business owner:

What is depreciation?

When you purchase an asset, the value of that asset decreases over time. The amount of value lost is known as depreciation. 

This is important for business owners because you can write off depreciation on your annual tax return as a deduction, lowering taxable income and thus the amount you’re taxed. Even though an asset depreciates, it is not necessarily a negative, since it helps you save on taxes.

One of the most common uses of the term depreciation occurs in the auto world. When you purchase a new car, it loses value as soon as you drive it off the lot, aka depreciates. It is immediately considered a used car.

Depreciating assets that you may use in your business include expensive equipment or machinery, real estate, technology like computers, automobiles, and more. Some intangible assets can depreciate as well, including intellectual property. And in that case, the process is known as amortization.

Understanding and calculating depreciation

The next component to understand is how to actually calculate depreciation, which can be tricky when recording your deductions. 

First, a few rules:

  • Your asset must have been in use for more than one year.
  • You need to write off depreciation for the asset’s useful life.
  • Depreciation starts once it is being used and stops when the cost has been recovered or you stop using it for your business.
  • You must be the owner of the property or asset.

You also need to know how long you can write off the depreciation:

  • Assets like office equipment, electronics, automobiles, and appliances have up to five years to be deducted.
  • Furniture and fixtures have seven years.
  • Rental properties have 27.5 years for residential and 39 years for commercial or non-residential.

Next is how to get started with calculations. You have three methods for writing off the depreciation: straight-line, accelerated, and Section 179 methods.

  1. Straight-line method: In this technique, you deduct the same amount of depreciation each year on a given asset over its useful life. To find this amount, subtract the amount you could sell it for at the end of its useful life (the salvage value) from the asset’s cost, and then divide that number by the number of years it will be in use.
  2. Accelerated method: This one allows you to take bigger deductions early on and smaller deductions later. Many small business owners decide to use this method, and it takes less math on your part. You will use the percentages in IRS Publication 946, Appendix A, and the Modified Accelerated Cost Recovery System (MACRS) created by the IRS. This approach is beneficial for businesses in need of cash because it allows them to deduct more during the first few years after buying an asset.
  3. Section 179 Deductions: Section 179 deductions allow you to deduct the full cost of an asset the year you acquire it for business. The maximum deduction is $1,050,000, and the value of property purchased limit is $2,620,000 for 2021. This option provides a more immediate, huge tax break. The government started offering this option after the Tax Cuts and Jobs Act was passed in December 2017, as an incentive for small business owners to make purchases to grow their businesses. This deduction can be used for computers, business machinery, cars, and office equipment.

Various software options can help calculate depreciation and save asset information from year to year. But it’s always wise to talk to a tax professional about your options so you can land on the right method. Otherwise, you could be leaving money on the table that your small business needs now.

Working with a small business financial expert

Depreciation of business assets is not always easy to understand. But you always must be thorough when completing your tax return and deducting expenses. You never want to do something suspect that will attract the attention of the IRS.

Talk to a tax professional who will help you understand tax laws and best practices you should follow. Always make sure you’re taking advantage of all tax breaks available—and remember that sometimes these change from year to year.

The team at Provident CPA and Business Advisors is here to help. We assist in putting the right financial plans in place to grow small businesses and help them pay the least amount of tax legally possible. We make sure you don’t miss anything when preparing your taxes, including credits and deductions.

Contact us today to get started with an experienced tax professional.

Top 7 Reasons You Need to Hire an Accountant

Many Americans take advantage of online tax platforms and do the heavy lifting themselves. But when your situation is a bit more complicated, you need a certified public accountant (CPA)

Key takeaways

  • Top 7 reasons to hire an accountant:
    1. You’re starting a business
    2. You need small business tax planning help
    3. You’re self-employed
    4. You need to free up time
    5. You’re facing an audit
    6. You need help with deductions
    7. You’re applying for a business loan or grant

Sometimes, you need more assistance than just using an online tax website to submit your tax return. Tax planning should be an ongoing consideration throughout the entire year, not just in April. This is especially true if you’re starting or running a business or are otherwise a self-employed worker. 

There are many credits and deductions you may not fully understand as a business owner, or you may need to pay quarterly taxes and are unsure how to start. Whenever you have uncertainty about taxes, you should work with an accountant—and ideally, a certified public accountant (CPA). You never want to miss something that could help you save money or put you at risk of an audit or other legal issue.

Let’s walk through seven common reasons to hire a CPA:

1. You’re starting a business

There are many crucial tax considerations when starting a business. One major factor is the type of legal business structure you set up. For example, sole proprietorships, partnerships, LLCs, and corporations all have different tax implications. An accountant can help you figure out which structure will give you the most benefits based on your current and long-term business goals.

2. You need small business tax planning help

Even after a small business is set up, you will need an ongoing tax planning strategy. It’s not enough to only think about taxes once a year. You may need to incorporate business planning and financial software to help keep track of cash flow and tax obligations. If you’re seeking funding, you’ll need to create a balance sheet, a business model, and other documents that a professional can help you with.

