Actually, a Recession is a Great Time to Launch That New Startup

Many people are worried about an impending global recession due to the economic slowdown that the COVID-19 pandemic has brought with it – and your average entrepreneur and startup founder is chief among them. It makes sense to assume that with so many people watching what they spend and with so much uncertainty in the air, it’s too risky to launch that business of your dreams anytime in the near future. 

But at the same time, that idea and reality may not line up quite as nicely as you’d think. Some argue that entrepreneurs actually should not worry about a potential recession for the simple reason that the state of the global economy doesn’t directly impact startups on a large scale. 

Some factors will determine whether or not a startup will succeed, but they have less to do with the coronavirus or an impending global recession than you might think. 

The Positives of Founding a Startup in a Recession: What You Need to Know 

One of the significant reasons why founding a startup in a recession isn’t necessarily the issue you thought it was going to be, has to do with the fact that products and services are generally cheaper during these periods of economic downturn. Smart entrepreneurs aren’t scared by this – they’re ready and waiting to take advantage of it

While larger companies are looking for any opportunity to retract and shed costs, those struggling businesses will likely sell off many of their assets at bargain-basement rates. Retailers and other organizations will usually drop their prices to move as much inventory as possible before it’s too late. Interest rates fall to their absolute lowest, meaning opening new credit lines or taking out loans has never been easier. 

Sure, none of this is precisely positive for those larger organizations – but it’s good news for your new startup that couldn’t have come along at a better time. Provided that you already have a plan in place, you can save on costs and still bring your vision of the perfect company into reality at the same time. 

Top Talent Will Always Be Looking for Opportunities 

Along the same lines, your startup will need high-quality employees, though depending on the financial side of your business, getting to that point may often be easier said than done. 

If a global recession occurs, this is another primary reason this could be good news for your efforts. As soon as the worldwide recession sets in, those larger companies will begin shedding workers – and fast. As unemployment rates rise across the country, it means that there will be a far larger number of qualified, passionate, and talented people available to fill whatever positions you have available. 

By putting in the effort to build a secure hiring plan, you’ll know what type of candidates to go after as soon as they become available. Not only that, but you’ll likely be able to secure these people at lower rates than you would have if the job market were more vital in your industry. 

Many people agree that this is an excellent opportunity to bring in a co-founder to complement your skillset. Never forget that a big part of your success will ultimately be determined less by what you do and more by whom you are surrounding yourself. If you’re able to attract qualified individuals who A, believe in what you’re trying to accomplish, and B, who possess the desired skills, you’ll be in a far better position, significantly earlier on in your company’s lifecycle.

Entrepreneurs Solve Problems. That Will Always Be True (and Necessary) 

In the end, the same factors that will impact whether a startup can succeed are as real today as they were before any of us had ever heard about the coronavirus. They are and will always involve your founding team and their ability to solve a problem for a paying customer. You cannot overstate the importance of starting your business with a qualified, well-balanced, and experienced team.

People will always have problems, and they will always look to new and innovative companies to help them. Yes, the issues may change given what is going on around the world – but the fact that people are looking for real, efficient solutions will not. 

In other words, it’s still all about the product-market fit. If your startup was founded on a genuinely innovative idea that speaks directly to the heart of a universal problem that many people are experiencing, it will be successful. It may take a bit longer in a global recession, sure – but the odds are very much in your favor. 

Many times, achieving this product-market fit has little to do with broader macroeconomic trends, which is precisely why a recession is probably a far better time to launch your startup than you thought. Once you remember that all recessions eventually come to an end – and the startups founded on a stable foundation during this time are in the best position to rebound – you’re looking at a stimulating position for any entrepreneur.

Please contact us if you are considering launching a business and would like assistance, or if you have any questions. 

Did You Know Unemployment Benefits are Taxable?

Article Highlights: 

  • CARES Act 
  • Unemployment Benefits 
  • States Taxation of Unemployment 
  • Will Unemployment Be Taxable? 

With the passage of the CARES Act stimulus package earlier this year, the federal government added $600 to the standard state weekly unemployment benefits and increased the number of benefit weeks to a total of 39. 

