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Worker Classification Is Still Important

In 2020 and 2021, many companies have experienced “workforce fluctuations.” If your business has engaged independent contractors to address staffing needs, be careful that these workers are properly classified for federal tax purposes.

Tax obligations

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).

No uniform definition

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.

The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Consult a CPA before filing Form SS-8 because filing the form may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Latest developments

In January 2021, the Trump Administration published a final rule revising the Fair Labor Standards Act’s employee classification provision. The rule change was considered favorable to employers.

The Biden Administration initially delayed the effective date and then issued a Notice of Proposed Rulemaking (NPRM) to withdraw the rule. After reviewing approximately 1,000 comments submitted in response to the NPRM, it withdrew the rule change before the deferred effective date. Contact your tax advisor for any help you may need with employee classification.

© 2021

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General

House Ways And Means Committee Advances Tax Legislation As Part of Reconciliation Bill

After almost 40 hours of debate over four days, the House Ways and Means Committee on September 15 approved a tax package that would increase rates on high-net-worth individuals and corporations and affect cross-border activity and pass-through entities, advancing the tax elements of the Biden administration’s “Build Back Better” agenda.

The package advanced on a largely party-line 24-19 vote – no Republicans voted for it, and only one Democrat, Rep. Stephanie Murphy, D-Fla., voted against it.

As the next step in the legislative process, the legislation now goes to the House Budget Committee, where it will be combined with bills from other House committees and eventually brought before the full House for a vote as the reconciliation legislation.

Individuals

The draft legislation would raise the top individual marginal tax rate from the current 37% to 39.6% for taxable income over $450,000 for married individuals filing jointly and surviving spouses, $425,000 for head of households, $400,000 for single individuals, $225,000 for married individuals filing separately, and $12,500 for estates and trusts. The proposal would be effective for taxable years beginning after December 31, 2021.

The capital gains tax rate would rise to 25% from 20% for transactions by high-income individuals made after Sept. 13, 2021.

The bill would also create a 3% surcharge on modified gross adjusted income above $5 million, and set a limit on contributions to large individual retirement accounts.

The bill would extend the holding period to obtain long-term capital gains treatment for gain allocated to carried interest partners from three to five years. The three-year holding period would remain in effect with respect to any income attributable to real property trades or businesses and for taxpayers (other than an estate or trust) with adjusted gross income of less than $400,000.

Business Provisions

The legislation would introduce a graduated income tax rate structure for most corporations, with a top corporate tax rate of 26.5%. Corporations with taxable income that does not exceed $400,000 would be subject to a new 18% tax rate (lower than the current 21% rate), while those with income that exceeds $400,000 but does not exceed $5 million would be subject to a 21% tax rate, and those with income in excess of $5 million would be subject to the top 26.5% rate.

On the international front, the bill would reduce the Section 250 deduction for global intangible low-taxed Income (GILTI) to 37.5%, resulting in an effective tax rate of 16.5% based on a corporate tax rate of 26.5%. The GILTI would be calculated on a country-by-country basis. Other international tax provisions include:

  • The deduction for qualified business asset investment (QBAI) would be reduced to 5%;
  • The foreign tax credit haircut would be reduced to 5%;
  • The tax on foreign-derived intangible income would rise to an effective rate of 20.7% based on a corporate tax rate of 26.5%;
  • Excess foreign tax credit carryforwards would be allowed for five years but carrybacks would be disallowed; and
  • A new limitation on interest expense deductions for some multinational corporations would be introduced.


What’s Not in the Bill

The Ways and Means tax bill does not include any changes to the cap on individual itemized deductions for state and local taxes, which was introduced in 2017’s tax reform. Ways and Means Chairman Richard Neal (D-MA) has said he is committed to include “meaningful SALT relief” in the final legislation.

A provision to end the tax-free step-up in basis above a $1 million threshold that was proposed by the Biden administration is also not included in the Ways and Means bill.

 

Written by Todd Simmens. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

 

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General

Potential Benefits of Section 1202 Continue to Grow

Section 1202 of the Internal Revenue Code is growing in popularity among investors and may become even more valuable in 2022.

Section 1202 allows founders and investors of corporations to exclude up to 100% of their capital gains derived from the sale of qualified small business stock (QSBS) held for more than five years (subject to limitations). Because the gain exclusion percentage for a shareholder depends on the QSBS issuance date, as time goes on more investors are becoming eligible for the full, 100% exclusion—and thus its rise in popularity.