3. You’re self-employed

There are many benefits to working for yourself as a sole proprietor. You don’t have to worry about creating certain legal structures and other requirements that some small businesses have. 

However, independent contractors have unique tax obligations since they’re not working for a traditional employer. You’ll have to pay quarterly estimated taxes in addition to your tax return. Especially if you’re just starting out in the self-employment realm, working with an accountant will help you understand the tax obligations and how to comply with them.

4. You need to free up time

Running a small business brings many responsibilities, and taxes are just one piece to the overall puzzle. You must manage daily operations, vendors, employees, customers, cash flow, and products, and you may no longer have time for bookkeeping and accounting. If this is the case, hire an accountant who can step in and take on many of these tasks. 

5. You’re facing an IRS audit

Of course, some businesses end up facing audits from the IRS. This could happen for a variety of reasons, including itemizing lots of deductions, profits skyrocketin from one year to the next, making an error on a tax return, or running a cash business. If you’re dealing with an audit, hire an accountant to help you through the process. You don’t want to face these issues alone, and they can be resolved much quicker with the right help by your side.

6. You need help with deductions

One major step that gets more complex in small business taxes is claiming deductions. You can significantly lower your taxable income and thus your tax burden when taking all of the deductions you’re eligible for. Deductions include eligible business expenses like equipment purchases, office expenses, bills, meals, and others. 

Additionally, there may be other deductions you qualify for, like the Qualified Business Income Deduction, which you can use to deduct up to 20% of business income if eligible. You don’t want to miss any of them when doing a tax return. An accountant will make sure you don’t overpay and claim all applicable deductions.

7. You’re applying for a business loan or grant

If you need a business loan or grant, an accountant can help. These applications can be tricky, and you want to be sure you put your best foot forward. Especially if it’s a new business, an accountant can help you understand the options and how to establish creditworthiness. They can tell you about funding options that you may not be aware of. And they can make sure that applications are always strong and information is presented clearly and accurately.

Why work with Provident CPA and Business Advisors?

If any of these situations apply to you, it’s time to hire an accountant. And the “certified” in certified public accountant means an individual has passed educational, work, and testing requirements that signal their competence in the field.

Running your own business requires that you maintain the right strategy for taxes, and you can’t always do it on your own. Make sure you claim all applicable deductions and are reporting everything accurately. 

The team at Provident CPA and Business Advisors is here to help, no matter what stage your small business is in. We help with business formation and planning, tax planning, and tax minimization. 

Contact our team of experienced professionals today to get started.

Are Unemployment Benefits Taxable?

If you were one of the millions of Americans who received unemployment, here’s what you need to know about taxes.

Key takeaways:

  • Unemployment benefits are taxable after the first $10,200
  • Some states don’t require an additional state income tax
  • Use Form 1099-G, which you should receive from the IRS

The COVID-19 pandemic led to record closures and lay-offs, disrupting almost every industry. The unemployment rate hit its peak in April 2020 at 14.7%, which was the highest rate and the largest monthly increase in the history of Bureau of Labor Statistics data, which dates back to January 1948. 

The pre-pandemic unemployment rate has receded, and things are looking up. But millions of Americans will receive unemployment this year. And those who receive these benefits may be wondering how to handle the income on a tax return. 

Unemployment benefits are taxable, but there are other considerations to be aware of. Here’s what you need to know:

Do you have to pay taxes on unemployment benefits?

Unemployment is a way for the government to help out workers when they lose their jobs. 

The CARES Act introduced in March 2020 provided new tax provisions and relief for those in need. The Act expanded unemployment benefits to gig workers, independent contractors, and other self-employed individuals, and the compensation amount received was increased to include an additional $600 per week. Another relief package signed in December 2020 provided continued assistance at $300 per week as supplemental to existing benefits.

In March 2021, the Biden Administration signed the American Rescue Act of 2021, which extended the $300 per week benefit until September 6, 2021. 

This new Act also outlined that taxpayers with an adjusted gross income of up to $150,000 don’t have to pay taxes on up to $10,200 of benefits received. However, anything received after that amount is considered taxable income on a tax return. 

Important note: if you paid your taxes before this law was implemented, you can file an amended tax return to reflect the change.

You may also have to pay a state tax. There are a few states that specifically don’t tax unemployment benefits, which are:

  • Alabama
  • California
  • Montana
  • New Jersey
  • Pennsylvania
  • Virginia

If you live in a state that doesn’t tax income at all, you also won’t have to pay income tax on unemployment:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Tennessee
  • Washington
  • Wyoming

All other states will tax these benefits, however. 

How to pay taxes on unemployment

If you received unemployment, you’ll get IRS Form 1099-G from the government, which indicates the exact amount received in a calendar year. Even if you don’t receive this form for whatever reason, you still need to report all income over the $10,200 amount on your tax return. 

Note that this compensation isn’t subject to FICA taxes. This includes Social Security and Medicare taxes that an employer withholds from paychecks. 

Keep in mind that the extra funds provided under the CARES Act and following legislation — the additional $600 per week and $300 per week — are also taxable after that initial $10,200. 