In many cases, workers are receiving unemployment benefits for the first time in their lives, and they may not be aware that the benefits are fully taxable for federal purposes. Making matters worse is that most states also tax unemployment benefits, which may come as a surprise with a potentially unpleasant outcome for many when it comes time to file their 2020 tax return next year. 

Those who received unemployment benefits will be sent a Form 1099-G (Certain Government Payments) from the state that paid the benefits. This tax form shows the amount of unemployment benefits received and the amount of tax withheld, if any. 

There are several states where unemployment benefits are not taxable. Seven states do not have a state income tax, so obviously, unemployment benefits are not taxable in those states, which are: 

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

 Seven states have state income tax but do not tax employment benefits. They include: 

  • California 
  • Montana 
  • New Hampshire 
  • New Jersey 
  • Oregon 
  • Pennsylvania 
  • Tennessee 
  • Virginia 

Two states exempt 50% of amounts above $12,000 (single taxpayer) or $18,000 (married taxpayers). They are: 

  • Indiana 
  • Wisconsin 

If you’ve collected unemployment compensation this year, your benefits’ impact on your tax bill will depend on several factors. These factors include the amount of unemployment received, what other income you have, if you are single or married (and, if married, whether you and your spouse are both receiving unemployment benefits), and whether you had or are having income tax withheld from benefit payments. 

If you have questions about the taxation of unemployment compensation, please contact us.

10 Tips for Better Budgeting

If you already have a budget, it’s probably been difficult for you to stick with it for the last several months. Unless you provide products or services that have been in high demand since the COVID-19 pandemic took place, you’ve had to adjust your budget significantly. 

Now is an excellent time to start doing some planning for 2021. While there are still uncertainties next year, creating a budget will give you a starting point. A budget increases your awareness of all of your projected income and expenses, which may make it less likely to find yourself always running short on funds. 

Here are some ways you can make your budgeting process more practical and realistic. 

Use what you already know. Unless you’re starting a brand-new business, you already have the best resource possible: a record of your past income and expenses. Use this as the basis for your projections. 

Be aware of your sales cycle. Even if you’re not a seasonal business, you’ve probably learned that some months or quarters are better than others. Budget conservatively for the slower months.

Distinguish between essential and non-essential expenses. Enter your budget items for bills and other costs that must be covered before you add optional categories.

You can use data from a previous year to create a new budget in QuickBooks Online.

Keep it simple. Don’t budget down to the last paper clip. You risk budget burnout, and your reports will be unwieldy. 

Build-in some backup funding. Just as you’re supposed to have an emergency fund in your personal life, try to create one for your business. 

Make your employees part of the process. It would be best if you weren’t secretive about the expense element of your budget. Try to get input from staff in areas where they have knowledge. 

Overestimate your expenses. Doing so can help prevent “borrowing” from one budget category to make up for a shortfall in another. 

Consider using excess funds to pay down debt. Debt costs you money. The sooner you pay it off, the sooner you can use those payments for some non-essential items. 

Look for areas where you can change vendors. As you’re creating your budget, think carefully about each supplier of products and services. Can you find less costly alternatives? 

Revisit your budget frequently. You should evaluate your progress at least once a month. You could even start by budgeting for only a couple of months to allow yourself to learn a lot about your spending and sales patterns that you can use for future reference. 

How QuickBooks Online Can Help 

QuickBooks Online offers built-in tools to help you create a budget. Click the Gear (also known as the wheel) icon in the upper right corner and select Budgeting under Tools. Click Add budget. At the top of the screen, give your budget a Name and select the Fiscal Year it should cover from the drop-down list by that field. Choose an Interval (monthly, quarterly, or yearly) and indicate whether you want to Pre-fill data from an existing year. 

QuickBooks Online supplies a budget template that already contains commonly used small business items.

The final field is labeled Subdivide by, which is optional. You can set up budgets that only include selected Customers or Classes, for example. Select the desired divider in that field, choose who or what you want to be included in the next. Click Next or Create budget in the lower right corner (depending on whether you used pre-filled data) to open your budget template. If you subdivided the budget, you’d see a field marked View budget. Click the down arrow and select from the options listed there. 

