Congress has passed two major pieces of legislation intended to stimulate the economy and provide direct support to businesses, their employees, and others hurt by the economic effects of the fight against the coronavirus and COVID-19. Many benefits take the form of refundable payroll tax credits for employers. The IRS is waiving certain penalties related to payroll taxes, and allowing employers to request advance payment of refunds under these new laws.

Payroll Tax Credits

Paid Sick Leave and Family Leave

The Families First Coronavirus Response Act (FFCRA) creates temporary systems for paid sick leave, paid family leave, and expanded unpaid family leave. Employers with fewer than five hundred employees are subject to these provisions, although employers with fewer than fifty employees may request a waiver.

The amount of leave and rate of pay depends on the purpose of the leave. Paid leave for one’s own diagnosis or quarantine is capped at $511 per day. Paid leave to care for a sick or quarantined family member or a child out of school is capped at $200 per day.

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If you are employed, your boss probably pays many of your taxes for you. Your pay stubs will show withholding for federal income tax, Medicare, and FICA. At the end of the year, you will receive a W-2 showing your total earnings from your job and the total amount of taxes withheld. Self-employed people must also pay these taxes, and they have to handle all of the details themselves. To understand whether you have to pay the self-employment tax, you need to determine whether you are “self-employed” for federal tax purposes, and whether you make enough from self-employment to need to pay the tax. Our Los Angeles tax advisors can help you assess these factors.

What Is the Self-Employment Tax?

It might be easiest to define the self-employment tax by comparing it to the taxes paid by employed persons. A typical employee has two types of tax withheld from their paychecks. The first is their individual federal income tax withholding. The amount that their employer withholds from each paycheck is based on the information they provided on Form W-4.

The other type of tax, commonly known as “payroll tax,” goes towards Social Security and Medicare. The Social Security portion is often known as the FICA tax, after the Federal Insurance Contributions Act. The employer withholds the following percentages of the employee’s gross wages:
– 6.2% for Social Security; and
– 1.45% for Medicare
The employer must match these amounts. While the employee pays 7.65 percent of their paycheck, the total amount received by the government equals 15.3 percent.

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Congress passed the largest economic stimulus bill in the nation’s history in March 2020 to address problems caused by the global coronavirus pandemic. Its provisions include a waiver of the rule requiring employees to take a minimum distribution from certain types of retirement accounts by a date after they attain a particular age or when they retire, whichever is later. In 2019, Congress amended the Internal Revenue Code (IRC) to change the age after which a person must take a required minimum distribution (RMD) from 70½ to 72. People who turned 70½ in 2019 were not covered by the new law, however, which created some confusion. The coronavirus stimulus bill alleviates this confusion by waiving all RMDs during 2020.

Required Minimum Distributions Before 2020

Section 401(a)(9) of the IRC requires employees with individual retirement accounts (IRAs) and certain other types of retirement accounts to take an RMD by a “required beginning date,” defined as April 1 of the year following whichever occurs later:
– The person “attains age 70½”; or
– The person retires.

The use of a “half birthday” caused some confusion for people, since anyone born more than halfway through a calendar year would not turn 70½ until the following calendar year. For example, a person who turned 70 in June 2010 would turn 70½ in December 2010. Their RMD date would be April 1, 2011. A person who turned 70 in July 2010, however, would turn 70½ in January 2011. Their RMD date would be the following year, on April 1, 2012.

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The IRS recently began sending stimulus payments authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These payments, which are technically tax rebates, can be up to $1,200 for individuals or $2,400 for married couples, with some exceptions. To assist individuals and families who have not received their payment yet, the IRS launched an online tool that allows people to check on their status. It is reportedly similar to the tool used to track tax refunds. The IRS has also issued a warning about possible financial scams targeting these payments.

Coronavirus Stimulus Payments

Section 2201 of the CARES Act establishes “2020 recovery rebates for individuals.” These are more commonly known as stimulus payments. The IRS sometimes refers to them as Economic Impact Payments. The “payments” are a credit against future federal income taxes, but since the CARES Act makes them refundable, the IRS is sending payments to individuals and families.

The maximum amount of $1,200 is available to any individual whose 2018 or 2019 federal income tax return shows adjusted gross income (AGI) of $75,000 or less. For married couples who filed a joint return, the maximum payment of $2,400 is available to anyone with AGI of no more than $150,000. Additionally, households with minor dependent children receive $500 per child.

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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is a massive stimulus package that became law on March 27, 2020. In total, the bill provides roughly $2 trillion, making it the largest economic stimulus bill in U.S. history. One noteworthy provision for small businesses involves a refundable employment tax credit for employers, known as the Employee Retention Credit (ERC). This credit is available to qualifying businesses that are experiencing a severe downturn in business, or that must suspend operations entirely under state and local public health orders.

Employee Retention Credit

Section 2301 of the CARES Act establishes the ERC. This tax credit is available for wages paid between March 12, 2020 and January 1, 2021.