What if you can’t afford unemployment taxes?

When the tax deadline is approaching, you may realize that you haven’t saved enough and you just don’t have the money to pay. If this is the case, the IRS does provide options. 

If you owe $50,000 or less, you can file Form 9465, which requests an installment agreement. You’ll pay a set amount each month over up to 72 months to pay off the amount of tax owed. Just remember that you will have to pay interest and a late payment penalty on any tax owed that isn’t paid by the due date, even if the IRS grants an installment agreement. 

It’s important to do everything you can to pay your taxes on time to avoid overpaying with fees and penalties. Remember that you can’t simply decide not to file your tax return—it’s the law, and not doing it will become expensive fast. 

The team at Provident CPA & Business Advisors helps business owners develop strategies for success while paying the least amount of tax legally possible. Contact us to learn more. 

When Should I Itemize Tax Deductions?

The standard deduction is the simplest way to do your taxes, but sometimes itemizing will save more money. Learn how to start calculating and which route to choose.

Key takeaways:

  • Itemizing deductions means you will list all eligible expense deductions on your tax return instead of claiming the standard.
  • Most Americans claim the standard deduction since it almost doubled from the Tax Cuts and Jobs Act in 2017.
  • If your itemized deductions are more than the standard deduction, consider itemizing.
  • Getting help from a tax professional will help you determine the best course of action.

When tax season rolls around each year, it’s easy to put off making your calculations, examining your records, and gathering your income-reporting forms. It can be especially challenging for self-employed individuals or business owners.

A big concern for many taxpayers is whether to itemize deductions on their tax returns versus taking the standard deduction. Of course, you always want to be sure that you minimize your tax burden in any way possible, so it’s no minor consideration. You may decide to itemize if you have a lot of eligible expense deductions, but most Americans claim the standard deduction. This is especially true ever since tax law revisions in 2017 nearly doubled the standard deduction.

Let’s walk through what it means to itemize, how to figure out expenses, and when you should go that route instead of the standard tax break.

What does it mean to itemize deductions?

Itemizing deductions on a tax return means you will list all deductible expenses from the applicable tax year, including charitable donations, out-of-pocket medical expenses, some mortgage expenses, investment interest, tax preparation costs, disaster losses, and others. 

These deductions are subtracted from your adjusted gross income (AGI), potentially lowering your annual tax bill significantly.

Most taxpayers claim the standard deduction—often, it doesn’t make sense to itemize to maximize tax savings. And the standard tax break is a lot easier, given you don’t have to list expenses line-by-line.

How to figure out your deductions

To understand what kind of deductions you’re working with, you’ll need to keep track of your expenses throughout the year. Make sure you have a system in place to maintain accurate, complete records, so you’re not scrambling when it’s tax time.

If you want to calculate your deductions, there are several numbers to keep track of, including:

  • Mortgage interest paid: A lender will send you Form 1098, Mortgage Interest Statement, to report what you paid in interest.
  • State and local taxes: If you pay state and local income tax, sales tax, personal property tax, or real estate tax, you can add these up to a maximum of $10,000 in deductions.
  • Charitable donations: Keep receipts and records of all contributions you made to nonprofits during the year.
  • Out-of-pocket medical expenses: You can only deduct out-of-pocket medical expenses that are over 7.5% of your AGI. Eligible expenses include fees for doctor and dentist visits, glasses and contacts, medical supplies, prescriptions, and many others. Just make sure it’s worth tracking all these expenses by first multiplying your AGI by .075 and thinking through whether you are realistically over that amount.
  • Costs of property damage: If you reside in an area that is a federally declared disaster area, any damage to your property may qualify for a deduction.
  • Miscellaneous deductions: There are a host of other expenses that are possible deductions, including gambling losses, amortizable bond premiums, theft losses from income properties, and penalties paid as restitution or remediation, among others.

If you plan to itemize your deductions next tax season, be sure to keep tabs on all these expenses and others you may be eligible for. Because taxpayers have to list the amounts of each on a tax return, it’s not enough to just have the overall total.

When you should itemize

It makes sense for some taxpayers to itemize, even though most people claim the standard deduction. The standard deductions for the 2020 tax year were as follows:

  • Single taxpayers: $12,400
  • Married joint filers: $24,800
  • Heads of household: $18,650

If you are over age 65 and/or are blind, you can increase the standard deduction, sometimes by more than $5,000. The standard deduction is relatively high now, nearly doubling in 2017 after the Tax Cuts and Jobs Act.

To determine if you should itemize or claim the standard deduction, calculate all the expenses above that you can deduct. At a minimum, ballpark them. If the expense total is greater than the standard deduction for a given taxpayer status, itemizing will get you a bigger deduction and reduce your tax bill even more. If it is less, then the standard deduction is your best bet.

Sometimes, if taxpayers expect to have a similar itemized total to their standard deduction, they’ll go with the standard just to save themselves all the work of keeping receipts and ensuring everything they report is accurate. The IRS may be more likely to audit tax returns with numerous itemized deductions, so it’s crucial to keep excellent records.