To create your budget, you enter numbers in the small boxes supplied. Columns are divided by months or quarters, depending on what you specified, and rows are labeled with budget items (Advertising, Gross Receipts, Legal & Professional Fees, etc.). You enter numbers in the boxes that apply. When you click on a box, a small arrow appears pointing right. Click on this, and your number will automatically appear in the rest of that row’s boxes. When you’re done, click Save in the lower right. You can edit your budget at any time. 

QuickBooks Online provides two related reports. Budget Overview displays all of the data in your budget (s). Budget vs. Actuals shows you how you’re adhering to your budget. 

We know creating a budget can be challenging, but it’s so important – especially right now. We’d be happy to look at your company’s financial situation and see how QuickBooks’ budgeting tools—and its other accounting features—can help you get a better understanding of your finances. Please contact us with any further questions. 

Tax Consequences of Losing Your Job

Article Highlights: 

  • Severance Pay 
  • Unemployment Compensation 
  • Health Insurance 
  • Employer Pension Plan 
  • Coronavirus-related Distributions 
  • Home Sale 

If you lost your job, there are several tax issues you may encounter. How you deal with these issues can profoundly impact your taxes and finances. The following are typical issues related to tax treatment: 

Severance Pay – Your employer may provide you with severance pay. Severance pay and payment for unused vacation time will be included in your W-2 income, and both are fully taxable. 

Unemployment Compensation – If you do not find another job right away, you generally qualify for unemployment compensation. Unemployment benefits, both the regular benefits you receive from your state unemployment department and the enhanced unemployment payments during the COVID-19 emergency, are taxable for federal purposes and may or may not be taxable by your state of residence. To minimize the tax you may owe when you file your 2020 tax return; you may want to request federal income tax withholding of 10% of the unemployment benefit amount. Do that by submitting a Form W-4V (Voluntary Withholding Request) to your state’s unemployment office. 

Health Insurance – If you lose your job and have health insurance through your employer’s group health coverage plan, you will need to determine your available options for continued coverage via COBRA or a replacement policy. If you give up coverage, you may be subject to penalties in some states for not being insured. 

  • COBRA Coverage – The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires continuation coverage to be offered to covered employees, their spouses, former spouses, and dependent children when group health coverage would otherwise be lost. COBRA continuation coverage is often more expensive than the amount that active employees must pay for group health coverage because they usually cover part of employees’ coverage costs. 102% of the total cost can be charged to individuals receiving continuation coverage (the extra 2% covers administration costs). COBRA generally applies to private-sector employers with 20 or more employees and state or local governments that offer group health coverage to their employees. In most cases, COBRA coverage is limited to 18 months. 
  • Health Insurance Marketplace Coverage – When existing health coverage is lost, a family may purchase health insurance through a government health insurance marketplace outside of the standard enrollment window. Depending upon your income for the year, you may qualify for the premium tax credit for the part of the year when you don’t have coverage through your employer, which will help pay for the insurance. Suppose coverage was already through a marketplace and not your employer; you should notify the Marketplace that you’ve lost your job and that your income has decreased, as you may then be eligible for a higher advance premium tax credit. However, advise the Marketplace once you are employed again to make appropriate adjustments to the advance premium tax credit amount. This may alleviate having to repay some of the credit when you file your 2020 return. 

Employer Pension Plan – Depending upon your employer’s pension plan, you may have the option of leaving your retirement funds in the employer’s plan or moving the funds to your IRA account. You can have the funds transferred to your IRA or take a distribution and roll it into your IRA within 60 days. However, this is where a tax trap exists; for distribution, the employer is required to withhold 20% for federal taxes, meaning only 80% of the funds will be available to roll over, and the remaining 20% will end up being taxable unless you can make up the difference with other funds. 

If you ever want to roll those funds into a new employer’s retirement plan, those retirement distributions should not be commingled with other IRA accounts. 

