In this Edition
December 14, 2021

Businesses Can Show Appreciation — And Gain Tax Breaks — With Holiday Gifts and Parties

PODCAST: Making Charitable Donations

Infrastructure Law Sunsets Employee Retention Credit Early

Gig Workers: Here Comes an Estimated Tax Deadline

Payroll & Year-End Reporting Webinar

Budgeting for Baby
Businesses Can Show Appreciation — And Gain Tax Breaks — With Holiday Gifts and Parties
At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties again after a year of forgoing them due to the pandemic. It’s a good time to brush up on the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?

Gifts to Customers

If you give gifts to customers and clients, they’re deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value. These costs include engraving, gift wrapping, packaging and shipping. Also excluded from the $25 limit is branded marketing items — such as those imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as the costs are “reasonable.”

Gifts to Employees

In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.

These are items that are small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys, hams, gift baskets, occasional sports or theater tickets (but not season tickets) and other low-cost merchandise.

De minimis fringe benefits aren’t included in an employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.

Throw a Holiday Party

In general, holiday parties are fully deductible (and excludible from recipients’ income). And for calendar years 2021 and 2022, a COVID-19 relief law provides a temporary 100% deduction for expenses of food or beverages “provided by” a restaurant to your workplace. Previously, these expenses were only 50% deductible. Entertainment expenses are still not deductible.

The use of the words “provided by” a restaurant clarifies that the tax break for 2021 and 2022 isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also generally 100% deductible. So you can treat your on-premises staff to some holiday meals this year and get a full deduction.

Show Your Holiday Spirit

Contact us if you have questions about the tax implications of giving holiday gifts or throwing a holiday party.

Matt Cantlon, CPA
D 507.252.6672
PODCAST
Podcast: Making Charitable Donations

For many giving to charity is more important than the deduction, but why not get the benefit if you can. This episode explains the ways to make charitable contributions and get a tax deduction for doing so.
Infrastructure Law Sunsets Employee Retention Credit Early
The Employee Retention Credit (ERC) was a valuable tax credit that helped employers survive the COVID-19 pandemic. A new law has retroactively terminated it before it was scheduled to end. It now only applies through September 30, 2021 (rather than through December 31, 2021) — unless the employer is a “recovery startup business.”

The Infrastructure Investment and Jobs Act, which was signed by President Biden on November 15, doesn’t have many tax provisions but this one is important for some businesses.

If you anticipated receiving the ERC based on payroll taxes after September 30 and retained payroll taxes, consult with us to determine how and when to repay those taxes and address any other compliance issues.

The American Institute of Certified Public Accountants (AICPA) is asking Congress to direct the IRS to waive payroll tax penalties imposed as a result of the ERC sunsetting. Some employers may face penalties because they retained payroll taxes believing they would receive the credit. Affected businesses will need to pay back the payroll taxes they retained for wages paid after September 30, the AICPA explained. Those employers may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees unless the IRS waives the penalties.

The IRS is expected to issue guidance to assist employers in handling any compliance issues.

Credit Basics

The ERC was originally enacted in March of 2020 as part of the CARES Act. The goal was to encourage employers to retain employees during the pandemic. Later, Congress passed other laws to extend and modify the credit and make it apply to wages paid before January 1, 2022.

An eligible employer could claim the refundable credit against its share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.

For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:

  • Began operating after February 15, 2020
  • Had average annual gross receipts of less than $1 million
  • Didn’t meet the eligibility requirement, applicable to other employers, of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.

However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.

Retroactive Termination

The ERC was retroactively terminated by the new law to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Therefore, for wages paid in the fourth quarter of 2021, other employers can’t claim the credit.

In terms of the availability of the ERC for recovery startup businesses in the fourth quarter, the new law also modifies the recovery startup business definition. Now, a recovery startup business is one that began operating after February 15, 2020, and has average annual gross receipts of less than $1 million. Other changes to recovery startup businesses may also apply.

What to do now?

If you have questions about how to proceed now to minimize penalties, contact us. We can explain the options. 

Aaron Boettcher, CPA
D 920.337.4523
Gig Workers: Here Comes an Estimated Tax Deadline
If you’re a gig worker or otherwise self-employed, and you don’t have taxes withheld from a paycheck, you likely have to make quarterly estimated tax payments to the IRS. Be advised that the fourth quarter 2021 estimated tax payment deadline for individuals is coming up on Tuesday, January 18, 2022.