Getting help from a tax professional

Tax laws are not the easiest things to understand, and they frequently change as political administrations come and go. When you’re not sure whether you should itemize or take the standard deduction, or you don’t know which of your expenses are deductible, a tax professional can help. 

Talk to the team at Provident CPA and Business Advisors to get all of your tax questions answered. We are experienced in best practices and well-versed in current rules—and will help you pay the least amount of tax legally possible.

What Basic Documents Do I Need to Do My Taxes?

If you have several avenues of income or lots of opportunities for deductions, gathering the right tax forms and documents can seem overwhelming. Here are the basics to help guide you.

Key takeaways

  • Documents and records you’ll need for your taxes:
  • Income tax forms (W-2, 1099s, etc.)
  • Investment income and retirement information
  • Tax forms for deductions (donations, medical payments, real estate, etc.)
  • Stimulus payment information

It’s always important to keep taxes in mind throughout the year to avoid leaving all the work to the last minute. And whether you are a regular W-2 employee or a business owner will significantly impact the information you need, the tax forms you will receive, and the tax planning strategy you implement.

No matter the situation, start gathering your documents and records early. Let’s walk through the paperwork and information you may need to complete your tax return.

Personal information

First, you’ll need all the essentials about yourself and your spouse, if applicable, to complete your taxes:

  • Name and spouse’s full name
  • Social security number or tax ID number
  • Spouse’s social security number
  • Date of birth and spouse’s date of birth
  • Bank account information if using the direct deposit method for your refund

If you have dependents, you’ll also need to gather their personal information and childcare records for your taxes, including their date of birth and social security number.

You also may need to provide an identity protection PIN issued by the IRS, if applicable, for you, your spouse, or a dependent. This number is used to protect your social security number from being used by someone else to file a tax return in your name. The IRS recently announced that all taxpayers are now eligible to get an identity protection PIN.

Forms and sources of income

Now, let’s take a look at the most common forms needed for income reporting. By the time you are completing your taxes, you should have received these forms from your employer or anyone who paid you throughout the year:

  • Form W-2: for regular employees
  • Form 1099-MISC: some self-employed individuals may receive this form from clients
  • Form 1099-NEC: most independent contractors will now receive this form from clients
  • Form 1099-G: reports government payments, including unemployment 
  • Form 1095-A: reports health insurance marketplace statements

To summarize: if you are a regular employee, you will receive Form W-2; independent contractors will receive either Form 1099-NEC or Form 1099-MISC; and the unemployed will receive Form 1099-G. 

That said, some contractors paid through third-party payment processors, such as PayPal, won’t receive a form if the annual amount is less than $20,000 and 200 transactions. If this is the case, you’ll need to self-report this income. If pay exceeds the threshold, the payment processor or freelance site should send a Form 1099-K.

Make sure you have a method for tracking income throughout the year so you can confirm that you’ve received all applicable forms from your employer(s) and/or clients.

If you are a small business owner or an independent contractor, you probably have to pay estimated quarterly taxes throughout the year. You will need Form 1040-ES with your tax return, which is a record of the payments you made. 

Other types of income you may need to report include prizes or awards, income from a trust, hobby income, or gambling income. Even if you do not receive a tax form for these payments, you still need to report them on your tax return.

Investment and retirement income

If you have any investment accounts, including retirement plans, you will also need the applicable forms from your financial institutions before doing taxes. These include:

  • Form 1099-INT: where interest income is reported
  • Form 1099-R: income from a pension, IRA, or annuity
  • Form 1099-OID: used if the original issue discount (OID) in gross income is at least $10
  • Form 1099-DIV: dividend income
  • Form 1099-B: for proceeds from broker and barter exchange income
  • Form 1099-S: reports income from real estate sales or exchanges and some royalty payments
  • Forms 1099-SA: reimbursements from Health Savings Accounts 
  • Form 1099-LTC: long-term care reimbursements

Today’s institutions may have enrolled you in a paperless program. So, instead of receiving a physical copy of your investment tax form in the mail, you may be able to find it in your online portal for easier access. If this is an option, it can help speed up the preparation process. 

Documents for deductions

Depending on your situation, you may need certain statements or receipts to claim deductions on your return. For example, if you made significant charitable donations, make sure you have those records to report that information accurately. Charitable donations may be cash or non-cash donations.

Other records you may need for deductions include the following:

  • Medical expenses
    • Doctor/hospital visit payments 
    • Insurance
  • Childcare expenses
    • Payments to daycare centers or other childcare providers
  • Homeownership documents, including:
    • Property tax records
    • Form 1098 or other mortgage interest documents
    • Records for energy-efficiency home improvements
  • Educational expenses, reported on Form 1098-T or 1098-E
    • Scholarships or fellowships received
    • Other qualified educational expenses
  • Educator (K-12) expenses
    • Supplies for the classroom
  • Tax payments
    • State and local tax paid aside from wage withholding
    • Vehicle sales tax
  • Retirement contributions on Form 5498, 5498-QA, or 5498-ESA
  • Disaster payments for federally declared disaster

These deductions can make a big impact on your tax burden, so always be thorough in record-keeping to ensure everything is reported. 