Should you be tempted not to roll the funds over, be aware that the distribution will generally be taxable, and if you are under the age of 59½, there will also be a 10% early withdrawal penalty. However, the CARES Act allows qualified taxpayers to make COVID-19-related distributions from qualified plans or IRAs (not to exceed $100,000 from January 1, 2020, to December 31, 2020) and receive favorable tax treatment. These distributions are penalty-free; they are taxed over three years and can be redeposited to an IRA or qualified plan within three years. 

Home Sale – If you relocate and have to sell your home and have owned and occupied the house as your primary residence for 2 of the previous 5 years, you will be able to exclude up to $250,000 of the gain ($500,000 if you are married and you and your spouse qualify for the exclusion). If you do not meet the 2-out-of-5-years qualifications, you will be allowed a prorated gain exclusion because you have lost your job.

As you can see, several issues may apply when a job loss occurs; this is even more relevant during the coronavirus emergency. To learn more about how these issues might affect your particular situation, please contact us

How to File Taxes After Moving to a New State

Moving to a new state can be an incredible new adventure. No matter what takes you to your new residence, you can’t forget about taxes. Here’s what you need to know about filing taxes in your new state as you settle into your new routine. 

Establish Residency in Your New State

Even if you haven’t sold your home or severed all ties with your previous hometown, you will need to make as many connections with your new residence as possible.

  • Change your mailing address 
  • Get your driver’s license and voter registration in your new state 
  • Register children for school (if applicable) in your new state 
  • Move your personal belongings and family pets to your new home 

This will help prove that you have fully moved from the original state and are no longer subject to taxes there as a resident. 

Cut Ties with Your Previous Jurisdiction 

If you have a second home in another state or you are still working or doing business in your previous state, you may still qualify as a resident in that state for tax purposes. 

If you still have ties in your previous state, make sure you understand the residency qualifications so that you can avoid any surprises at tax time. 

Determine What Kind of Tax Return Is Required 

Unless you moved on January 1st of the calendar year, you are likely – at a minimum – a part-year resident of each state. 

Typically, this means that you will allocate your income, deductions, credits, and other tax items based on the number of days you lived in each state. You would file a part-year tax return in each state unless the state that you are moving from or moving to does not have a state income tax requirement. 

Check Your Eligibility for Tax Credits, and Other Tax Benefits That You May Be Eligible for in Your New State 

The forms that each taxpayer may use are consistent when completing your federal tax return. However, no two states are exactly alike when it comes to filing a tax return. Credits and other benefits that you may be eligible for in one state may not apply in another state. 

You may find that you now qualify for extra credits or other incentives not previously available to you. 

Get Help from a Tax Professional 

When it comes to your taxes, it’s best to contact a tax professional if you’re unsure of the steps to take when completing your tax forms. 

We can assist with tax planning and identifying tax credits and deductions. Your Tarlow advisor can help you avoid mistakes when completing your tax return that can result in costly interest and penalties. Please contact us for more information.

Webinar on Thursday, October 22, at 12:30 PM (ET): Unpacking PPP Loan Forgiveness

Tarlow Invites You: PPP Webinar

Unpacking PPP Loan Forgiveness
What you need to know to maximize forgiveness

Your Covered Period is coming to an end and you are getting ready to complete your loan forgiveness application. But it seems like every week there’s a change in the Paycheck Protection Program rules. Have you kept up with the changes in the SBA guidance? Failure to do so could cause your business to miss out on loan forgiveness.

On Thursday, October 22, 2020, at 12:30 PM (ET), our CPA channel affiliate partner, Aprio, will host a complimentary webinar to revisit the PPP regulations, including the latest developments.

