Year-End Reminders For Chicago Small Business Owners

December 30, 2022 Nancy McClelland Leave a comment

Chicago businesses should take a moment to review upcoming changes before year-end.

The Chicago Department of Business Affairs & Consumer Protection (BACP) was designed to “license businesses and public vehicles, provide business education and access to resources, enforce the Municipal Code, and protect consumers from fraud,” which means that sometimes they have to create and enforce ordinances and regulations that are a bit arduous or challenging for small businesses. But in the public interest, we need to take a moment to review the annual changes and requirements to make sure we have everything in order. (Besides, the penalties for willful ignorance are no fun.)

With that in mind, here are some things you’ll need to make sure to take care of before ringing in the new year.

Illinois Department of Human Rights Sexual Harassment Training
For the record, this one is state-mandated, not just city-wide. The Illinois Workplace Transparency Act requires all employers to comply with the sexual harassment prevention training by December 31, 2020, and thereafter must provide annual training to all employees.
As of July 1, 2020, the Illinois Human Rights Act defines “employers” as those having one or more employees (replacing the prior threshold of 15 or more employees in Illinois for most types of discrimination). This means that every employer in Illinois must comply with this sexual harassment training requirement, for all employees working in Illinois, regardless of their status as part-time, intern, or temporary. There is no requirement to train independent contractors, though it is recommended.

The Illinois Department of Human Rights provides the training for free (registration ends 24-hours before each class), or there are numerous commercial training options (as low as $25). They have an FAQ here, as well as details on minimum training for all employers, versus more comprehensive training for bars and restaurants.
Chicago Minimum Wage
Back in 2014, the city implemented a gradual increase of the minimum wage. It applies to any employee who works at least two hours in any two-week period. As of July 1, 2022 the minimum wage in Chicago is $14.50 per hour for employers with 4 to 20 workers, and $15.40 per hour for employers with 21 or more workers. Tipped workers have a minimum wage of $8.70 for employers with 4 to 20 workers, and $9.24 for employers with 21 or more workers. If a tipped worker’s wages plus tips do not equal at least the full minimum wage, the employer must make up the difference. BACP offers a one-hour-long free webinar on the ordinance.
Chicago Paid Sick Leave
This ordinance went into effect on July 1, 2017, and was so poorly-written that folks are still confused. It applies to any business or individual that employs at least one “employee” and has a facility within Chicago’s city limits (though Cook County followed suit a few months later and has a similar requirement). The term “employee” covers anyone who works at least 80 hours within a 120-day period (20 hours a month).
– For hourly employees, paid sick leave accrues at one-hour for every 40 hours worked. Salaried-exempt employees are presumed to have worked 40 hours/week.
– Employees are capped at accruing a total of 40 hours of sick leave each year, unless the employer opts to set a higher limit.
– Employers must permit employees to carry over half of their accrued leave, to a maximum of 20 hours of unused sick leave each year (40 for employers with 50 or more employees).
– Employers are not required to pay out any accrued but unused sick leave upon employment termination.

What we’ve generally seen — given the stringent requirements and the way hours accrue — is that many employers with existing PTO policies have to get substantive revisions, as they often do not follow the same rules (even though they are often more generous). Failure to comply is costly, so we recommend having an HR professional experienced with the Chicago rules review your policy.

BACP offers a one-hour-long free webinar on the ordinance.
Illinois Secure Choice Retirement Savings Plan
State law now requires every Illinois employer with 16 or more employees to either offer their own retirement program, or to sign up to help staff contribute to personal IRAs via Secure Choice. As of November 1, 2023, this obligation will extend to employers with 5 or more employees.

Aside from the administrative burden, there are no costs to small businesses owners. The program facilitates saving for retirement — but is still limited to the IRS’s annual $6000 cap ($1k higher for those 50 and up), increasing to $6,500 in 2023. (For those interested in a higher limit, I strongly recommend Guideline 401k plans for small businesses, which use low-cost Vanguard Admiral Shares — my own clients have the first five months of plan fees waived.)