Stimulus payment information

For tax years 2020 and 2021, you will need information about the economic impact payments (EIPs), or stimulus payments, if you qualified for them. IRS Notice 1444 shows the amounts you were paid, but keep records of when you received it and how much you were given each time.

If you did not receive the amounts you are owed, you can claim the Recovery Rebate Credit for the 2020 tax return to claim the rest of a stimulus payment.

Work with a tax professional for your tax-related questions

Depending on your work, income, and investments, your tax return may get complicated fast. To make sure you have all the documents you need—and that everything is claimed that you’re eligible for—work with a tax professional who knows how to take care of it all. 

The team at Provident CPA and Business Advisors is ready to help. We can help you minimize your tax burden as a business owner or individual taxpayer. Work with our team to create the right tax plan. Contact us today to learn more about our services.

Do I Need to Pay Estimated Tax to the IRS?

If you receive non-wage income, you may need to pay estimated taxes each quarter. Learn who must pay and how payments are calculated. 

Key takeaways

  • Estimated quarterly taxes are paid by workers who are not standard W-2 employees
  • Taxpayers who run their own business or work as an independent contractor need to pay estimated tax
  • Payments are due April 15, June 15, September 15, and January 15
  • Note the self-employment tax, which is a 15.3% tax that comprises Social Security and Medicare 
  • A tax professional can help you calculate what you owe in estimated tax

Running your own business brings lots of perks, including more flexibility and control over what you do. But there are tax implications that you need to be aware of if you are a freelancer or running a sole proprietorship, S-Corp, or another entity.

Many business owners and contractors must pay quarterly taxes throughout the year, known as estimated tax payments. Here is your guide to what these payments are, what kind of business structures need to pay them, and how to do it. We’ll also briefly discuss what the self-employment tax is.

What is estimated tax?

If you are a qualifying entity, you need to pay an estimated quarterly tax if you owe more than $1,000 each year when filing your tax return or have a qualifying corporation and owe more than $500 when filing. These are the payment due dates for each quarter: April 15, June 15, September 15, and January 15.

Because business owners and sole proprietors do not have an employer withholding tax from each paycheck, regular tax payments must be made throughout the year to make up for it. Aside from the income tax obligation, estimated taxes cover self-employment tax and alternative minimum tax. 

Next, let’s talk about who has to make these payments.

Who must pay quarterly estimated tax?

The IRS states that if you are “in business for yourself,” you will usually have to make estimated tax payments. This includes independent contractors, freelancers, and taxpayers with side gigs. These types of businesses must also pay estimated tax:

  • Sole proprietors
  • Partners
  • S corporation shareholders
  • Some corporations

If you are a regular W-2 employee, you probably do not have to pay estimated taxes unless you earn money on the side. If you are one of the above entities and earn a salary or regular wage, you may be able to have your employer withhold more tax from your wages to avoid having to make quarterly tax payments.

You also don’t have to pay estimated tax if you had zero tax liability the year before, were a U.S. citizen for the entire year, and the prior tax year covered a complete 12-month period.

How do you pay estimated tax?

If you have to pay, you can figure out how much you owe by using Form 1040-ES. You’ll need to determine your estimated adjusted gross income, taxable income, deductions, credits, and taxes for the entire year. Try taking a look at your tax information from last year if your situation is similar. Alter how much tax you expect to pay by figuring out how much you will likely earn this year, whether it’s more or less. You then divide what you expect to owe in taxes for the year by four and pay that amount per quarter.

Form 1040-ES walks you through how to figure your estimated tax for each quarter. You will enter information about: 

  • Adjusted gross income
  • Credits
  • Self-employment tax
  • Other taxes

Follow the prompts and instructions on the form to calculate the exact numbers. Then take a look at the applicable year’s tax rate schedules to determine your tax bracket.

You can pay estimated taxes using one of the following methods:

  • Paying online, via IRS Direct Pay or the IRS2Go mobile app, using a credit or debit card, electronic fund withdrawal, or Online Payment Agreement (if you cannot pay in full by the due date)
  • Paying by phone
  • Paying by cash, in person
  • Paying by check or money order using your estimated tax payment voucher

Usually, the fastest and easiest way to pay is via IRS Direct Pay, which can be found at IRS.gov/payments, or on the IRS2Go mobile app. On the IRS payments page, you will select whether you want to pay by bank account transfer or card, choose “Make a Payment” on the next page, and choose your reason for payment as “Estimated Tax.” Make sure you pay by the deadlines each quarter.

What is the self-employment tax?

Part of estimated quarterly taxes is figuring the self-employment tax you owe. The self-employment tax rate is 15.3%, which covers two types of tax: Social Security (12.4%) and Medicare (2.9%).

Because self-employed individuals do not make these contributions from their paychecks, this additional tax is included when making estimated tax payments. And they must pay the full 15.3%, whereas W-2 employers typically cover half of it. This tax is paid on top of income tax and does not replace it. 