Amount of Wages

Employers may take the credit against the Social Security portion of payroll taxes in an amount equal to fifty percent of wages, up to a maximum of $10,000 per employee. The maximum tax credit is therefore $5,000 per employee. If an employer ordinarily pays an employee $1,500 per week, the available tax credit for that week is $750.

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As local and state governments continue to implement protective measures against the global coronavirus pandemic, businesses have had to adapt quickly. Many businesses have had to close indefinitely because of “shelter in place” orders that urge people to remain home except for essential functions. The IRS has extended the deadline for paying income taxes and filing returns. Other federal agencies have taken similar actions. A de facto ban on social gatherings in many parts of the country has almost certainly had an impact on businesses that sell alcohol, along with other businesses regulated by the Alcohol and Tobacco Tax and Trade Bureau (TTB). In late March 2020, this agency announced postponement of multiple filing and tax deadlines.

The Alcohol and Tobacco Tax and Trade Bureau

Like the IRS, the TTB is part of the U.S. Department of the Treasury. It was created when the Homeland Security Act of 2002 moved the law enforcement functions of the Bureau of Alcohol, Tobacco and Firearms (ATF) to the Department of Justice. The Treasury Department retained ATF’s regulatory and tax collection roles and transferred them to the newly created TTB. It has authority over the federal taxation of alcohol, tobacco, and firearms.

National Emergency

The Internal Revenue Code (IRC) gives the Secretary of the Treasury the authority to postpone payment and filing deadlines in the event of a “federally declared disaster.” The president made an emergency declaration on March 13, 2020.

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The world has had to learn a new vocabulary in recent weeks. In an effort to slow the spread of the coronavirus and the disease it causes, COVID-19, public health officials across the globe have urged people to practice “social distancing.” Non-essential businesses are closed, and thousands if not millions of people have quickly learned how to work remotely. In the midst of all of this, the federal government has offered some relief by delaying Tax Day for three months. Instead of income tax returns and payments being due on April 15, they will now be due on July 15.

Why April 15?

April 15 has been the due date for federal income taxes for a little less than seventy years. Income taxes themselves have only been an inevitable part of life nationwide for a bit more than a century.

The Sixteenth Amendment to the U.S. Constitution first authorized the federal government to levy an income tax in 1913. Eight years earlier, the Supreme Court had ruled that an income tax contained in a tariff bill was unconstitutional. Amending the Constitution overruled the court.
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Our tax advocates know that investing in an individual retirement account (IRA) can be an excellent way to set money aside for retirement and save on federal income taxes. An important caveat for traditional IRAs is the required minimum distribution (RMD). As the name implies, you must withdraw a minimum amount by a certain date, based on your age. A bill signed into law last year, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, raises the age for the RMD, and removes an obligation for banks to notify their IRA customers of an upcoming RMD date.. The new law took effect almost immediately, which might catch some banks by surprise. The IRS has therefore issued a notice giving latitude to banks that issue incorrect notices in 2020, provided they also issue a correction to those customers.

What Is a Required Minimum Distribution?

With a “traditional” IRA, you can contribute money before taxes up to a certain amount each year, but you must withdraw a minimum amount by a specified date. Prior to the SECURE Act, the Internal Revenue Code (IRC) required an RMD by April 1 of the calendar year following whichever occurs later:  the account owner reaches the age of 70½; or the account owner retires. This can be confusing for many people:

– If a person turned 70 years old on February 1, 2017, they would turn 70½ on August 1, 2017, and their RMD date would be April 1, 2018.
– If, however, they turned 70 on August 1, 2017, then they would turn 70½ on February 1, 2018, and their RMD date would be April 1, 2019.

This might be why the law required banks to notify customers with traditional IRAs of an upcoming RMD. Banks use IRS Form 5498 to show IRA contributions during the year. Box 11 shows whether an IRA owner must make an RMD. Boxes 12a and 12b show the RMD date and amount, respectively. Banks must send these forms out by January 31 of each year.

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In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, with the intention of facilitating the creation and use of retirement accounts, including individual retirement accounts (IRAs) and 401(k) plans. Whether intentional or not, the bill has eliminated a popular tool used in estate planning known as the “stretch IRA,” which allowed people to convey an IRA to their heirs while minimizing tax liability. Some options may still be available, though, and our Los Angeles tax advisors can explain them.

What Was a Stretch IRA?

A stretch IRA was a way of passing both the value of a retirement account and its tax deferrals from generation to generation. The term does not describe a type of account, but rather a strategy used to maximize the returns on a retirement account passed down through a will with a minimal tax bill. It was most commonly used with traditional IRAs, which defer income taxes on contributions until the money is distributed to the owner or other beneficiary.

Under new rules found in the SECURE Act, owners of traditional IRAs must begin taking required minimum distributions (RMDs) by a certain date. The amount of the RMD is based on the account owner’s life expectancy, using IRS tables. The remaining balance of the account is divided by the number of years left in the owner’s life expectancy.

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