Our State Representative, Will Guzzardi, co-presented an excellent informational session recently, and his team graciously invited us to share the link and passcode with anyone interested in learning more:
https://us02web.zoom.us/rec/share/GbU0vqXStnOYNsgxPg-1sUWGWWhWy_G_Wo6dbjjDOUhCdaK8FyNfyv7ySjH3Ggb7.L9WjeYo8OmJ6cQIg
Passcode: Vd*Uqgn2
The session is about 40 minutes long — feel free to skip the 5-min introduction if you’re pressed for time.

(I’ll be providing a breakdown and analysis of the plan and the info-session in an upcoming blog post. Spoiler alert: I’m mostly pretty happy with this legislation! –This doesn’t happen often.– However, most sole proprietors will want to make sure to implement their own savings plan simultaneously, since they won’t be eligible to participate; and many others will prefer the 401k approach due to higher limits.)
State Unemployment Insurance Contribution Determination Rate
If you have employees, you should normally have received a letter from IDES with your 2023 unemployment rate determination by now, but they are running behind and the letters won’t be posted on mytax.illinois.gov until January 5th, 2023. As soon as they do, you will need to update your payroll company’s records with the new unemployment tax rate, or it can cause expensive problems with reporting and reconciliations in the future. I wrote a blog on how to do this if you’re using Gusto for payroll.

HAPPY NEW YEAR, CHICAGO SMALL BUSINESSES:
WE WOULDN’T BE A WORLD-CLASS CITY WITHOUT YOU!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Software, Tips

How To Add Health Insurance To S-Corp 2%+ Owner W-2 In Gusto

December 28, 2022 Nancy McClelland Leave a comment

As anyone who’s worked with me — clients, team members, colleagues, vendors — knows, I adore Gusto Payroll. They truly changed my life for the better (not to mention the lives of thousands of small business owners) when they decided to create a tech-forward payroll company that seamlessly syncs with QuickBooks Online.

(Note: our affiliate link will earn you a $100 gift card after you run your first payroll — or up to $500 if you are an accountant or bookkeeper who signs up your own clients. We may earn a commission as well — win-win! For our own clients, we offer a 15% discount in lieu of referral fees.)

I have explained the importance in prior blog posts of making sure that S-Corp medical premiums are properly tracked and reported in QuickBooks and on the W-2 forms for shareholder-employees. The IRS has driven this point home repeatedly, and even has a page devoted to som e issues that arise specific to owners of 2% or more of an S-Corp who perform services for the company.

With so many of our own clients using Gusto, I wanted to share how to properly report S-Corp medical insurance premiums, and decided to make the information available to the public as well.

Much of the following information was collected from the Gusto Help section — which is freely available to the public — but as their dynamic support site changes structure and organization frequently, it seemed like collecting the various instructions into one area would be helpful.

Setting up benefits for S-Corp 2% shareholder-employees

For S-Corps, the IRS requires that health insurance premiums paid by the company to employees with a 2% or greater ownership be reported as wages (not pre-tax benefits), and included on their W-2s in Box 1, but not Boxes 3 or 5.

(This means that the total will be taxable for income taxes but not payroll taxes, and once the self-employed health insurance deduction is taken on the personal return, the wages and deduction net to zero — so in effect the corporation will have taken the deduction for the health insurance. More in this blog post and from the IRS here.)

Note: If your company’s benefits are provided through Gusto, they will manage this reporting for S-Corp owners automatically, as long as they are marked as a 2% shareholder in Gusto (under “Employment Details” in the shareholder-employee’s info in the “People” section).

However, if you offer benefits outside of Gusto (and use Gusto for payroll), then follow these steps to set up benefits for 2% shareholder employees:

Sign in to your Gusto admin account.
Go to the People section and select Team members.
Click on the employee’s name.
Under Employment Details, make sure the employee is designated as a 2% Shareholder.
Under Benefits, click Add Benefit.
Next to Select a Benefit, select “Create New Benefit” from the drop down menu.
Enter a Benefit Name.
Next to Benefit Type, select Medical, Dental, or Vision.
You will have the option to enter a Company Contribution Per Pay Period or Employee Deduction Per Pay Period. (For S-Corp shareholder-employees, this will usually be a company contribution, but check how your plan is set up.)
Company contributions: Taxable at the employee level only, for both federal and state income tax.
Employee deductions: Fully taxable as wages at both the employee and employer level.
Click Save.

