Tag: Advisory

This article provides an overview of estimated tax payments that must be paid when income is earned from sources that do not withhold taxes. It also outlines the IRS safe harbor estimated tax payments that can be made to avoid penalties and interest related to the underpayment of estimated taxes.

When to Make Estimated Tax Payments

The IRS requires taxpayers to pay their taxes as they earn income. If a taxpayer earns income or a salary from an employer, income taxes are withheld from their paycheck. In addition to income taxes, the employer also withholds Social Security and Medicare taxes. It should also be noted that state and local income taxes will be withheld if the employee is based in a state that imposes an income tax.

Taxpayers that expect to owe more than $1,000 in additional income tax from sources that did not withhold taxes must make estimated tax payments.

Examples of income that are generally not subject to withholding taxes include self-employment earnings, interest, dividends, capital gains, rents, unemployment compensation, and gig economy earnings. As a result, taxpayers with these types of income must carefully consider making estimated income tax payments if these earnings will result in $1,000 or more of income. If a taxpayer has self-employment earnings, they must also pay Social Security and Medicare with the estimated income tax payment.

Due Dates for Estimated Taxes

Estimated taxes are paid quarterly, these are the due dates:

First Quarter – April 15

Second Quarter – June 15

Third Quarter – September 15

Fourth Quarter – January 15

Safe Harbor Payments

The IRS provides safe harbor methods for calculating estimated tax payments. If a taxpayer follows these guidelines, they will not be subject to penalties and interest if they owe additional tax when they file their tax return.

If a taxpayer’s adjusted gross income was less than $150,000 during the prior tax year (2020) then a taxpayer can make quarterly estimated payments that total the smaller of 100% of their tax liability from last year or 90% of what they expect to owe this year in 2021. If a taxpayer’s adjusted gross income was over $150,000 last year, then they have to pay 110% of the tax they owed last year.

The $150,000 threshold applies to married couples filing jointly and to single filers (the threshold is $75,000 for taxpayers that are married and file separate returns).

Taxpayers can subtract any Federal taxes that are withheld from other sources such as salaries or retirement benefits from estimated tax payments. Additionally, if a taxpayer had an overpayment last year that amount can be applied to the current tax. Remember, the goal is to have total payments to the IRS that equal either 100% of the tax owed last year or 90% of the tax liability for the current tax year.

Estimated Self-Employment Taxes

Taxpayers that earn income from self-employment, such as, from a business, consulting, or freelance work, may be subject to self-employment tax. Self-employment tax consists of two parts – the Social Security and Medicare taxes. These taxes are imposed upon 92.35% of self-employment income.

When an individual works for an employer, the Social Security and Medicare taxes are withheld from their paychecks. In addition to this, the employer matches the amount of tax paid by the individual employee to both programs.

For the 2021 tax year, the Social Security tax is assessed at a rate of 14.4% and the Medicare tax rate is 2.9%.

The Social Security tax is only assessed on the first $142,800 of earned income. Unlike Social Security tax, there is no income cap for the Medicare tax. The 2.9% rate applies to all earned income. In addition, high-income individuals pay an additional Medicare tax, at a rate of 0.9% for any income above $200,000 (single filers) or $250,000 (married filing jointly).

The self-employment tax rate structure for 2021 is:

15.3% on the first $142,800 in net self-employment income

2.9% on any net self-employment income above $142,800.

How to Pay Individual Estimated Taxes

Estimated income tax and self-employment tax for Social Security and Medicare taxes are all paid with form 1040-ES on a quarterly basis as noted above.

How RVG and Company Can Help

If you need advice or assistance to determine whether, and/or how much estimated tax should be paid, please contact RVG & Company today.

This article provides an overview of the estimated tax payments which must be paid by a corporation. It also outlines the IRS safe harbor estimates and alternative methods that a corporation may use to minimize and accurately reflect its estimated tax payments. It is important to timely pay the correct amount of estimated tax in order to avoid penalties and interest related to underpayment.

General Rule

Estimated tax payments for corporations are normally made in four installments on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. For calendar-year corporations, those dates are April 15, June 15, September 15, and December 15.

Each required installment is 25% of the “required annual payment” The term “required annual payment” means the lesser of:

100% of the tax on the return for the tax year, or

100% of the tax shown on the return of the corporation for the preceding tax year.

It should be noted that large corporations cannot use 100% of the preceding year’s tax to compute estimated tax payments. A large corporation is any corporation having taxable income of $1 million or more during any of the three immediately preceding tax years.

Alternative Methods to Determine Estimated Taxes – Exceptions to the General Rule

A corporation may also compute its required quarterly installments using one of two alternative methods: (1) the annualized income method or (2) the adjusted seasonal income method. Normally, a corporation will benefit from one of these methods if it earns most of its taxable income during part of the tax year. If the required quarterly installment determined under one of these methods is less than 25% of the required annual payment under the general rule noted above, the corporation can pay the lesser amount for that quarter.

How to Pay Corporate Estimated Taxes

Corporations can use form 1120-W to calculate their estimated tax payment, however, all payments must be made electronically to the IRS.