To find out your self-employment tax obligation, subtract your business expenses from your gross self-employment income. Typically, 92.35% of self-employment earnings are subject to the self-employment tax, so multiply those earnings by the 15.3% rate. 

In 2020, the first $137,700 of earnings was subject to the Social Security tax; it is $142,800 in 2021. If you earned over $200,000 from self-employment, you might also owe an additional 0.9% Medicare tax.

Talk to a tax professional if you have questions

If you earn income from running your own business or working as an independent contractor, you will probably need to pay quarterly estimated tax payments each year. When you are unsure about your obligations or whether your work qualifies, talk to a tax expert who will make sure you file everything correctly. 

The Provident CPA and Business Advisors team can guide you through tax planning and help you figure out precisely what you need to pay in estimated taxes each quarter. We will help you file your annual tax return and ensure you take advantage of any credits and deductions for which you qualify.

Contact Provident CPA and Business Advisors to get started.

What Are the Tax Implications of Working Remotely?

Many Americans who have been working remotely don’t know state-by-state tax laws, which could mean they’ll be hit with an unexpected bill. Here’s what you need to know.

Key takeaways

  • Americans working remotely might have to pay more taxes if they worked in more than one state
  • Other tax implications for some remote workers include work-from-home tax deductions, like the home office deduction

Over the last year, businesses of all sizes shifted to remote work environments, and more employees telecommuted than ever before. Many companies have realized that remote work has its own set of benefits, and the trend isn’t going to go away anytime soon.

Of the American workers whose jobs can be done remotely, 71% have worked from home over the last year. More than half of those remote workers say they want to continue working from home, even after pandemic restrictions are completely gone.

While working remotely has perks, there are a few tax implications to be aware of. It’s not always easy to understand whether you can take the home office deduction or work in other states without making changes to tax withholding or paying more.

Here are some important points to consider if you’ve been working remotely and are trying to prepare your taxes.

Remote work in a different state

First, let’s talk about what happens when you work remotely in a different state from where the company offices are located. Each state has laws about how remote work is handled. Unfortunately, almost half of remote workers (47%) surveyed by the Harris Poll for the AICPA said they aren’t aware that each state has its own remote-work laws.

There could be significant consequences if taxpayers don’t change the state withholding taxes from their paychecks to reflect where they actually worked. If taxpayers didn’t change their withholding by the end of 2020, they could have a more significant state income-tax liability this year.

For instance, because each state’s laws vary, people who have worked in several different states this year may face a variety of filing requirements or tax liabilities.

Each state outlines the period worked there to be liable for state income taxes, including from one day of work to 60 days. Many states also have rules for when you are considered a statutory resident of the state. If you have lived in a state for usually more than 183 days, the state will require that all of your income is taxable, so you could face dual taxation if you are found to have dual residency.

There was some government focus on these matters after the pandemic, with proposals for the Remote and Mobile Worker Relief Act being part of the Senate’s COVID-19 relief bill. This legislation would create a national standard for employees working in different states than business offices, including a 90-day grace period for working in a state before an employee is subject to its tax liability. However, this proposed bill has yet to gain much traction.

If you have worked remotely in a different state than where your company’s office is located, make sure you research state and local laws to ensure you don’t get hit with a surprise tax bill. Note that your federal taxes will likely not be impacted based on the state you worked in. 

Deductions for remote workers

Other significant tax implications for remote workers are related to the work-from-home deductions you can take. Let’s walk through a few of them:

1. Home-office deduction

You may think you’re able to claim the home office deduction if you use a space in your home for work. But it’s only available to some workers. If you are a regular W-2 employee, you can no longer take this deduction, as it was eliminated as part of the Tax Cuts and Jobs Act.

Self-employed individuals who use their home office exclusively for their business—and use it regularly—can take the home office deduction.

2. Business expenses

Independent contractors can also write off many of their business expenses for working from home, including:

  • Equipment or supplies used for business
  • Utilities costs (internet, electricity, cell phone)
  • Depreciation on assets
  • Health insurance premiums
  • Business meals
  • Travel costs for travel lasting longer than a workday and requiring that you stay somewhere to rest
  • Use of a vehicle for business (mileage, depreciation, insurance, gas, oil changes)
  • Business-related subscriptions
  • Business insurance
  • Rent expenses
  • Some retirement contributions
  • Advertising costs
  • Business startup costs

Again, these expenses may only be deducted by self-employed individuals, not most regular W-2 employees. However, some employers are assisting their remote workers with stipends related to these costs.

3. Qualified business income deduction

A significant deduction available for qualifying businesses in 2020 is the qualified business income (QBI) deduction. This benefit is for small business owners or self-employed individuals and is up to 20% of QBI. The income limit is $163,300 for single taxpayers and $326,600 for joint filers.

Sole proprietorships, partnerships, S corporations, and LLCs may be eligible to take this deduction. Qualified income includes your business’s net profit but excludes income earned outside the U.S., some guaranteed payments, dividends, capital gains or losses, and interest income.