This webinar will cover:
  • Eligible costs for forgiveness
  • Limitations on non-payroll costs
  • Documentation requirements and best practices
  • Which application is right for you
Speakers on the panel include:
  • Justin Elanjian, Partner, Assurance Services, Aprio
  • Tommy Lee, Partner in Charge, Retail, Franchise & Hospitality, Aprio

Register Today

The SBA and the Treasury Released an IFR to Streamline the PPP Loan Forgiveness Process

On Thursday, October 8, 2020, the U.S. Small Business Administration (SBA) and the Treasury released an Interim Final Rule (IFR) to streamline the forgiveness process for recipients of Paycheck Protection Program (PPP) loans. Under the new IFR, borrowers of $50,000 or less can apply for forgiveness using a simplified application form, SBA Form 3508S. PPP borrowers of $50,000 or less are now exempt from reductions in forgiveness based on:

  • Reductions in full-time equivalent (FTE) employees; and,
  • Reductions in employee salary or wages.

For all PPP loans, the October 8 IFR also includes guidance for lender responsibilities concerning the review of borrower documentation of eligible costs for forgiveness in excess of a borrower’s PPP loan amount. 

When a borrower submits the newly released Form 3508S, the lender is required to: 

  • Verify receipt of the borrower certifications included in the Form; and, 
  • Verify receipt of the documentation the borrower submits to validate payroll and nonpayroll costs, as requested in the Form. 

The borrower’s responsibility is to provide an accurate loan forgiveness amount calculation. The borrower must verify the reported information and amount on the loan forgiveness application. According to the IFR, lenders are allowed to depend on the borrower’s representations.

Click Here to Read the Full IFR Released on October 8, 2020 

Tarlow is Here to Help – Please Contact Us with Questions

Tarlow Partners and staff members are closely monitoring the PPP rules, tax-related legislation and regulations, and guidance from the SBA and the Department of Treasury. We are readily available to assist business owners and will continue to send updates about relevant news and changing guidelines. If you have any questions about this update or any tax matter, please contact your Tarlow advisor for assistance.

PPP Loan Update: New Guidance for Ownership Changes

The U.S. Small Business Administration (SBA) issued a Procedural Notice (‘the Notice”) to provide information concerning the required procedures for changes of ownership of an entity that has received Paycheck Protection Program (PPP) funds (a “PPP borrower”).

The Notice, which was addressed to SBA employees and PPP lenders, clarifies what constitutes a change in ownership and the responsibilities a PPP borrower continues to hold regardless of any change in ownership.

The Definition of a Change of Ownership

In the Notice, the SBA defines a change of ownership when at least one of the following transactions occurs since the PPP loan was approved:

  • Sale or transfer of at least 20%: At least 20% of the common stock or other ownership interest of the PPP Borrower is sold or otherwise transferred, including to an affiliate or an existing owner of the entity;
  • Sale or transfer of at least 50%: The PPP Borrower sells or otherwise transfers at least 50% of the fair market value of its assets; or
  • Merger: A PPP Borrower is merged with or into another entity.

Regardless of a change in ownership, the PPP borrower remains responsible for the following:

  • Performance of all obligations under the PPP loan;
  • The certifications made in connection with the PPP loan application, including the certification of economic necessity;
  • Compliance with all other applicable PPP requirements;
  • Obtaining, preparing, and retaining all required PPP forms and supporting documentation; and
  • Providing the required forms and supporting documentation to the PPP lender or lender servicing the PPP loan, or to the SBA upon request.

All sales or transfers that have occurred since the date of the approval of the PPP loan must be aggregated. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.

Required Procedures Prior to a Change in Ownership

Before closing any change in ownership transaction, a PPP borrower is required to notify the PPP lender in writing of the contemplated transaction.  They must also provide the PPP lender a copy of the documentation underpinning the proposed transaction.  Some changes in ownership may require SBA approval, with the SBA having 60 calendar days to review and provide a determination of its approval. The PPP lender must notify the SBA within five business days of the completion of a transaction and is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.

The Notice provides different procedures to be followed depending on whether or not the PPP note has been fully satisfied. If a PPP note has not yet been fully forgiven or paid, one of the requirements is that the PPP borrower establishes an escrow account controlled by the PPP lender in the amount of the outstanding PPP loan balance. The escrow funds must first be used to repay any remaining PPP loan balance after forgiveness has been processed plus interest.