Further, the 2021 Green Book proposes far-reaching changes to the taxation of long-term capital gains, which are taxed at graduated rates under the individual income tax. Today, the highest rate is generally 20% (23.8% including the net investment income tax, if applicable, based on the taxpayer’s modified adjusted gross income (AGI)).

Under the Green Book proposal, long-term capital gains of taxpayers with AGI of more than $1 million would be taxed at ordinary income tax rates to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. Currently, the highest rate for individuals is 37% (40.8% including the net investment income tax), though the Green Book also includes a proposal to raise the individual rate to up to 39.6% (43.4% including the net investment income tax).

While reinvestments into Qualified Opportunity Zones, like-kind exchanges for real property (possibly limited going forward), and reinvestment of proceeds into qualified replacement property from sales of corporate stock to an Employee Stock Ownership Plan of 30% or more of the corporation’s outstanding stock provide some deferral opportunities, Section 1202 is the only provision that provides an exclusion opportunity for QSBS. The higher that the capital gains tax rate goes up, the greater the potential tax benefit of utilizing an available Section 1202 exclusion.

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Construction General Helpful Articles Jackson, TN Memphis, TN

Protect Your Construction Company from the Effects of High Supply Prices

Building supply manufacturers are doing their best to catch up with the high demand for their materials. Material prices overall are continuing to climb, making it difficult for contractors of all types and sizes to provide their services in the same manner they did before the pandemic as well as grow their businesses.

What can contractors do?

Communication is key for contractors and business owners right now. It is important for clients to know developments in supply chains and pricing. Much of the information that should be communicated can be included in contracts. Even though they cannot impact the supply chain and prices of materials, contractors can protect themselves from losing money and work through several means.

  • Expiration Dates

With prices and supply availability changing every day, contractors cannot guarantee a price for long. Since there is a chance that original quotes can change at a moment’s notice, contractors can explain that their quote is only viable until a certain date. 

  • Delay Clauses

Since there are typically damages contractors must claim when a job is not completed by the projected date, it is important for contractors to include delay clauses in their contracts. With the pandemic and the unknowns of the building materials supply chains, contractors cannot be held accountable for the delay in construction due to lack of materials.

Need more insight?

Our experts are consistently keeping tabs on industry changes. Contact one of our representatives today for consulting that will keep your business running smoothly and productively in the midst of unknowns.

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General

4 Reasons to Revisit Your Powers of Attorney

Although much of estate planning deals with what happens after you pass, it’s equally important to have a plan for making critical financial or medical decisions if you’re unable to make them for yourself. Carefully designed financial and health care powers of attorney allow you to designate a trusted person to make financial and medical decisions on your behalf in the event an illness or injury renders you unconscious or otherwise incapacitated. They also allow you to provide your designee with guidance on making these decisions, including your preferences regarding the use of life-sustaining medical procedures.

Review and revise as needed

Powers of attorney can provide peace of mind that your wishes will be carried out, but it’s important not to get lulled into a false sense of security. You should revisit these documents periodically in light of changing circumstances and consider executing new ones.

Possible reasons you may need new powers of attorney include:

1. Your wishes have changed.

2. The person you designated to act on your behalf has died or otherwise become unavailable.

3. You’re no longer comfortable with the person you designated. (For example, perhaps you designated your spouse, but have since divorced.)

4. If you’ve moved to another state, your powers of attorney may no longer work the way you intended. Certain terms have different meanings in different states, and states don’t all have the same procedural requirements. Some states, for example, require durable powers of attorney to be filed with the local county recorder or some other government agency.

Honoring your powers of attorney

Even if your circumstances haven’t changed, it’s a good idea to execute new powers of attorney every few years. Why? Because powers of attorney are effective only if they’re honored, and — because of liability concerns — some financial institutions and health care providers may be reluctant to honor documents that are more than a few years old.

Contact your ATA representative with any questions regarding powers of attorney. We’d be pleased to further explain how they work or, if your estate plan already includes powers of attorney, help determine if you need to revise them or execute new documents. © 2021

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ATA Business Insights

Join us for our free quarterly webinar to gain business insights to help shape strategies, solve problems, and grow your company. This quarter’s topic: Supercharge Your Business with an Innovation Strategy Session. 

Register with this Zoom link for the June 8th event. It will start 11AM central time.