Many small business owners and self-employed workers who are working remotely may qualify for this 20% deduction, so ask a tax professional for more details. 

Work with a tax expert from Provident CPA & Business Advisors

If you have shifted to a remote-work environment this year, make sure you know if there are tax consequences or if you qualify for work-from-home deductions. The tax professionals at Provident CPA & Business Advisors are ready to walk you through your potential obligations and credits. We help our clients pay the least amount of tax legally possible and clearly explain how changing laws and regulations apply to their situation.

Contact us to learn more about our tax planning services for business owners and individuals.

What Is the IRS Taxpayer Relief Initiative?

Millions of American taxpayers have tax-related debt. The IRS has introduced a new initiative to help these debtors find relief in the wake of COVID-19.

Key takeaways

  • Millions of Americans still owe billions in tax debt to the IRS
  • The Taxpayer Relief Initiative expands allowances and assistance to many taxpayers
  • More Americans may be eligible for an offer in compromise or installment agreement
  • Taxpayers may be able to benefit from collections delays, lower tax bills, and relief from penalties

Many American taxpayers are still struggling with the effects of the COVID-19 pandemic. Existing debt or financial troubles have worsened during the economic recession, and many individuals have difficulty managing what they owe. 

Over the last year, the IRS has delayed tax filing deadlines and other requirements. And there have also been delayed refunds and other challenges faced by the agency itself.

Over 11 million American taxpayers owe money to the IRS, whether in back taxes, penalties, or interest, and they owe an estimated $125 billion in tax-related debt. As the pandemic has caused record unemployment, business closures, and layoffs, many taxpayers are challenged to make ends meet, much less cover their tax debt bill.

The government is seeking to provide assistance with the recent Taxpayer Relief Initiative. Here’s what you need to know about this program and how it helps many taxpayers get through the recession.

What is the Taxpayer Relief Initiative?

In March 2020, the IRS introduced the People First Initiative, which provided relief to American taxpayers facing financial hardships. This program offered temporary relief, such as suspended payments and postponed debt-collection actions, but it ended in July 2020. 

In November, the IRS introduced the Taxpayer Relief Initiative to further help individuals struggling with the economic downturn caused by COVID-19. This initiative focused on helping people who owed taxes or related debt to the IRS, expanding upon current tools to help people pay off what they owe.

Benefits of the Taxpayer Relief Initiative

Qualifying taxpayers will receive the following benefits related to installment agreements and payment plans:

  • If a taxpayer qualified for a short-term payment plan, they now have a maximum of 180 days to resolve liabilities, up from the 120-day limit.
  • More flexibility is provided for taxpayers who can’t meet the terms of an offer in compromise.
  • For companies and individual business owners who have gone out of business because of the pandemic, new tax balances will be added to existing installment agreements.
  • Qualifying taxpayers who owe less than $250,000 to the IRS can set up installment agreements without a financial statement, as long as they propose a sufficient monthly payment proposal.
  • If a taxpayer only owes money for 2019 and owes less than $250,000 to the IRS, they may be able to set up an installment agreement without an IRS-filed notice of federal tax lien.
  • Those who already have an installment agreement may be able to use the Online Payment Agreement system to change monthly payment amounts and due dates.

In addition to these agreement-related relief initiatives, taxpayers also may be able to temporarily delay collections from the IRS, settle their bill at a lesser amount with an offer in compromise, or receive relief from penalties.

These benefits will help Americans find at least some relief as they manage other forms of debt, make mortgage or rent payments, or pay their other monthly expenses.

How to qualify for the Taxpayer Relief Initiative

Some taxpayers may be able to suspend collections by the IRS if they can exhibit a financial “hardship.” This means that if the taxpayer were to pay the IRS what is owed, they would not be able to cover other reasonable living expenses. If the proof is sufficient, the IRS would then classify the taxpayer’s account as CNC, or “currently not collectible.”

To qualify for an offer in compromise, taxpayers need to file an application that outlines their current financial situation. Whereas the IRS might usually cancel an offer in compromise if a taxpayer fails to make their payments, the agency may show much more flexibility.

The installment agreements also have requirements that must be met. Typically, individuals must owe less than $50,000 in taxes, penalties, and interest, or $25,000 for business taxpayers, to qualify for these agreements. 

But the Taxpayer Relief Initiative expanded this requirement so that taxpayers owning between $50,000 and $250,000 may be able to receive a non-streamlined installment agreement, which stipulates that debts must be paid within the 10-year statute of limitations. This is an option if a taxpayer’s case has yet to be assigned to an IRS officer.

This overview covers the basics of the Taxpayer Relief Initiative. But there are more aspects to this program, and a tax professional can help you understand how it could impact you. 

Assistance taking advantage of every new initiative

If you have questions about your tax debt or the IRS’s Taxpayer Relief Initiative, it’s beneficial to work with a tax expert who can walk you through all of the requirements and steps. The 2020 tax year is unlike any other, given government relief programs and often drastic changes to incomes because of the pandemic.

The team of experienced tax professionals at Provident CPA & Business Advisors can help. Contact us today to learn more. 

