A new year means a whole new set of tax laws to follow. Thankfully, many of these tax changes for 2020 can put more money in your pocket. The following article shares the most important tax changes for 2020 so you can make the best choices over the course of the year.
This list details the tax changes in 2020 that are important to the government agencies. Specifically, we’ve listed out items that the government successfully attacks during an audit. If you have questions or would like to schedule an appointment, please give us a call at (360) 778-2901. We would be happy to discuss the tax changes for 2020 in relation to your current tax situation.
The most important tax changes for 2020 that could affect your taxes
Minimum wage in WA state
Washington State minimum wage rose to $13.50 per hour for 2020. Employees working more than 40 hours per week (with either wages, salaries or commissions) must be paid overtime at 1½ times their regular rate. There are slightly different rules for the federal and state governments. Washington employers must follow the rule (state or federal) that is more favorable to the employee. Learn more online at Federal overtime information or State of Washington overtime pay information.
Employee Fringe Benefits:
Auto use
Employees and 1% or more owners or corporate officers of a corporation should be taxed on the value of their company owned/leased auto use for personal or commuting purposes. Withholding should be taken from wages on a regular basis. We recommend using an auto mileage log for business vehicles. Detailed logs kept for over the course of the year may be sufficient to support business use percentages.
Medical insurance
Medical insurance for employees must be provided through a group medical insurance plan. (To be eligible for the premium tax credit, health plans must be purchased through the SHOP marketplace). The SHOP marketplace is available in Whatcom County. Arrangements that were acceptable before the passage of the Affordable Care Act are no longer valid. Many employers have now given employees raises with the hope that employees will use the extra money to purchase their own individual health insurance policies. We don’t recommend that the employer pay amounts for individual health insurance premiums, even if the amount of those payments is deducted from net wages. Nor do we recommend that an employer require supporting proof that employees have proof of any medical insurance coverage.
In the case of an S corporation with only owner-employees, nothing has changed. Premiums paid or reimbursed are shown as wages subject to income tax withholding — but not fica and medicare tax — and deducted as an adjustment in income on Form 1040.
If there are other employees, the corporation must offer a group plan or violate the non-discrimination requirements. With the absence of employee coverage, any premiums paid would either be part of shareholder distributions, or deducted from net wages, but in either treatment the premiums would not be deductible as an adjustment to income on page one of Form 1040.
Other Fringe Benefits
Examples include discounts, gifts, cash bonuses, tickets to entertainment events, use of entertainment, recreation or amusement property (e.g. photographic, DVDs etc, personal use of computers).
The employer should report to the employee the value of such benefits received and include the benefit in gross wages subject to tax withholding.
Non-discrimination
Generally, fringe benefits must not favor owners or the highly compensated, over other employees who work more than part-time. While the laws have changed recently in this area, the trend is towards equality of benefits.
Information Returns
If you pay $600 or more a year of business interest or $600 or more to any person, partnership, or limited liability company (LLC) for services or rent you must file a Form 1099. This does not include corporations – see “Note” below. For your protection, we highly recommend that you have a W-9 form filled out before making payment. At the minimum, get a social security number (or taxpayer identification number, usually a 91-XXXXXXX number) and address from each recipient before making payment. There is a $100 penalty for each failure to provide the taxpayer ID number. You may be liable for 28% backup withholding on payments made in certain circumstances.
Many software programs, such as Quickbooks, can generate most 1099 forms. If you need help setting up the 1099 features in Quickbooks, please call our office for assistance.
Notes to Remember
The exemption for 1099 filings applying to corporations does not apply to corporations providing legal services.
There is no $600 threshold for Fishing 1099s. Report all fishing payments.
Filing deadlines and Penalties for forms 1099 and W2:
January 31st – Penalties:
- Late by 30 days or fewer = $50.00 penalty for each late form;
- 31 days or greater $110.00 penalty for each late form.
- For filing after August 1st. $270.00 each.
- Intentional neglect to file $550.
We don’t know how aggressive the Internal Revenue Service will be in enforcing these penalties in 2020. To avoid any penalties, you will need to have 1099-Misc forms and W-2s mailed to recipients and filed with the IRS by January 31st, 2020.
Casual Labor/Independent Contractors
There are rules about how much you, as an employer, must pay if people you are treating as independent contractors turn out to be considered employees. (For example, “Direct sellers,” usually individuals selling from their homes, and real estate salespeople are independent contractors). If one of your independent contractors is legally considered an employee, then you will have to pay back amounts for federal withholding and social security taxes.
Non-employee labor is not very common. However, a reasonable example could include hiring someone for irregular work for a low wage. Specifically, amounts spent are less than $100 a year for social security tax purposes, or less than $50 a quarter in income tax withholding.
Casual Labor/Independent Contractors Legal Paperwork
Additionally, the government agencies require the person have a business license, file statements of income/expenses with the IRS and have more than one source of income to be considered a legitimate subcontractor.
NOTE: The Department of Labor and Industries requires businesses in the construction industry to cover subcontractors as employees for industrial insurance purposes unless the subcontractor provides a certificate of coverage.
S Corporation Wages For Shareholders
This area is coming under more IRS scrutiny in recent years. Subchapter S corporations should be careful to pay officer/shareholders reasonable compensation in the form of wages subject to Social Security, Medicare and withholding taxes. Ideally these W-2s should include personal auto use of corporate vehicles. Medical insurance for which the corporation has either paid the premiums or reimbursed the shareholder should be included in Box 1 wages (not subject to fica and medicare tax).
