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The 2021 “Social Security wage base” is increasing

If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).  

For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year.

Employees working more than one job

You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld.

Older employees 

If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).

For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings.

Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations.

© 2020

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Avoiding conflicts of interest with auditors

Hand drawing two blank arrows diagram with copy space with black marker on transparent wipe board isolated on white.

A conflict of interest could impair your auditor’s objectivity and integrity and potentially compromise you company’s financial statements. That’s why it’s important to identify and manage potential conflicts of interest.

What is a conflict of interest?

According to the America Institute of Certified Public Accountants (AICPA), “A conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client or other appropriate parties as impairing the member’s objectivity.” Companies should be on the lookout for potential conflicts when:

  • Hiring an external auditor,
  • Upgrading the level of assurance from a compilation or review to an audit, and
  • Using the auditor for a non-audit purposes, such as investment advisory services and human resource consulting.

Determining whether a conflict of interest exists requires an analysis of facts. Some conflicts may be obvious, while others may require in-depth scrutiny.

For example, if an auditor recommends an accounting software to an audit client and receives a commission from the software provider, a conflict of interest likely exists. Why? While the software may suit the company’s needs, the payment of a commission calls into question the auditor’s motivation in making the recommendation. That’s why the AICPA prohibits an audit firm from accepting commissions from a third party when it involves a company the firm audits.

Now consider a situation in which a company approaches an audit firm to provide assistance in a legal dispute with another company that’s an existing audit client. Here, given the inside knowledge the audit firm possesses of the company it audits, a conflict of interest likely exists. The audit firm can’t serve both parties to the lawsuit and comply with the AICPA’s ethical and professional standards.

How can auditors prevent potential conflicts?

AICPA standards require audit firms to be vigilant about avoiding potential conflicts. If a potential conflict is unearthed, audit firms have the following options:

  • Seek guidance from legal counsel or a professional body on the best path forward,
  • Disclose the conflict and secure consent from all parties to proceed,
  • Segregate responsibilities within the firm to avoid the potential for conflict, and/or
  • Decline or withdraw from the engagement that’s the source of the conflict.

Ask your auditors about the mechanisms the firm has put in place to identify and manage potential conflicts of interest before and during an engagement. For example, partners and staff members are usually required to complete annual compliance-related questionnaires and participate in education programs that cover conflicts of interest. Firms should monitor conflicts regularly, because circumstances may change over time, for example, due to employee turnover or M&A activity.

For more information

Conflicts of interest are one of the gray areas in auditing. But it’s an issue our firm takes seriously and proactively safeguards against. If you suspect that a conflict exists, contact us to discuss the matter and determine the most appropriate way to handle it.

© 2020

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The tax rules for deducting the computer software costs of your business

Do you buy or lease computer software to use in your business? Do you develop computer software for use in your business, or for sale or lease to others? Then you should be aware of the complex rules that apply to determine the tax treatment of the expenses of buying, leasing or developing computer software.

Purchased software

Some software costs are deemed to be costs of “purchased” software, meaning software that’s either:

  • Non-customized software available to the general public under a non-exclusive license or
  • Acquired from a contractor who is at economic risk should the software not perform. 

The entire cost of purchased software can be deducted in the year that it’s placed into service. The cases in which the costs are ineligible for this immediate write-off are the few instances in which 100% bonus depreciation or Section 179 small business expensing isn’t allowed or when a taxpayer has elected out of 100% bonus depreciation and hasn’t made the election to apply Sec. 179 expensing. In those cases, the costs are amortized over the three-year period beginning with the month in which the software is placed in service. Note that the bonus depreciation rate will begin to be phased down for property placed in service after calendar year 2022.

If you buy the software as part of a hardware purchase in which the price of the software isn’t separately stated, you must treat the software cost as part of the hardware cost. Therefore, you must depreciate the software under the same method and over the same period of years that you depreciate the hardware. Additionally, if you buy the software as part of your purchase of all or a substantial part of a business, the software must generally be amortized over 15 years.

Leased software

You must deduct amounts you pay to rent leased software in the tax year they’re paid, if you’re a cash-method taxpayer, or the tax year for which the rentals are accrued, if you’re an accrual-method taxpayer. However, deductions aren’t generally permitted before the years to which the rentals are allocable. Also, if a lease involves total rentals of more than $250,000, special rules may apply.

Software developed by your business

Some software is deemed to be “developed” (designed in-house or by a contractor who isn’t at risk if the software doesn’t perform). For tax years beginning before calendar year 2022, bonus depreciation applies to developed software to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either deduct the development costs in the year paid or incurred or choose one of several alternative amortization periods over which to deduct the costs. For tax years beginning after calendar year 2021, generally the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.