 

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ATA Named a 2021 Accounting Today Top Regional Leader

ATA named top accounting firm.

 

Alexander Thompson Arnold PLLC (ATA) has been recognized as a top regional leader as well as a top firm to watch for 2021 by Accounting Today, maintaining their ranking from the previous year.

Accounting Today releases a publication every year detailing the top 100 accounting firms in the country, firms to look out for, regional leaders, top tax firms and highlights from the previous year relating to the top 100 firms. The roster includes firms with positive growth rates, which landed ATA on the top firms list for the southeast. The report also evaluates a firm in all aspects and not just growth numbers, looking at cutting-edge business practices, which differentiated ATA and put the company on the firms to watch list.

“This achievement shows that the strides we are making to improve our firm and expand our reach are paying off,” said Managing Partner John Whybrew. “Our firm has emphasized working as a team, so this recognition is due to the hard work and improvements we have made together.”

To view the full rankings, click here.

About Alexander Thompson Arnold PLLC (ATA)

ATA is a long-term business advisor to its clients and provides other services that are not traditionally associated with accounting. For example, Revolution Partners, ATA’s wealth management entity provides financial planning services; ATA Technologies provides trustworthy IT solutions; Sodium Halogen focuses on growth through the design and development of marketing and digital products; Adelsberger Marketing offers video, social media, and digital content for small businesses; and newly added ATAES a comprehensive human resource management agency.

ATA has 13 office locations in Tennessee, Kentucky and Mississippi. Recognized as an IPA Top 200 regional accounting firm, it provides a wide array of accounting, auditing, tax and consulting services for clients ranging from small family-owned businesses to publicly traded companies and international corporations. ATA is also an alliance member of BDO USA LLP, a top-five global accounting firm, which provides additional resources and expertise for clients.

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General

Comprehensive Covid-19 Relief Package Passed

On March 10, 2021, the U.S. House of Representatives passed a modified version of the American Rescue Plan Act of 2021 (ARP bill), President Biden’s $1.9 trillion COVID-19 relief package aimed at stabilizing the economy, providing needed relief to individuals and small businesses, and improving and accelerating the administration of coronavirus vaccines and testing. The House was required to re-vote on the bill after the House version passed on February 27 was modified by the Senate on March 6. The relief package, which is Biden’s first major legislative initiative, is one of the largest in U.S. history and follows on the heels of the Trump Administration’s $900 billion COVID relief package enacted in December 2020 (Consolidated Appropriations Act, 2021 (CAA)).

The House-approved bill will now be sent to President Biden for his signature, and it is expected that the legislation will be enacted before the current supplemental federal unemployment benefits expire on March 14.

The most significant measures included in the Act are the following:

  • A third round of stimulus payments to individuals and their dependents
  • Extension of enhanced supplemental federal unemployment benefits through September 2021
  • Expansion of the child tax credit and child and dependent care credit
  • Extension of the Employee Retention Credit (ERC)
  • $7.25 billion in aid to small businesses, including for the Paycheck Protection Program (PPP)
  • Increased federal subsidies for COBRA coverage
  • Over $360 billion in aid directed to states, cities, U.S. territories and tribal governments, and the Senate added $10 billion for critical infrastructure, including broadband internet, and $8.5 billion for rural hospitals
  • $160 billion earmarked for vaccine and testing programs to improve capacity and help curb the spread of COVID-19; the plan includes funds to create a national vaccine distribution program that would offer free shots to all U.S. residents regardless of immigration status
  • Other measures that address nutritional assistance, housing aid and funds for schools.

The original House version of the bill included a plan to gradually increase the federal minimum wage to $15/hour. This minimum wage provision was stripped from the Senate version following a ruling by the Senate parliamentarian that the minimum wage provision did not conform to the budget reconciliation rules.

Measures Affecting Individuals

The bill includes several measures to help individuals who have been adversely affected by the impact of the coronavirus pandemic on the economy. The additional round of stimulus checks, in conjunction with supplemental federal unemployment benefits, should provide some measure of relief to individuals. A temporarily enhanced child tax credit offers another area of assistance.

Cash Payments

Immediate cash relief will be granted to individuals and families in the form of new stimulus payments. While a $1,400 stimulus check (compared to the $600 under the CAA) will be paid to qualifying individuals and their dependents, the final version of the bill was narrowed by the Senate as a compromise to accommodate concerns of certain members and to secure votes, with the result that fewer taxpayers will receive a stimulus payment than was the case with the previous stimulus checks. The relief payments are expected to start shortly after President Biden signs the bill.

