2023 Year-End Considerations — Part 2

Business concept of tax payments burden

{8 minutes to read} I hope you are looking forward to the Thanksgiving holidays ahead. Wherever you choose to enjoy your food and festivities — whether alone or with others — don’t leave gratitude off the menu. 

I trust that you found the earlier article informative — that is Part 1 for Individuals. Just in case you missed it, I included this link: 2023 Year-End Considerations — Part 1

Let’s Proceed to Part 2 — While most of this article is geared toward businesses with employees, all could benefit from staying informed. Item # 1 also applies if you pay others for work/business-related services (and you intend to take the deduction from your income).

For Small Businesses and Entrepreneurs

What is in This Article?

  1. Form 1099 Reporting: The IRS is becoming more aggressive with its compliance requirements.
  2. State Tax Reporting: This could be triggered by a “remote workforce.”
  3. Employee Retention Credit (ERC): The IRS is clawing back with added interest & penalties, and possible criminal prosecution.
  4. Employers: Businesses will be required to set up certain retirement plans for qualified employees. 

Form 1099 Reporting Compliance

The IRS has stepped up its compliance requirements on non-employee payments. In general, payments totaling $600 or more to certain non-employees require reporting to the IRS. You may already know that once you issue a payment, it can become an endless task to get the W-9 form completed. Please use W-8 forms for foreign individuals and businesses. Tax withholding may be required.

The best way to tackle the W-9 completion is to collect the completed form upfront during the onboarding process, and before you make a payment. For your reference, here is a link to the W9 Form on the IRS website.

While there are multiple types of 1099 reporting, this article is specific to 1099-MISC, 1099-NEC, and 1099-K. The first two are for types of payments, such as cash or checks. 1099-K, the less-known one, is for card/app payments. These income tax forms are generally issued when you receive non-employee compensation. The income is reported to the Internal Revenue Service (IRS) by the payer. The IRS requires the issuance of a 1099 form to a taxpayer/payee (other than a corporation) who has received at least $600 or more in non-employment income during the tax year. It is the responsibility of the payer to report the 1099-MISC and 1099-NEC to the IRS, however, for the 1099-K, the third-party payment networks (generally card merchants) are required to file the 1099-K to the IRS. Per the IRS,  “Form 1099-K is a report of payments you got during the year from credit, debit or stored value cards such as gift cards, payment apps, or online marketplaces (third-party payment networks).”

State Tax Reporting — Could Be Triggered by “Remote Workforce”

As a result of the recent pandemic, the way and where we work has changed significantly. Some companies allow employees to work remotely (partial/hybrid or fully). While this is great for work-life balance, it could become costly for small businesses. How so? A business could trigger state tax reporting in a state in which it has not transacted business. For example, having an employee working in a state may require a business to register and file a tax return in that state and to withhold payroll taxes for that state. Keep in mind that some states may not have personal tax filing requirements, however, there may be a business tax filing requirement. Ensure that the company that handles your payroll is aware of an employee’s actual work location. What could trigger an audit from a state? One — if an employee or at times independent contractors file for unemployment claims, and Two (not elaborated here) — you receive income from such a state (e-commerce is often a culprit.)

Are You Losing Sleep at Night Wondering if Your ERC Claim was Filed in Good Faith?

If you are experiencing a great deal of doubt about your eligibility and would rather not deal with a possible repayment of the funds, you still have time to withdraw your application. The IRS created a withdrawal process for Employee Retention Credit (ERC) claims that are still in the pipeline to be processed.

On September 14, 2023, as part of its effort to crack down on scams, the IRS announced that it has created a special path “to help those who filed an Employee Retention Credit (ERC) claim and are concerned about its accuracy.”

According to the IRS, “this new withdrawal option allows certain employers that filed an ERC claim but have not received a refund to withdraw their claim and avoid future repayment, interest, and penalties — an ERC claim that’s still being processed can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible.” Employers have until the end of this year to withdraw a claim.  

What if the money was from a willfully fraudulent claim filed? Per the IRS, this is a potential criminal act.

As you may recall, the ERC was designed to assist businesses with paying employees during the COVID-19 pandemic, when their business operations were fully or partially suspended due to a government order, or they had a significant decline in gross receipts during the eligibility periods.

Employers’ Responsibility for Auto-Enrollment of Employees, for Certain Retirement Plans.

With the increased cost of living, social security income may not be enough to take care of basic necessities during your less “able” years when most earning power decreases. So, it makes sense to have some money coming from other resources to fill in the gaps.

Employers (With No Current Plan): This is where the government requires you to help by way of automatic enrollment of your employees into a qualified retirement plan. The set-up cost could take a bite out of your bottom line, so consider planning ahead. Not to worry, there is a tax credit to assist with your start-up costs.

Under the recent Secure 2.0 Act, Employers/Businesses will be required to set up certain retirement plans for qualified employees. In essence, the Act is meant to encourage employees’ savings at different income levels. Putting together a plan could take months, so it’s best to start planning now. Consider consulting with a Professional Employer Organization (PEO) provider — some payroll companies offer this as an additional service. It is encouraged to have this handled by specialized professionals. In an article from Fidelity, “Secure 2.0: Rethinking retirement savings,” you can learn about some of the other changes to retirement savings for all generations from Generation Z to the Silent Generation.

As always, thank you for reading. I hope you find something useful to implement as you plan ahead. Please reach out if you have questions.

Thank you for reading.
With gratitude,

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com

The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.