If following any of the above rules requires you to change your treatment of software costs, it will usually be necessary for you to obtain IRS consent to the change.

Contact us

We can assist you in applying the tax rules for treating computer software costs in the way that is most advantageous for you.

© 2020

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Gifts in kind: New reporting requirements for nonprofits

On September 17, the Financial Accounting Standards Board (FASB) issued an accounting rule that will provide more detailed information about noncash contributions charities and other not-for-profit organizations receive known as “gifts in kind.” Here are the details.

Need for change

Gifts in kind can play an important role in ensuring a charity functions effectively. They may include various goods, services and time. Examples of contributed nonfinancial assets include:

  • Fixed assets, such as land, buildings and equipment,
  • The use of fixed assets or utilities,
  • Materials and supplies, such as food, clothing or pharmaceuticals,
  • Intangible assets, and
  • Recognized contributed services.

Increased scrutiny by state charity officials and legislators over how charities use and report gifts in kind prompted the FASB to beef up the disclosure requirements. Specifically, some state legislators have been concerned about the potential for charities to overvalue gifts in kind and use the figures to prop up financial information to appear more efficient than they really are. Other worries include the potential for a nonprofit to hide wasteful use of its resources.

Enhanced transparency

Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, aims to give donors better information without causing nonprofits too much cost to provide the information.

The updated standard will provide more prominent presentation of gifts in kind by requiring nonprofits to show contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets. It also calls for enhanced disclosures about the valuation of those contributions and their use in programs and other activities.

Specifically, nonprofits will be required to split out the amount of contributed nonfinancial assets it receives by category and in footnotes to financial statements. For each category, the nonprofit will be required to disclose the following:

  • Qualitative information about whether contributed nonfinancial assets were either monetized or used during the reporting period and, if used, a description of the programs or other activities in which those assets were used,
  • The nonprofit’s policy (if any) for monetizing rather than using contributed nonfinancial assets,
  • A description of any associated donor restrictions,
  • A description of the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition, and
  • The principal market (or most advantageous market) used to arrive at a fair value measurement if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.

The new rule won’t change the recognition and measurement requirements for those assets, however.

Coming soon

ASU 2020-07 takes effect for annual periods after June 15, 2021, and interim periods within fiscal years after June 15, 2022. Retrospective application is required, and early application is permitted. Contact us for more information.

© 2020

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October 2020 Short Bits

AUDIT DECLINE

The IRS is auditing fewer returns. In 2019, it audited only 0.4% of individual returns. That’s about one out of 250 returns. The bulk of all IRS audits are done by mail and focus on narrow issues. In 2019, taxpayers claiming the earned income tax credit saw increased audit rates. About 1.2% of these filers were audited.

COUNTING COUNTS

Every 10 years, the Census Bureau counts the number of people living in the country and its territories. Why do they do this? It helps determine the amount of federal funding your local community receives for things like firefighting, highway construction and school lunches. It also determines how the seats in the House of Representatives are divided among the states.

MORE WORK

A recent survey by the Pew Research Center suggests that granting women the right to vote helped gender inequality but there is more work to do. Seventy-seven percent believe sexual harassment presents a huge obstacle to women being equal with men. Other obstacles include different societal expectations between genders, not enough women in positions of power and workplace discrimination including lack of equal pay.

DEDUCTIBLES INCREASE

According to a new study from EBRI’s Center for Research on Health Benefits Innovation, health insurance deductibles continue to increase. The study showed that salaried individuals have higher deductibles than hourly individuals. Additionally, the study finds that union members have lower deductibles than those not in unions. HSA-eligible health plans had the highest deductibles, but HMO/EPO plans had the largest increase in deductibles.

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October 2020 Questions and Answers

QUESTION:

I have an older car that I am considering donating. Can I get a tax deduction for the donation?

ANSWER:

It depends. You first must donate the car to a qualifying charity. Donating it to a family member won’t qualify for a deduction. You also must itemize deductions on Schedule A to do it. The deduction is generally the sales proceeds that the charity receives from selling the car. There are exceptions like if the charity keeps the car for its business use or donates it to a needy person. Finally, the deduction can’t exceed 50% of your adjusted gross income. The charity will provide you with a Form 1098-C that will tell you how much they sold the car for. And you must attach Form 8283 to your tax return if claiming a deduction greater than $500.

QUESTION:

I am confused about the so-called kiddie tax. What are the current rules?

