Tax

If you have employees, you must withhold their 6.2 percent share of the Social Security tax from their wages up to an annual wage ceiling ($137,700 for 2020). You must pay the money to the IRS along with your matching 6.2 percent employer share of the tax.

But under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as you likely know, employers are allowed to defer paying their 6.2 percent share of the Social Security tax on wages paid to employees through the end of 2020. Fifty percent of these deferred taxes will have to be paid during 2021 and the remainder in 2022. 

Both the Trump administration and the IRS have issued orders permitting employers to defer withholding and paying the employee portion of the Social Security tax for a limited time. But the executive order on employee deferral is much more limited in scope than the CARES Act employer deferral, and it’s beset with practical problems for employers.

Which Taxes Can Be Deferred?

The deferral applies only to the employee portion of the Social Security tax due on wages paid from September 1, 2020, through December 31, 2020. No other payroll taxes can be deferred.

Which Employees Qualify for the Deferral?

Only employees who earn less than $4,000 biweekly qualify for the deferral. Employees who are not paid on a biweekly basis qualify if their pay is equivalent to less than $4,000 biweekly. This would include employees who are paid less than

• $2,000 weekly,
• $4,333 semimonthly, or
• $8,666.67 monthly.

Each pay period is tested separately. An employee who earns too much during one pay period can still qualify for the deferral if he or she earns less than the ceiling amount in a later pay period.

Is the Deferral Mandatory?

IRS officials have stated that the deferral is not mandatory. Employers are not obligated to offer the deferral to their employees. This is so even if an employee requests it.

What Happens When the Deferral Period Ends?

The employee Social Security tax deferral ends on December 31, 2020. IRS guidance provides that the deferred taxes must then be paid “ratably” from wages paid from January 1, 2021, through April 30, 2021. Employers must withhold and pay the deferred taxes from employee wages paid during this period. 

Thus, from January 1, 2021, through April 30, 2021, most employees will have to pay a 12.4 percent Social Security tax instead of the normal 6.2 percent. This amounts to a 6.2 percent pay cut for affected employees for four months.

What If Employees Quit or Get Fired?

If an employee quits or is fired during the four-month repayment period, there may not be enough wages paid to cover the deferred Social Security taxes. The IRS says that in this event employers can “make arrangements to otherwise collect” the deferred taxes. What form such “arrangements” could take is unclear.

Interest, penalties, and additions to taxes will begin to accrue on any unpaid deferred Social Security taxes starting May 1, 2021. Thus, if you (the employer) fail to remit the deferred monies because employees were not employed during the collection period, you are on the hook.

Due to the uncertainty involved, many employers have reportedly elected not to participate in the employee Social Security tax deferral.

If you have any further questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 24, 2020

Best Choice: De Minimis or 179 Expensing – or Bonus Depreciation?

You may not have considered the choices you have for deducting the assets that you buy for your business. 

To create some perspective, let’s say you have seven employees who now work at least two days a week from home because of COVID-19. To facilitate this working at both the office and the home, you purchased seven laptop computers at a cost of $2,179 each.

You have five choices for deducting the computers:

1. De minimis expensing
2. Bonus depreciation
3. Section 179 expensing
4. Modified accelerated cost recovery system (MACRS) depreciation
5. Straight-line depreciation

You have four things to consider:

1. What is the maximum you can deduct this year, and what if you want to deduct less?
2. How does this affect your Section 199A deduction if you operate as a proprietorship, a partnership, or an S corporation? (C corporations don’t qualify for the Section 199A deduction. If you operate as an LLC, you are one of the four taxable entities (proprietorship, partnership, or C or S corporation.)
3. If you file as a proprietorship on Schedule C of your Form 1040, is there a self-employment tax issue when you sell the computers?
4. How does your choice affect your local, county, and state personal property taxes?

As you can see, there’s much to consider. That’s why you have me. If you are going to buy assets for your business this year and you want my insights, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 20, 2020

Trade-In on a New SUV – Reimbursement by Corporation

When it comes to vehicles, there’s much to think about.

For example, the rules on vehicle trade-ins have totally changed. 

To illustrate, let me tell you about a trade-in Joyce completed last month. She traded in her three-year-old vehicle on a new SUV with a gross vehicle weight rating (GVWR) of 6,075 pounds. 

The dealer granted her a trade-in value of $13,000 and paid off the $16,000 remaining note on the old vehicle.

Under the tax law, after the Tax Cuts and Jobs Act, this is a sale of the old vehicle traded in and a purchase of the new SUV. So, we have two different transactions. In this story, I’m going to deal with only the trade-in. 

Joyce used the vehicle that she traded in 70 percent for business, drove it 41,000 total miles, and used IRS mileage rates to calculate her business vehicle deductions. She paid $50,000 for the vehicle in 2018. Here’s how we calculated her tax-deductible loss:

Calculation. Because we believe it is easier, we use 100 percent for the calculations and then use the 70 percent business percentage to find the final amount—the deductible loss, in this case.

Depreciation. Within the IRS standard mileage rate is a component for depreciation. For example, the 2020 standard mileage rate is 57.5 cents a mile, with 27 cents for depreciation incorporated in that rate.

Trade-in. The dealer allowed $13,000 as the fair market value of the trade. This operates as cash when Joyce makes her purchase of the new SUV. In addition, the dealer paid off the existing note, so the total value of the trade for gain and loss purposes is $29,000 ($13,000 + $16,000).

Deductible loss. The $6,951 loss is an ordinary loss that Joyce reports on IRS Form 4797.

The important part of Joyce’s story is that her trade-in, like all trade-ins of vehicles and other personal property, is a sale. And that means there’s a taxable gain or loss.

If you are thinking of trading in your vehicle or other personal property, make sure to consider the taxable gain or loss. If you would like my help, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 17, 2020