Under the final bill, individuals earning up to $75,000, single parents earning $112,500 and couples earning up to $150,000 are eligible for the $1,400 check, with the amount decreasing for individuals making between $75,000 and $80,000. Individuals earning more than $80,000, single parents earning $120,000 and couples earning more than $160,000 are disqualified from receiving stimulus checks. The House version of the bill would have allowed single taxpayers earning up to $100,000, single parents earning up to $150,000 and couples earning up to $200,000 to have qualified for the $1,400 payment.

An additional $1,400 check will be sent to each dependent of the taxpayer, including adult dependents (e.g., college students, parents). The previous two stimulus payments limited the additional checks to dependent children 16 years old or younger.

The amount of the stimulus check will be based on information in the taxpayer’s 2020 tax return if it has been filed and processed; otherwise, the 2019 return will be used. The amount of the check will not be taxable income for the recipient.

Extended Unemployment Benefits

The current weekly federal unemployment benefits (which apply in addition to any state unemployment benefits) of $300 will be extended through September 6, 2021; the Senate cut back the $400 that would have applied through August 29 under the House version. Additionally, the first $10,200 of unemployment insurance received in 2020 would be nontaxable income for workers in households with income up to $150,000.

The extension also covers the self-employed and individual contractors (e.g., gig workers) who typically are not entitled to unemployment benefits.

Child Tax Credit

The child tax credit will be expanded considerably for 2021 to help low- and middle-income taxpayers (many of the same individuals who will be eligible for stimulus checks), and the credit will be refundable.

The amount of the credit will increase from the current $2,000 (for children under 17) to $3,000 per eligible child ($3,600 for a child under age six), and the $3,000 will be available for children that are 17 years old. The increase in the maximum amount will phase out for heads of households earning $112,500 ($150,000 for couples).

Because the enhanced child tax credit will be fully refundable, eligible taxpayers will receive a check for any credit amount not used to offset the individual’s federal income tax liability. Part of the credit will be paid in advance by the IRS during the period July through December 2021 so that taxpayers do not have to wait until they file their tax returns for 2021.

Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit will be expanded for 2021 to cover up to 50% of qualifying childcare expenses up to $4,000 for one child and $8,000 for two or more children for 2021 (currently the credit is up to 35% of $3,000 for one child or 35% of $6,000 for two or more children). The credit will be refundable so that families with a low tax liability will be able to benefit; the refund will be fully available to families earning less than $125,000 and partially available for those earning between $125,000 and $400,000.

Earned Income Tax Credit (EITC)

The EITC will be expanded for 2021 to ensure that it is available to low paid workers who do not have any children in the home. The maximum credit will increase from about $530 to about $1,500, and the income cap to qualify for the EITC will go from about $16,000 to about $21,000. Further, the EITC will be available to individuals age 19-24 who are not full-time students and those over 65.

Measures Affecting Businesses

The ARP bill contains provisions designed to assist small businesses, in particular.

Small Businesses and Paycheck Protection Program        

An additional $7.25 billion is allocated to assist small businesses and for the Paycheck Protection Program (PPP) forgiven loans. The current eligibility rules remain unchanged for small businesses wishing to participate in the PPP, although there is a provision that will make more non-profit organizations eligible for a PPP loan if certain requirements are met.

The PPP—which was originally created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020—is designed to help small businesses that have suffered from the disruptions and shutdowns related to the coronavirus pandemic and keep them operational by granting federally guaranteed loans to be used to retain staff at pre-COVID levels. A PPP loan may be forgiven in whole or in part if certain requirements are met.

The Economic Aid Act, which is part of the CAA, had earmarked an additional $284 billion for PPP loans, with specific set asides for eligible borrowers with no more than 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods. The program ends the earlier of March 31, 2021 (the application period under the PPP is not extended under the ARP bill) or the exhaustion of the funds—additional funds are now allocated under the ARP bill.

It should be noted that the Biden Administration recently designated the 14-day period between February 24 and March 10, 2010 for businesses and nonprofits with fewer than 20 employees to apply for a PPP loan.

Employee Retention Credit

The ERC, originally introduced under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and enhanced under the CAA, aims to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the COVID-19 pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.