In addition, the Notice addresses situations where the new owners or successors arising from a transaction have a separate PPP loan. The SBA outlined the requirements for segregating and delineating PPP funds and expenses, along with documentation and compliance by PPP borrowers.

SBA Approval is Not Required in Several Cases

For an equity sale, prior SBA approval is not required if:

  • The transaction is of 50% or less of the equity of the borrower; or
  • The PPP borrower completes and submits a forgiveness application reflecting use of all of the PPP loan proceeds and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.

For an asset sale, prior SBA approval is not required if:

  • The PPP borrower completes and submits a forgiveness application reflecting use of all of the PPP loan proceeds and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.

Obtaining Required SBA Approval

If the change in ownership does not meet the above conditions, the PPP lender may not unilaterally approve the change in ownership. The PPP lender must submit the following to the SBA:

  • the reason that the PPP borrower cannot fully satisfy the PPP note or escrow funds;
  • the details of the requested transaction;
  • a copy of the executed PPP note;
  • any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, the seller (if different from the PPP borrower), and the buyer;
  • disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and
  • a list of all owners of 20 percent or more of the purchasing entity.

According to the SBA, an asset sale of greater than 50% of the assets of the borrower where an escrow account is not utilized will be conditioned on the purchasing entity. This is assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms. The assumption must be included as part of the purchase and sale agreement.

Maintaining Two PPP Loans

A change in ownership may result in the new owner holding two PPP loans.  In this case, the new owner is responsible for segregating and delineating PPP funds and expenses. The new owner must also provide documentation to demonstrate compliance with PPP requirements with respect to both loans.

Continuing Obligations

In the event the transaction is structured as a stock sale or merger, the PPP Borrower will remain subject to all obligations under the PPP loan. The SBA will have recourse against the original owners for any unauthorized use of PPP funds by the new owners.

In Summary – Next Steps

If you are contemplating a transaction that will result in a change in ownership, to follow are the next steps:

  • Notify your PPP lender
  • Know when your PPP lender is accepting PPP loan forgiveness applications
  • Submit your PPP loan forgiveness application and the required supporting documentation
  • Contact your PPP lender to set up an interest-bearing escrow

If the PPP loan is fully satisfied, whether by being repaid in full or by the remittance of full forgiveness by the SBA, there are no restrictions on a change in ownership.

Tarlow is Here to Help – Please Contact Us with Questions

Tarlow Partners and staff members are closely monitoring the PPP rules, tax-related legislation and regulations, and guidance from the SBA and the Department of Treasury. We are readily available to assist business owners and will continue to send updates about relevant news and changing guidelines. If you have any questions about this update or any tax matter, please contact your Tarlow advisor for assistance.

Still Waiting for the IRS to Cash Your Check?

Article Highlights:

  • IRS’s Unopened Mail Backlog
  • Uncashed Checks
  • Dishonored Payment Penalty
  • IRS Relief for Taxpayers

During the COVID-19 pandemic, the IRS has furloughed many of its employees. Other IRS employees are required to work from home to mitigate the spread of the virus. Many IRS offices remained closed for months, and a backlog of millions of pieces of unopened mail accumulated in trailers set up outside IRS facilities.

The piles of unopened mail include payment checks, which creates a problem for many e-filed returns with tax due because the IRS computer shows a tax return filed, but no payment made. Because the IRS utilizes a significant amount of automation, its computers began automatically spitting out tax-due notices, including to those who had mailed in payments. While most IRS facilities have reopened and IRS employees have returned to work, it will take them weeks, if not months, to get all of the backlogged mail opened and processed.

After receiving complaints from taxpayers and members of Congress, the IRS put information on its website about these outstanding payments: the payments will be posted as of the date when they were received by the IRS, not the date when the Service processes them. In most cases, this will eliminate or minimize penalties and interest for late payments. If you mailed a check to the IRS that has yet to clear your bank, with or without a return, the IRS says that you should not cancel or put a stop-payment on the check. However, it would help if you were sure that you have adequate funds in the account from which the check was written so that the check will clear when the IRS does process it.

