Tax Tips: Expanded Child Tax Credit (CTC) and Advance Payments
The American Rescue Plan Act expanded the eligibility and amounts of the child tax credit for 2021 tax returns:
The definition of a qualifying child is broadened for 2021 to include 17-year-olds (i.e., children who haven’t turned 18 by the end of 2021).
The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year) for 2021. The increased credits are subject to complex income phase-out rules. The credits are stepped down to $2,000 at higher incomes—and are phased-out for joint filers with AGI over $400,000.
The CTC is fully refundable for most taxpayers for 2021, which means you receive the credit even if you have no tax liability.
The IRS established a program to make periodic monthly payments equal to 50% of eligible taxpayers’ 2021 CTCs. The payments were sent July through December 2021. To determine the amount of the advance CTC payments, the IRS looked at 2020 returns (or 2019 if 2020 had not been filed).
If you received advance CTC payments a reconciliation must be done comparing the total received with the amount you’re eligible to claim.
To assist with the reconciliation process, the IRS sent taxpayers Letter 6419, Advance Child Tax Credit Reconciliation, from late December 2021 through January 2022. The letter contains the amount of 2021 advance CTC payments and the number of qualifying children used to calculate the advance payments. Taxpayers can also check the amount of advance payments received by using the CTC Update Portal and Online Account on IRS.gov.
If you received total payments that exceed the amount of CTC you can properly claim, you may need to repay some or all of the excess payments.
Please contact your KTLLP advisor for assistance in maximizing your child tax credits.
Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.
Are you maximizing your earned income tax and child tax credits?
The Consolidated Appropriations Act (CAA) of 2021 included a temporary change that could result in larger earned income tax credits and child tax credits.
A tax credit is an amount that taxpayers can subtract, dollar for dollar, directly from taxes owed.
While the above credits would generally be based on 2020 earned income, the act permits taxpayers to determine the credits by substituting their earned income from 2019, if that amount is greater than the taxpayers 2020 earned income.
This could produce larger credits for eligible taxpayers who earned lower wages in 2020 due to the pandemic.
Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.
In an S corporation, employee fringe benefits paid on behalf of a 2% shareholder are subject to special rules.
A 2% shareholder is any person who owns more than 2% of the corporation’s outstanding stock on any day during the S corporation’s tax year, considering both direct and constructive ownership.
The related-party stock attribution rules also apply to the S corporation. Under these rules, your spouse, parents, children and grandchildren are considered to own the same stock as you. Furthermore, if you employ them in your S corporation, their fringe benefits are subject to the same rules.
Let’s take a closer look at some of the most common favorable fringe benefits.
1. Health Insurance
In order for a 2% shareholder in an S Corporation to receive a full deduction for health insurance premiums paid on behalf of the employee, the employee’s spouse, or their dependents, the following steps must be followed:
The S corporation must pay the insurance premiums, either directly or through reimbursement to the shareholder.
The S corporation must include the health insurance as wages not subject to FICA on the shareholder’s W-2.
The cost of the health insurance premiums are deducted on the shareholder’s individual return, using the self-employed health insurance deduction on page 1 of their Form 1040.
Warning No. 1 – Greater than 2% shareholders cannot participate in a Section 125 Plan. The shareholder’s participation will destroy the S corporation’s tax-favored Section 125 cafeteria plan. If the 2% shareholder participates in the Section 125 plan, not only is the plan disqualified, but the benefits will be taxable to themselves and all employee participants.
Warning No. 2 – According to the IRS, earned income of a more-than-2% shareholder in an S corporation under which an insurance plan is established is the shareholder’s Medicare wages (Box 5 of Form W-2) from that corporation. Since health insurance premiums are not included in Medicare wages, this definition of earned income effectively requires a 2% shareholder have cash wages subject to FICA taxes that equal or exceed the premiums in order for the 2% shareholder to receive the full health insurance deduction on his or her individual return.
Warning No. 3 – Beware of Employees. The S corporation can pay for or reimburse the 2% shareholders’ individually-owned insurance but the S corporation may not pay for or directly reimburse the non-managerial employees for such policies.