A Pay-As-You-Go System

Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest and dividends. If you fail to make the required payments, you may be subject to an underpayment penalty as well as interest.

Generally, you need to make estimated tax payments for 2021 if you expect to owe at least $1,000 in tax after subtracting tax withholding, deductions and credits, and you expect withholding, deductions and credits to be less than the smaller of 90% of your tax for 2021 or 100% of your 2020 tax. (The applicable amount is 110% if your 2020 adjusted gross income was more than $150,000, or $75,000 for married couples filing separately.)

Sole proprietors, partners and S corporation shareholders generally must make estimated tax payments if they expect to owe $1,000 or more in tax when filing a tax return.

Quarterly Due Dates

If you’re new to estimated tax payments, be prepared to submit them throughout the year. The due dates are typically April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day.

Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher, or by credit or debit card.

Seasonal Businesses

Most individuals make estimated tax payments in the four installments. You simply determine the required annual payment, divide the number by four and make four equal payments by the due dates.

However, you may be able to make smaller payments during some quarters under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.

The Correct Amount

Estimated tax payments are just like paying a traditional tax bill in that you want to fulfill your obligation without overpaying the federal government. Contact our firm with any questions you may have about setting up estimated tax payments or using the annualized income method.

Charlie Wendlandt, CPA
D 715.384.1986
Payroll & Year-End Reporting Webinar
The on-demand webinar addresses compliance issues of year-end payroll processing and reporting and brings you up-to-date on the latest changes that affect the close of 2021 and the beginning of 2022.

Topics covered include:

  • 2021-2022 Changes
  • W-2 Information
  • Pre-tax Benefits
  • Fringe Benefits
  • Employee vs Independent Contractor
  • Affordable Care Act (ACA)
  • Miscellaneous
Budgeting for Baby
With Babies bring joy and excitement. They also bring substantial adjustments to the family budget! In a September 2021 article, news provider U.S. News and World Report found that, after adjusting for inflation, it costs about $267,233 in 2021 dollars to raise a baby to age 18 based on previously published Bureau of Labor Statistics data. That’s a daunting number, to be sure. Fortunately, there are some things you can do to, shall we say, pacify the challenge.

Check Your Insurance

Life and disability insurance are critical. Life insurance provides financial protection if an income-earner in your family dies. Term insurance can be a cost-effective option. It offers protection for a specific period — say, 20 years — at which point many children will be relatively self-sufficient, and the loss of income less harmful. Of course, you’ll also need to ensure that your will names a guardian to look after your children in case of your death while they’re still minors.

Disability insurance provides financial protection if a breadwinner becomes disabled and no longer can earn a living. While some employers offer disability insurance, the policies often don’t provide enough income to cover all expenses. And Social Security disability benefits might not offer the protection you expect. For instance, to obtain the benefits, the breadwinner typically must be unable to work at any job. So, consider purchasing your own policy that will pay if you can’t continue in your current job. The distinction might make a difference.

Review Tax Breaks

Eligible parents can receive a valuable Child Tax Credit. And if you pay a caregiver to watch your baby so you can work, you may be able to claim the dependent care credit. Depending on your income, this can be up to 50% of eligible childcare expenses, up to $8,000 for one child, or $16,000 for two or more. The caregiver typically can’t be a dependent, your spouse or a parent of the child.

Another option is a dependent care Flexible Spending Account (FSA). This is an employer-sponsored program that allows parents to set aside up to $10,500 (for 2021) pretax annually (up to $5,250 if you’re married and file separately) to cover qualified childcare expenses. It’s important to note that you can’t use both the credit and the FSA for the same expenses.

Get Expert Advice

You’ll want to reduce financial worries before your baby’s arrival, as you’ll be pretty tired immediately afterward. We can offer advice to help you evaluate various options and manage your finances. That way, your family will start, and build, on a solid economic foundation.

Start Saving for College Early

The sooner you start saving for your baby’s education, the more you can leverage the value of monthly compounding. If you save $200 per month starting at your baby’s birth and earn a 6% return, you’ll have nearly $78,000 in 18 years!

One of the best options, potentially, is a Section 529 education savings plan. It allows you to save for college expenses, as well as K-12 tuition expenses. Contributions aren’t tax-deductible for federal purposes, but many states offer tax benefits. Withdrawals used for qualified education expenses (limited to $10,000 per year for K-12 tuition) aren’t subject to federal income tax, and typically not subject to state income tax.

Jill Wrensch, EA
D 715.384.1989
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