Typically, the penalty for a dishonored payment (a bounced check) of over $1,250 is 2% of the amount of the check, money order, or electronic payment. If the amount is $1,250 or less, the penalty is the amount of the check, money order, or electronic payment, or $25, whichever is lower.

To provide fair and equitable treatment during the COVID-19 emergency, the IRS provides relief from bad-check penalties. The dishonored payment penalty will be waived for dishonored checks that the Service received between March 1 and July 15 due to delays in IRS processing. However, interest and other penalties may still apply.

The IRS has also decided to suspend mailing specific tax-due notices to taxpayers temporarily until the unopened mail backlog is cleared up. If you have received a tax-due notice but know that you already paid the tax, the IRS asks that you wait to contact it about any unprocessed paper payments that are still pending.

So, for now, taxpayers who have uncashed payments should be patient. If you send additional correspondences to the IRS about your uncashed payment, it would be added to the mountains of already unopened mail. Due to high call volumes, calling the IRS may also be of little use during this time.

If you have any further questions, please contact us.

Are You Ready for Form 1099-NEC?

Article Highlights:

  • 1099-NEC Has Been Resurrected
  • Non-Employee Compensation
  • Combating Fraudulent Filings
  • Due Dates
  • Form W-9
  • Penalties
  • 1099 Worksheet

The Internal Revenue Service has resurrected a form that has not been used since the early 1980s, Form 1099-NEC. NEC stands for non-employee compensation. This form will be used to report non-employee compensation in place of the 1099-MISC, which has been used since 1983 to report payments to contract workers and freelancers. Form 1099-MISC has also been used to report rents, royalties, crop insurance proceeds, and several other types of income unrelated to independent contractors.

The revival of the 1099-NEC was mandated by Congress with the passage of the PATH Act back in 2015. However, there have been some complications with implementing the form, so its use has been delayed. It will now make its return debut in 2021 for payments made in 2020.

The change is to control fraudulent credit claims—primarily for the earned income tax credit (EITC), which is based on earned income from working. Scammers were filing tax returns before the regular February 28 due date for 1099-MISC, which does not give the IRS the time to cross-check the earned income claimed in the returns. As a stopgap measure, 1099-MISC filings that included non-employee compensation were required to be filed by January 31, the same due date as W-2s, another source of earned income. Using the 1099-NEC for non-employee compensation, the IRS will be able to eliminate the problems created by having two filing dates for the 1099-MISC.

As a result, the 1099-MISC has also been revised, and Box 7—where non-employee compensation used to be entered—is now a checkbox for “Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale.” Other boxes after Box 7 have also been reorganized.

The 1099-NEC is quite simple to use since it only deals with non-employee compensation, which is entered in Box 1, and there are entries for federal and state income tax withholding.

If you operate a business and engage the services of an individual (independent contractor) other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, you are required to issue the individual a Form 1099-NEC soon after the end of the year to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit.

The due date for filing a 1099-NEC with the IRS and mailing the recipient a copy of the 1099-NEC that reports 2020 payments is February 1, 2021. (Normally, the due date is January 31, but because that date falls on a weekend next year, the due date becomes the next business day, February 1, 2021.)

It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual needed to file 1099 for the year. Therefore, it is good practice always to have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them, and before you pay them. Having a correctly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.

IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the vendors’ data you’ll need to file the 1099s accurately. It also provides you with verification that you complied with the law if a vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 before engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.

The penalties for failure to file the required informational returns are $280 per informational return. The penalty is reduced to $50 if a correct but late information return is filed no later than 30 days after the required filing date, or it is reduced to $110 for returns filed after the 30th day but no later than August 1, 2021. If you are required to file 250 or more information returns, you must file them electronically.

To avoid a penalty, copies of the 1099-NECs you’ve issued for 2020 need to be sent to the IRS by February 1, 2021. They must be submitted on magnetic media or optically scannable forms (OCR forms).

Tarlow prepares 1099s for submission to the IRS. We provide recipient copies and file copies for your records. You may use the 1099 worksheet to provide us with the information needed to prepare your 1099s. Please contact us if you have any questions or would like assistance.