An S corporation which directly pays for or reimburses employees for employee-arranged health insurance premiums (as opposed to paying premiums for company-arranged group coverage) faces stringent Affordable Care Act penalties.
2. Health Reimbursement Arrangements (HRAs)
A shareholder-employee who owns more than 2% of the shares can’t gain an extra benefit from a Section 105 plan or other HRA.
If the S corporation reimburses the more than 2% shareholder-employee using a health reimbursement plan or account, it simply creates more taxable income to the shareholder. Likewise, if health insurance costs are included in the reimbursement, the shareholder treats the health insurance costs included in his or her W-2 as discussed in No.1 above.
For medical reimbursements other than health insurance, the S corporation reports the income as wages on the W-2, the shareholder itemizes those deductions as a medical expense on Schedule A of Form 1040 (federal income tax form used to report an individual’s gross income).
3. Health Savings Accounts (HSAs)
The S corporation treats contributions to the more than 2 percent shareholder-employee’s health savings account (HSA) as W-2 income; however it is exempt from Social Security and Medicare, and the shareholder-employee deducts the HSA on his or her Form 1040.
4. Disability Insurance
The S corporation treats the premiums paid for an income replacement disability policy on a more than 2% shareholder-employee as wages for withholding tax purposes that are exempt from FICA and federal unemployment taxes.
Under this requirement, the more than 2% shareholder-employee has constructively paid the disability premiums personally because of the W-2 treatment, and that means he or she collects the disability income tax-free.
Fringe benefits that are not as beneficial to the S corporation shareholder:
While some fringe benefits give your S corporation a tax deduction for the compensation, the benefit is compensation on the shareholder’s W-2. Effectively, this gives the shareholder zero tax benefit from the fringe benefit.
These benefits increase the corporation’s share of the FICA taxes on the compensation it has to add to the 2% shareholder’s W-2.
The benefit increases the 2% shareholder’s personal FICA taxes because of the compensation added to the W-2.
These non-beneficial fringe benefits subject to FICA taxes include:
1.Group Term Life Insurance
Shareholder-employees cannot deduct the group term life insurance on their personal return. To see whether it is a good or bad the idea to cover a more than 2% shareholder-employee with group term life insurance, you need to compare the cost savings (if any) of the group insurance with the additional FICA taxes paid by both the corporation and the shareholder.
2. Qualified Moving Expense Reimbursements
For tax years beginning January 1, 2018 and before January 1, 2026 tax reform eliminates the fringe benefits and tax deductions for moving expenses. This applies to both employees and shareholder-employees who own more than 2 percent.
3. Meals and Lodging
Meals and/or lodging that are provided to a more than 2% shareholder-employee for the company’s convenience (for example, because the shareholder-employee must be on the company premises for overnight duty) are treated as wages subject to FICA and are not deductible on the shareholders’ personal tax return.
However, this benefit is tax exempt if paid to a non-managerial employee, or one that is a shareholder who owns less than 2% of the shares.
4. Qualified Employee Achievement Program
The 2% shareholder may not deduct the value of the achievement award on his or her personal income tax return.
5. Qualified Adoption Assistance
If the 2% shareholder is paid the adoption assistance fringe benefit and it’s included on the shareholder’s Form W-2, the shareholder can claim the adoption credit allowed by the tax code on his or her personal income tax return.
For more information on how to report these and other fringe benefits on your federal and state payroll reports and Form W-2, please contact your KTLLP advisor.
All businesses, including nonprofit and government entities, compensate employees for their efforts. It is the employer’s responsibility to comply with the federal and state payroll laws. A part of complying with the laws is filing all required payroll tax forms and making all necessary deposits of payroll taxes. The consequences of not complying with these laws can be significant to an organization.
Federal Tax Deposit
Employers must deposit the federal income taxes withheld from employees’ checks as well as both the employer and employee social security and Medicare taxes. Deposits are made according to the monthly or semiweekly deposit schedules, unless you accumulate more than $100,000 in taxes on any day (see information below). The deposit schedule for a calendar year is determined from the total taxes reported on Form 941, line 10, in a 4-quarter lookback period. The lookback period begins July 1 and ends June 30.