ANSWER:

Congress changed this law twice recently so, it’s understandable that you’re confused. For 2020, your child’s unearned income over $2,200 is taxed at your tax rates. And your child may need to file a tax return if unearned income exceeds $1,100. Of course, there are exceptions that allow you to include some of the child’s unearned income on your return.

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Raising Money-Savvy Kids

Teach your kids that money doesn’t grow on trees—it’s earned. Likewise, teach them to earn and save up money for things they want. Don’t be their money tree every time they want to buy something.

WORK AND SAVE

Every kid should have expectations for being a responsible family member. Homework, picking up toys, grooming and maybe something like emptying the dishwasher each day. Beyond that, make a list of age-appropriate chores that they can do to earn money. Mowing the lawn pays $10 while taking out the trash pays $1. Let them decide what they’re willing to do to get that new toy.

INVESTING BASICS

For older kids, teaching them that saving money isn’t enough. Teach that investing is just as important. Explain the basics of the stock market, bonds, bank accounts, charge cards and short versus long term planning. Make sure they understand the concept of time and money and eventually house down payments and retirement savings. When they start working, they will need to understand the concept of income taxes.

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Protect Your Children

Unfortunately, some parents believe that if they died prematurely guardians for their child(ren) would automatically be the Godparents. This may be their wishes, but unless they properly draft legal documents, the court will decide what happens to the children—and your assets.

SET UP A TRUST

While you can name a guardian in your will, you still need to set up financial support for young beneficiaries who cannot receive assets until they are older. That’s why parents often place assets in a trust. You can name the child’s guardian or a trustee to manage the assets and you can specify when and how your child, or guardian, receives money. Trusts are also private, unlike wills that usually have to go through probate and become public record.

A popular choice is a revocable living trust. Benefits of a revocable living trust are that you can change it as often as you like because it remains your personal property until you die.

Planning for a disabled child is a bit more complicated. A good option in this situation is a special needs trust, which can help ensure the care and oversight needed indefinitely.

BENEFICIARIES

Consider life insurance to replace parental income and name the revocable living trust as the beneficiary. Also, make the trust beneficiary of all your retirement accounts. This will ensure that the proceeds flow directly to the living trust and can be used to provide for your child’s care.

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October 2020 Client Profile

Cora and her husband have three children under the age of 15. She has witnessed her parents’ health deteriorating and is stressed knowing she will be responsible for their care. How can she prepare for the inevitable?

Cora should start by investing time now to prepare. She should talk with her parents to get a complete picture of their financial and legal affairs. Do they have wills, long-term care or life insurance policies?

How about medical directives or powers of attorney? If not, Cora should consider getting these now instead of waiting until a health crisis. Having to handle these administrative tasks along with her grief may lead to unintended consequences.

If one parent is a veteran, the local Veteran Affairs office may have options for elder care and assistance.

Is downsizing right for her parents? Selling their empty nester home can yield a significant cash windfall and up to $500,000 of gain is excluded from tax, assuming eligibility tests for ownership and residency are met.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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Reinventing Your Business

The COVID-19 pandemic disrupted everything from education to business as we know it. Here are some considerations as you continue to run your small business during these challenging times.

VIRTUAL VS. IN-PERSON

With stay at home orders, lockdowns and temporary closures, your employees had to work remotely to keep business running relatively smoothly. Now that it’s been several months, determine whether it makes sense to keep employees remote. Recent research* indicates that nearly half of employees feel more productive when working from home. Of course, you’ll want to implement measures to ensure your employees remain productive. One bonus of not being tied to a physical office is that it widens your pool for future job applicants. That means you could attract top talent who live in another city or state.

OFFICE OF THE FUTURE

Even with remote employees, you may find that you still need an office; albeit a less expensive smaller one. For employees with jobs that don’t allow for remote work, de-densifying will be key. Ensure employees are adequately separated or alternate days that they come in. Be sure the office is sanitized regularly. Safety first. And if employees need meeting rooms to visit with clients, when videoconferencing isn’t an option, maybe reconfiguring your office space to include more meeting rooms is necessary.

BEHAVIOR CHANGES

More people are shopping online and staying home. Maybe now’s the time to create your online store to allow customers to order your products. Or offer curbside pickup for local customers. Providing multiple options for customers to buy will increase revenue and help build brand loyalty. Also, now might be the best time to implement a digital marketing strategy. With more people spending time online, enhancing your social media presence or delivering relevant content can pay off.

* https://www.mckinsey.com/business-functions/organization/ our-insights/reimagining-the-office-and-work-life-after-covid-19