The CAA extended the eligibility period of the ERC to June 30, 2021, increased the ERC rate from 50% to 70% of qualified wages and increased the limit on per-employee wages from $10,000 for the year to $10,000 per quarter ($50,000 per quarter for start-up businesses). The new bill extends the ERC for another six months to December 31, 2021 under the same terms as provided in the CAA.

Other Measures

  • Employers offering COVID-19-related paid medical leave to their employees would be eligible for an expanded tax credit through September 30, 2021.
  • The bill increases the proposed subsidies of insurance premiums for individual workers eligible for COBRA after they were laid off or had their hours reduced to 100% (85% under the version of the bill passed by the House) through September 30, 2021.
  • Funds are allocated for targeted Economic Injury Disaster Loan advance payments, as well as for particularly hard-hit industries such as restaurants, bars, and other eligible food and drink providers; shuttered venue operators; and the airline industry.
  • Effective for taxable years beginning after December 20, 2020, the bill repeals IRC section 864(f), which allows U.S. affiliated groups to elect to allocate interest on a worldwide basis. This provision was enacted as part of the American Jobs Creation Act of 2004, and has been deferred several times. The provision is relevant in computing the foreign tax credit limitation under IRC section 904.
  • The bill does not cancel student debt but there is a provision that would make student loan forgiveness passed between December 31, 2020, and January 1, 2026, tax-free (normally the cancellation of debt is considered taxable income).
  • A deduction will be disallowed for compensation that exceeds $1 million for the highest paid employees (e.g., the CFO, CEO, etc.) for taxable years beginning after December 31, 2026.
  • The limitation on excess business losses of noncorporate taxpayers enacted as part of the Tax Cuts and Jobs Act will be extended by one year through 2026.
  • The bill substantially lowers the threshold for third-party payment processors to report information to the IRS. Specifically, IRC section 6050W(e) will be revised so that the current threshold of $200,000 for at least 200 transactions is reduced to $600. As a result, such payment processers will have to provide Form 1099K to sellers for whom they have processed more than $600 (regardless of the number of transactions). This change, which will apply to tax returns for calendar years beginning after December 31, 2021, will bring many more sellers, including “casual” sellers, within the 1099K reporting net.
    start-up businesses). The new bill extends the ERC for another six months to December 31, 2021 under the same terms as provided in the CAA.

For more information, contact your ATA representative at https://ata.cpa/locations.

 

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Alexander Thompson Arnold PLLC Climbs Top 200 Firm List in the Nation

IPA Top 200
FOR IMMEDIATE RELEASE

ATA has increased its ranking from 147 to 136 on the 2020 INSIDE Public Accounting (IPA) Top 200 Firms list. This accolade is deemed by the IPA Annual Survey and Analysis of Firms.

 

IPA 100, 200, and 300 firms are ranked by U.S. net revenues and are compiled by analyzing the more than 550 responses received this year for IPA’s Survey and Analysis of Firms. This is IPA’s 30th annual ranking of the largest accounting firms in the nation.

“It’s a goal of ATA’s to expand our footprint. Over the last several years, our firm has focused on bringing additional service offerings to the markets we serve,” said John Whybrew, managing partner of ATA. “Thank you to our clients and business partners who have helped contribute to our success. We look forward to continuing our services with you,” said Whybrew.

This is an unprecedented time in the accounting industry. With the many changes that took place in early 2020, ATA has proven to be agile and adaptive through these unique circumstances. Continued growth and flexibility while working with clients during this time has proven ATA can arise to any challenge.

As the future arrives, ATA understands its need and responsibility to stay ahead of the curve as new trends and innovative approaches hit the accounting industry. ATA will continue to improve and expand the services that are offered as well as strategically grow its office footprint.

INSIDE Public Accounting (IPA), founded in 1987, is published by The Platt Group. The Platt Group publishes both the award-winning INSIDE Public Accounting newsletter and the award-winning National Benchmarking Report, along with other key reports on the profession. The Platt Group assists firms to become more successful through a variety of services.

ATA has 14 office locations in Tennessee, Kentucky, and Mississippi. Recognized as an IPA Top 200 regional accounting firm, we provide a wide array of accounting, auditing, tax and consulting services for clients ranging from small family-owned businesses to publicly traded companies, and international

corporations. ATA is also an alliance member of BDO USA, LLP, a top five global accounting firm, which allows us to utilize their resources and expertise for clients.

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