If the total taxes on Form 941, Line 10 (total taxes after adjustments), for the 4 quarters in your lookback period were $50,000 or less, you are a monthly depositor. Under the monthly deposit schedule, deposit employment taxes on payments made during the month by the 15th day of the following month.
If the total taxes on Form 941, Line 10 for the 4 quarters in your lookback period were more than $50,000 you must deposit using the semiweekly deposit schedule. The semiweekly deposit schedule depends on the employer’s payday.
If payday falls on a:
Then deposit taxes due by the following:
Wednesday, Thursday or Friday
Saturday, Sunday, Monday or Tuesday
If you accumulate $100,000 or more in taxes on any day, you must deposit tax by the next business day regardless of your deposit schedule. If you are a monthly schedule depositor and accumulate a $100,000 tax liability on any day, you become a semiweekly depositor on the next day and remain so for at least the rest of the calendar year and for the following calendar year.
Federal Tax Reporting – Quarterly
In addition to the required payroll deposits, employees must file the Form 941. The Form 941 is filed quarterly and reports the following information:
Wages you have paid
Tips your employees received
Federal income tax you withheld
Both the employer and employee’s share of social security and Medicare taxes
Additional .9% Medicare withheld from employee’s wages in excess of $200,000 in a calendar year (employee only tax)
Current quarter adjustments – fractions of cents, sick pay, tips and group-term life insurance
Form 941 is due the month following the end of each quarter:
Form 941 Due Date
January, February, and March
April, May, and June
July, August, and September
October, November, and December
Federal Tax Reporting – Annual
After the end of the calendar year, payroll information must be submitted to the IRS. Form W-2, Wage and Tax Statement is used to submit annual payroll information. Form 1099 Miscellaneous is filed for each person to whom you paid the following during the year:
At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
At least $600 in rents, services (including parts & materials), prizes and awards, other income payments, medical and health care payments
Gross proceeds of $600 or more paid to an attorney
Withheld any federal income tax under the backup withholding rules regardless of the amount of the payment
Payments that do not need reported on the Form 1099 include:
Payments to a corporation (except for medical and health care payments, attorney’s fees, veterinarians, gross proceeds paid to an attorney)
Payments for merchandise, telegrams, telephone, freight, storage and other similar items
Payments of rents to real estate agents
Business travel allowances paid to employees
The due date for giving the recipient forms W-2 and 1099 is January 31. The paper filing of Forms W-3/W-2s and Forms 1096/1099 due date is the last day of February. Electronically filing of Forms W-3/W-2 and 1096/1099 due date is March 31. E-Filing is required if you have 250 or more W-2s or 1099s. Our accounting services department can assist with preparation, review and/or e-filing of these returns.
If you have any questions regarding the above information or additional questions regarding federal payroll taxes and required filings, please contact Jani Zweber or Rebekah Wolkenhauer at 342-5630.
Lost, mislaid, and abandoned property is all personal property which is no longer in the possession of its rightful owner. Lost or unclaimed checks are a typical example that impact many businesses (i.e. long, outstanding checks on the bank reconciliation).
Unclaimed property laws provide a system whereby items such as un-cashed checks are reported to the individual state’s Unclaimed Property Office, then published in the local newspaper and then finally turned over to the State for safe keeping until its rightful owner makes a claim. South Dakota Codified law 43-41B outlines the requirements for reporting unclaimed property to the SD State Treasurer’s Office.
What do I need to know?
According to SD Codified law, a check issued which has been outstanding for more than three years after it was made payable, is presumed to have been abandoned. Any payroll check which has been outstanding for more than one year after it was made payable, is presumed to have been abandoned. There are many more examples as defined by SD Codified Law but these are the most common.
Unclaimed Property reports and remittance are due November 1st for property reportable to the State of South Dakota as of the preceding June 30th.
How does this impact you?