Self-Employed Persons
Self-employed persons who have low or no net profit may wish to use the optional method of computing Social Security tax to keep or establish eligibility for Social Security Disability payments. For eligiblility, a person needs credits (generally one’s age, less 22), twenty of which were earned in the ten years before disability. One credit is equivalent to $1410 of earnings and no more than four credits can be earned in any one year.
Employee Records
As soon as they are hired, employees must complete W-4 forms and I-9 forms. These employment forms are available on our Tax Resources page. The Department of Social and Health Services must also be notified when you hire a new employee. The DSHS collects this information to help locate and collect child support payments from non-custodial parents. Fax the completed W-4s to DSHS at 1-800-782-0624. Each employee claiming “exempt status” must provide a new W-4 every year. If not, those employers should withhold using single with zero exemptions.
You should also retain employee time cards and/or work schedules. Records should indicate each employee’s actual beginning and ending hours of work by day. If the employee does different kinds of work, time cards should note the jobs performed (this information is for the Department of Labor and Industries). Retain records of employees’ first and last days of employment.
Records For The WA State Department Of Revenue (DOR)
When the DOR audits, you’ll need to have the following handy:
Reseller Permits
Washington State Resale Certificates have been replaced with Reseller Permits. These Reselling permits are issued by the Washington State DOR. You can find Application Information here. These permits must be renewed every four years.
Equipment
Keep a file of all receipts for the equipment and items on your depreciation schedules. The DOR will want you to prove that you paid the sales tax on all these items.
Use Tax (aka Sales Tax)
The DOR will want to review your records to see that you have been paying use (sales) tax on non-resale items purchased out-of-state. Also on items that you’ve used yourself. Magazine subscriptions are a perfect example. Ideally, you should review credit card statements/check books and list the items to be included in the December Sales/Business & Occupation Tax Report. Recently the DOR has been auditing for sales tax due as more businesses have been purchasing supplies online and not paying Washington State sales taxes on the purchases.
Out-of-State Sales
Some out-of-state sales may be exempt from business and occupation and/or sales tax. The rules can be technical; please call us at (360) 778-2901 for more information if you do business out-of-state.
Prices Including Sales Tax
Price lists, menus, etc., must clearly state if prices include sales tax. Furthermore, bars and restaurants must have an additional sign posted to the same effect.
The DOR has been increasing audits regarding unclaimed property held by Washington State businesses. Examples of unclaimed property are uncashed checks, customer credit balances, and outstanding gift certificates. Unclaimed property held over three years (reporting years end on June 30th) must be reported to the State annually by November 1st. Beginning in 2016, all reports are to be filed electronically. To learn more, read through the guide for reporting unclaimed property.
Travel And Entertainment Records
Auto Travel: Maintain a daily log of miles driven, destination, purpose of trip and name of customer.
Lodging Expense: You must have receipts. Cancelled checks will not count.
Meals: You must have a diary of cost, and receipts for meals over $75. For entertainment expenses, your records must provide the name, title, business, and your business relationship to the person entertained. Business meals and entertainment deductions are 50% of the cost. Meals must be:
- directly related to the conduct of business;
- have a clear business purpose;
- not be lavish or extravagant; and
- be provided in the presence of the taxpayers or an employee.
Credit For Small Employer Health Insurance Premiums
Credit Worksheet:
Note: the credit is available for group policies purchased through the SHOP marketplace.
De Minimis Capitalization Policy
The IRS default for expenditures to be depreciated instead of deducted as an expense is $200. When we prepare your taxes, we will assume that you adopted the written policy in 2015, 2016 or 2017, using a $500 threshold. You must adopt the written policy before the commencement of any year. Copy and paste the sample de minimis capitalization policy onto your company letterhead, adding the appropriate year. Then print and keep this policy with your business records.
Form Filing Deadlines
| Form | 2020 Filing Due Date (Tax Year 2019) |
| Form 1065 – Partnerships | March 16 |
| C Corporations | April 15 |
| Form 1065 Extension | September 15 |
| Form 1041 Extension | September 30 |
| Form 5500 series – Employee Benefit Plan Extension | October 15 |
| FinCEN 114 – FBAR (will be allowed to extend) | April 15 |
| Form 990 | May 15 |
Miscellaneous Tax Changes for 2020
There are penalties if you understate your tax liability on returns filed with the IRS. Business taxpayers especially, should be careful labeling personal expenses paid through business accounts.
Personal Property Tax Reports are due to the County Auditor by April 30 annually. You should receive a blank form to list the equipment you own or lease. The following year, a tax is assessed on the depreciated value of these items. We will perform this service if we receive the form and information in a timely manner. There are no extensions for this annual deadline. Note: you may list the values at cost without including sales or use tax.
The Washington Industrial Safety and Health Act (WISHA) requires all employers to adopt a written accident prevention program. Every Washington employer must have a safety and health committee plan. You can find the required workplace posters on the Labor and Industries website. Search under “publications by number” and scroll to publication F101-054-000. Employers are required to post a list of reportable workplace injuries.
When using a credit or debit card, retain the actual charge slips. The IRS does not accept bank or credit card statements as proof expenses incurred. We also encourage our clients to have copies of cleared checks to include with their bank statements.
Washington Paid Family & Medical Leave
Starting January 1, 2019, you should collect Paid Family and Medical Leave premiums from your employees’ paychecks. Benefits to employees will be available starting January 1, 2020. The premium for 2019 is 0.4% of an employee’s gross wages. An employer can choose to pay all or some of their employees’ share of the premium on their behalf. You are not required to pay the employer portion of the premium if you have less than 50 employees. Learn more about paid leave for employers. The employer toolkit also has resources about paid leave.
For more information about the tax changes for 2020 and how they may affect your tax return this year, please contact us at (360) 778-2901, or fill out the contact form below.
The End of the Independent Contractor