State and Local Taxes

Lastly, it should be noted that state and local jurisdictions that impose income taxes generally require the payment of estimated taxes. Many states follow the guidelines issued by the IRS. Each state must be separately researched to conform to that state’s rule.

How RVG and Company Can Help

If you need advice or assistance to determine whether, and/or how much-estimated tax should be paid, please contact RVG & Company today.

The Social Security Administration recently announced that COLA (Cost-of-Living Adjustment) will increase by 5.9% in January 2022. This is the largest increase since July 1982. But what is COLA?

Social Security Benefits
Receive 5.9% Cost of Living Adjustment

COLA is an adjustment to the Social Security and Supplemental Security Income (SSI) benefits that are being paid out to approximately 70 million Americans. We will take a closer look at COLA and its significance, and what effect does the change in COLA have on you as a taxpayer.

In 1972 the law was changed to provide for automatic annual cost-of-living allowances based on the annual increase in consumer prices. Beneficiaries of the SSI had to wait on the action from Congress to receive a benefit increase before the 1972 legislation. This change simplifies the adjustment and does not allow the effect of inflation to take hold on the benefit payments.

The automatic annual cost-of-living allowance is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If there is no increase in the CPI-W, there can be no COLA increases.

The significance of COLA is that it ensures that the purchasing power of the SSI benefits is not being reduced by inflation. While a 5.9% benefit increase looks good on paper, it is important to note that it is not additional income. It is the minimum amount needed to maintain the purchasing power the beneficiaries had all along.

The beneficiaries also have to account for Medicare Part B premiums and taxes that reduce the value of the COLA increase for many. The Medicare Part B premiums increase on a yearly basis that seniors pay for physician and outpatient services. The premium paid depends largely on the beneficiary’s income. The adjustment for inflation is consequently being eroded by the increase in Medicare premiums and cannot keep up fast enough with the inflation. If you are on Medicare, you will not get your 2022 Social Security benefit amount until the official Medicare premiums are announced. You can check in December if you have an online social security account.

The social security tax funds the social security program in the United States. Working taxpayers are funding the benefits of the existing beneficiaries. Ideally, those working taxpayers will eventually retire and qualify for SSI benefits that are funded by current workers.
The tax has two parts. The first is the payroll tax (FICA) and the self-employment tax (SECA). The Medicare tax makes up the second part. Payroll taxes are based on an employee’s net wages, salaries and tips that are typically withheld by an employer and forwarded to the government. In 2022, the social security tax is 6.2% for the employer and 6.2% for the employee.

Self-employed taxpayers pay Social Security taxes as part of the quarterly estimated taxes to the Internal Revenue Service (IRS). These taxpayers pay the full 12.4% since they are considered both the employee and employer. Fortunately, the IRS allows self-employed individuals to deduct the employer portion of self-employment taxes from their taxable income.

The social security tax rate rarely changes – employees have been paying 6.2% since 1990. However, unlike the tax rate, the Social Security tax limit is adjusted annually due to COLA to keep Social Security benefits on track with current inflation. The maximum amount of earnings subject to Social Security Tax will rise 2.9% from $142,800 in 2021 to $147,000 in 2022. Any income earned beyond the wage cap is not subject to a 6.2% social security payroll tax. However, there is no wage base limit for Medicare tax. The cost of adjusting COLA falls mainly on about 12 million high-earning workers.

If you have any questions regarding the Social Security benefits or taxes related to it, please contact RVG & Company to discuss this issue at 954.233.1767.

Taxpayers who elected to itemize their deductions may have reduced their federal income tax liability by claiming a full deduction, also known as the “SALT deduction,” for certain State and Local Taxes (SALT) paid before the Tax Cuts and Jobs Act (“TCJA”) was enacted in 2017. The taxes paid to a state were subsidized by the federal government and reduced the taxpayers’ cost of living in a state.

Under the TCJA, the previously unlimited SALT deduction was limited to $10,000, this is also known as the “SALT Cap”. The TCJA SALT Cap applies for tax years 2018 through 2025. The reason for this is that it was considered to be unfair to the federal government to subsidize bad fiscal policy in high-tax states, such as New York and California.

We will explore the impact the SALT cap has had on taxpayers and the states, the workarounds the states have made to lighten the load on taxpayers, and explore possible future changes to the SALT deduction.

The changes enacted in the TCJA have considerably affected the SALT deduction in the last several years. The SALT deduction reduced the cost of state and local government taxes to taxpayers because a slice of the taxes deducted is paid for by the federal government. The SALT cap increases the cost to the taxpayer and state and local taxes by decreasing the deduction’s value.

State and local tax payments and liabilities tend to increase with a taxpayer’s income. In addition, sales and property tax payments increase as a result of higher income and increased consumption. Thus, the SALT cap mostly affects taxpayers with higher income as this group would report more state and local taxes.