Review your monthly bank reconciliations for long, outstanding checks. If a check has not cleared the bank timely, it is your responsibility to follow up to determine the reason. Does another check need to be issued as the vendor lost it? Was the amount paid on a subsequent invoice and is shown as paid twice in the accounting records? Is the employee’s forwarding address no longer valid?
If after all efforts are exhausted, business owners should read the filing requirements at the link below and ensure reporting is completed.
As a valued client of Ketel Thorstenson, LLP, we would like to take this opportunity to provide you with IRS regulations regarding advances made to employees. Wages generally are taxable and subject to employment tax (i.e. FICA, federal income tax withholding, FUTA) when actually paid or when made available to employees. This would include payroll advances made to employees. This is referred to as the “constructive receipt doctrine”.
What are my options?
Option #1: Under the constructive receipt doctrine, taxes should be withheld at the time of the advance. When the employee repays the advance, it is deducted on a pretax basis. If a salary advance is repaid in another tax year, the taxation and reporting becomes more complicated.
For example, ABC Company advances $500 to its employee on 1/15/15. Taxes should have been withheld on this date and remitted under the normal 941 tax filings. If the amounts were not properly withheld, taxes were not remitted to the IRS timely and, in addition, amendments may need to be made to Form 941 tax filings.
Option #2: For these reasons, some employers elect to provide their employees with interest free loans in lieu of salary advances. Employee loans must 1) be substantiated by a signed promissory note agreeing to repay the loan and 2) the daily aggregate balance cannot be more than $10,000, otherwise interest must be charged. This option removes any complex tax and reporting procedures.
Backup Withholdings Related To Vendor Payments
Ketel Thorstenson, LLP would like to take this opportunity to provide you with IRS regulations regarding backup withholdings related to your vendor payments. Form W-9 should be provided to and received from your vendors before the first payment is made to them. This form provides you with the correct tax identification number (TIN), or Social Security number (SSN), which is certified by the business or individual. This information is used by your business to determine who receives a Form 1099 at the end of the year. Once a Form 1099 is filed, the IRS will send you a notice if the payee’s name and TIN on the information return you filed do not match the IRS’s records.
What if I don’t receive a W-9? Your payments to vendors are subject to 28% backup withholdings if:
A vendor fails to provide your business with a certified Form W-9 indicating they are not subject to backup withholdings;
A vendor does not furnish their TIN;
IRS notifies you the TIN was incorrect.
Once these amounts are withheld, they are submitted to the IRS and are not refundable to the vendor. If a Form W-9 is later provided and the business is exempt from backup withholdings, then the Form 1099 will indicate the amount withheld and paid to the IRS during the year.
Even if the payee does not provide a TIN in the manner required, you are generally not required to backup withhold on any payments you make if the payee meets certain criteria. Refer to the W-9 instructions for further information regarding these exemptions. The most common exemption is a business which is a corporation.
If you would like to discuss these topics further or have specific questions regarding your business, please contact your bookkeeper in charge or Jani Zweber, Accounting Services Manager, for further assistance at 605-342-5630.
I am spending all of my time managing payroll for my employees.
The financial reports out of my system do not make any sense.
My bookkeeper is going out on maternity leave. Now what?
Our Company is growing but we do not have enough accounting work for two full-time employees. What options do I have?
I have hired three bookkeepers in the past year. I am struggling with finding qualified help.
It doesn’t always make sense to hire an in-house staff member to manage and monitor everyday accounting tasks. Likewise, small-to-medium businesses and organizations often find themselves seeking out the services of outside entities to manage responsibilities, such as bookkeeping and payroll.
What Can Our Accounting Services Do For You? In addition to alleviating the burden of everyday accounting tasks, KTLLP offers the best in technology and service to keep your business running smoothly and efficiently. Our accounting services allow you to free up management and staff resources, while entrusting these responsibilities to an established and experienced accounting firm.
Some of the services offered by Ketel Thorstenson, LLP are:
Bank statement reconciliations
W2’s and 1099’s
Quarterly Payroll Reporting
Sales and Excise Taxes
See our website for further details or call Jani Zweber, Accounting Services Manager, at 342-5630.