What Tax Provisions Expired in 2020?

The pandemic caused the introduction of new provisions to help taxpayers stay afloat. Which ones were extended and which expired at the end of 2020?

Key takeaways

  • FFCRA and employer paid leave
  • Qualified tuition deduction
  • Payment Protection Program changes
  • Standard deduction increases
  • Provisions extended under the COVID-19 relief bill

Each year can bring a new set of tax rules to learn and factor into your strategy. 2020 was monumental in many ways, and the government introduced many new tax provisions to help Americans get through the COVID-19 pandemic. Many of these items, however, were set to end on December 31, 2020.

Another COVID-19 relief package was passed in late December and extended many of the tax provisions, however. For instance, the 7.5% medical expense deduction was extended, as were energy-efficiency deductions and the New Markets Tax Credit (NMTC).

However, several provisions did expire on December 31. Others were kept but changed drastically. Here’s a look at these tax provisions and what they could mean for your returns.

FFCRA and employer paid leave

The Families First Coronavirus Response Act (FFCRA) stipulated that employers with under 500 employees must provide employees with paid sick leave or expanded family and medical leave if employees could not work because of quarantine restrictions or the need to care for an individual in quarantine. 

The FFCRA also stated that employers must offer an extra 10 weeks of paid family and medical leave at two-thirds of the worker’s regular pay rate when they need to care for a child because of the pandemic.

The FFCRA was not extended by Congress, and it expired at the end of 2020. However, Congress is still encouraging employers to provide this type of leave by extending the tax credit to those eligible until March 31, 2021.

Qualified tuition deduction

A deduction of up to $4,000 in tuition and higher-education costs was previously available to parents of college students. The tax break was repealed in the latest COVID relief act in an attempt to help taxpayers make the transition to the lifetime learning credit, which we’ll discuss later.

Payment Protection Program changes

The late-2020 relief bill also extended and expanded the Payment Protection Program (PPP), but there are a few significant changes for the new year. Let’s walk through the key revisions to be aware of if you are considering a PPP loan:

  • Forgiven PPP loans are not included in gross income.
  • The tax basis will not be reduced because of loan forgiveness.
  • Tax deductions are allowed for deductible expenses paid with forgiven PPP loan funds.

First-time PPP loans are now available for:

  • Businesses with 500 or fewer employees
  • Sole proprietors, independent contractors, and self-employed individuals
  • Not-for-profits
  • Accommodation and food services operations with fewer than 500 employees per location
  • Business leagues
  • Some news organizations

Second-time PPP loans are only available to borrowers with 300 or fewer employees who will use their full first PPP loan before the second loan is dispersed. And they must have experienced a reduction in revenue of 25% or more in all or part of 2020 compared to all or part of 2019.

Publicly traded companies are no longer eligible for PPP loans. This is a significant change from 2020, likely sparked after huge companies obtaining the loans caused public outrage.

Standard deduction increases

The standard deduction will increase for 2021 taxes, with an additional $150 for single filers, heads of household, and married filing separately, and an extra $300 for joint-married filers. The new rates will be as follows:

  • Single: $12,550
  • Married filing jointly: $25,100
  • Head of household: $18,800
  • Married filing separately: $12,550

These are fairly normal annual increases to the standard deduction—after it was increased significantly in 2018 by the Tax Cuts and Jobs Act (from $6,500 to $12,000 for individual filers, and $13,000 to $24,000 for joint filers).

Provisions extended under the latest COVID-19 relief bill

Many tax provisions set to expire at the end of 2020 were extended until 2025 or permanently with the second COVID-19 relief bill in late December. 

Here are a few credits and deductions to be aware of that were extended, plus any changes starting in 2021:

  • The 7.5% medical expense deduction: This deduction is now a permanent provision.
  • The lifetime learning credit is expanded and available to higher-income taxpayers and worth up to $2,000 per return to offset undergraduate, graduate, and professional degree programs.
  • The tax break for homeowners with a forgiven mortgage balance due to a foreclosure or short sale: The amount of forgiven debt that taxpayers can exclude from gross income was reduced (up to $750,000 for joint filers and $350,000 for single filers). It is in effect through 2025.
  • The private mortgage insurance premiums deduction: For taxpayers who itemize, this deduction is available through 2021. Deductions on mortgage and home equity loans or lines of credit may apply to up to $750,000 in total qualified loans.
  • Employer student loan payments: The CARES Act provided a tax incentive for employers to help employees with student loan debt. Employers could deduct up to $5,250 and have that amount excluded from workers’ taxable income. This provision has been extended through 2025.

It’s nothing new for tax provisions to change in a given year. But because 2020 was so unprecedented, make sure you keep a close eye on revisions that may still be introduced by new legislation and additional relief bills in 2021.

Work with tax experts to understand the new rules

If you still have questions about which tax credits or deductions you qualify for or how your 2021 taxes will be impacted by recent legislation, talk to the experts at Provident CPA and Business Advisors. Our team will review your situation and help you meet your goals. 

Contact Provident to learn more about our services.