The $10,000 cap on the SALT deduction has produced a migration from high tax states to low/zero-tax states. Florida and Texas, two states with zero income taxes, gained the largest number of tax-filers from 2016-2017, amounting to 56,000 and 35,000 tax-filers, respectively. New York, one of the highest income tax states in the US, lost the largest number of taxpayers between tax years 2016 and 2017, amounting to 77,000 tax-filers. The loss of high-income taxpayers causes deficiencies in state budgets and incentivizes state governments to develop state tax legislation to retain their residents.

The SALT cap does not limit the deductibility of state taxes imposed on business entities. As a result, several states have proposed or passed legislation on Pass-through Entities (“PTEs”) designed to allow the PTEs to deduct state income taxes that the individual owners would have otherwise been unable to deduct under the SALT cap. This in known as a SALT Cap Workaround. The work-around legislation varies from state to state, but they share a similar goal of reducing the SALT cap’s effect on taxpayers without reducing their state or local tax obligations. As of October 27th, 2021, 19 states have enacted a form of a SALT Cap workaround to provide relief to state and local taxpayers within their states.

On November 9th, 2020, The IRS released Notice 2020-75 that effectively permits PTEs to fully deduct entity-level state and local income taxes that would otherwise have been paid by the owners of a PTE. This adds a layer of reassurance to states and individuals on working around the SALT cap.

Under recently proposed tax legislation, the House, currently held by the Democrats, has proposed to raise the annual SALT deduction cap to $72,500 from $10,000 through 2031. It was also proposed that the higher deduction cap would apply retroactively beginning in 2021. The proposed bill will eventually move to the Senate where the SALT deduction cap may be adjusted or removed as the proposal has received criticism from top Senate Democrats.

Despite the TCJA reducing the SALT cap deduction to $10,000 on federal income taxes, numerous states have found a workaround to the SALT cap deduction to maintain their budgets and retain high-income taxpayers within their states. Additionally, the proposed tax bill by the House provides that the SALT cap ceiling may be higher in the future.

If you have any questions regarding the SALT Cap Deductions or taxes related to it, please contact RVG & Company, today! (954) 233-1767.

IRS Form 1099 reports a taxpayer’s income that does not come from wages, salaries, or tips from a main employer. It is an informational return and does not need to be attached to an individual’s tax return. However, it is recommended to keep a copy of the form for a taxpayer’s personal records. There are two dozen versions of Form 1099, and each lists a different type of income. Form 1099 is used to determine how much income a taxpayer received during the tax year and what kind of income it was. A taxpayer will have to report that income in various places within the tax return, depending on the type of income that is reported.

To be eligible to receive Form 1099, a taxpayer’s income needs to be above a certain amount depending on the type of Form 1099. For the 1099-INT, 1099-DIV, and 1099-R, a taxpayer should receive a form if there was at least $10 or more of income to report. Whereas for Form 1099-MISC, a taxpayer should receive a form if there was at least $600 or more of income to report. Again, it all depends on the type of Form 1099. A taxpayer will not receive a Form 1099 if the income is below the threshold, however, the income should still be included in the tax return.

It should be noted that receiving a 1099 form does not necessarily mean that taxes are owed on that income. A taxpayer may have deductions that offset the income or some or all of it might not be subject to tax based on characteristics of the asset that generated it.

Companies and institutions are required to send most 1099 forms by January 31st following the tax year. Income earned, for example, in 2021 would be reported in a Form 1099 that a taxpayer should receive by January 31st, 2022, from the payor. If a taxpayer has opted to receive forms digitally, the digital version should be shown on your account on January 31st, or first thing on February 1st.

If a taxpayer receives physical copies of their tax forms, the taxpayer’s forms need to be postmarked in the mail by January 31st. If that date falls on a weekend or holiday, it should be available on the next business day. There are, however, a few exceptions: Form 1099-B, 1099-S, and some 1099-MISC forms must be postmarked by February 16, 2021.

The payor may send a consolidated Form 1099 if sending multiple versions of Form 1099, to a taxpayer that has distinct categories of income with the payor. A Consolidated Form 1099 is common for people who have investment income, capital gains, and brokerage accounts containing investments in either mutual funds or Real Estate Investment Trusts (REITs). A taxpayer should receive a consolidated Form 1099 Form by February 16th following the tax year.

If a taxpayer does not receive their Form 1099, the payor responsible for sending the form must be contacted. If a taxpayer needs to file a previous year’s tax return and is missing their old Form 1099, a free copy can be provided by the IRS by requesting a wage and income transcript. It should be noted that the IRS receives copies of Form 1099 that are sent to taxpayers. As a result, the IRS will cross-reference the Forms provided by payors to the income reported on individual tax returns. A taxpayer’s failure to accurately report Form 1099 income can be easily detected and adjusted by the IRS.

If a taxpayer does not receive their 1099 forms in time to file their tax return, a request for a penalty-free six-month tax extension is available by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. To receive the extension, the taxpayer must estimate their tax liability on this form and should also pay any amount due.

If you have any questions regarding 1099 Requirements or other obligations, please contact RVG & Company, today! (954) 233-1767.