As long as the entity is set up in Gusto as an S-Corp and the shareholder-employees that own 2% or more of the company are marked as such under Employee Details, the health insurance premium benefit should be added to Box 1, but not Boxes 3 or 5. You should review your draft W-2 at or shortly after year-end to make sure it is accurate, and contact Gusto immediately if there are issues so they can correct them before the final W-2 is issued and filed with the IRS and SSA.

FAQs about 2% shareholders:

Q: Which benefits must be taxed as wages for 2%+ shareholders?

A: Medical, Dental, Vision, HSAs, and more must be taxed as wages. Refer to Publication 15-B to view all a full list of benefits that are treated as wages.

Q: What if a 2%+ shareholder status changes part way through the year?

A: Change the 2%+ shareholder status in the employee’s account. Employees who are 2%+ shareholders at any point during the year must be taxed as such for the entire year.

Q: What happens if you need to update an employee’s 2%+ shareholder status mid-or-end year, and they have already received pre-tax benefit deductions this calendar year?

A: If your company withheld health insurance premiums rather than having them processed as 2%+ shareholder — contact Gusto Support, as their team will need to assist within adjusting the benefits, since there are tax implications.

Education, IRS, Software, Tips

Partnership And S-Corp Medical Insurance Premiums For Owners: Avoid Double-Dipping

December 28, 2022 Nancy McClelland Leave a comment

Note: much of the information below was pulled from the old Polito Eppich website — however, they have since merged with another firm to become Magnus Blue, and as such have removed their former blog content. My 2018 blog post linking to their article on how to properly account for partnership and S-Corp health insurance to avoid double-dipping now points to a web archive of the original site — but since that’s hard to find, I’m borrowing some of their material and sharing it here as well. To-date it’s the most well-illustrated and to-the-point summary I’ve seen on the topic.

The IRS rules for reporting health insurance premiums for partnership and S-Corp owners are complex, and as a result, easy to accidentally bungle. Sometimes an entity will incorrectly deduct the premium, and so will the owner — on their personal return — leading to what is known as “double-dipping”. This usually happens when the person preparing the personal return did not also prepare the business entity return.

TL;DR? The most important take-aways are:
1) you can’t double-dip; and,
2) though the particular hoops that have to be jumped through are a) different for partnerships than for S-Corps, and b) a PITA for both, they are in fact the law and must be followed.

The key here is that when the entity pays for health insurance for owners, it is deducted as payments for services to the partners or S-Corp shareholders — who are then entitled to take the self-employed medical insurance deduction — which means it will net to zero deduction on the personal return. If you’re not careful, then the deduction is mistakenly taken on both the entity-level and personal returns. In their original article, Polito Eppich illustrated the accidental double-dipping (all charts are copyright of Polito Eppich).

We will use an example of a $10,000 medical insurance premium to illustrate this issue. Here’s what was happening (incorrect approach):

Income (Expense)	Passthrough Business Entity	Owner’s K-1	Owner’s Personal Return	Net Taxable Income
Medical premiums paid	$(10,000)
Ordinary income reduced		$(10,000)		$(10,000)
Self-employed medical insurance deducted			$(10,000)	(10,00)
Total effective deduction on owner’s return				$(20,000)

Accidental double-dipping — the $10k premium becomes $20k.

Here is how it should be handled:

PARTNERSHIPS

The actual deduction occurs at the partnership level and is passed to the partner — via lower income on the K-1.

If the partnership pays for the health insurance premiums for its partners, it deducts the expense as guaranteed payments and reports the amount to each partner on their respective K-1s as guaranteed payments.

The partner then picks up the guaranteed payment as income and reports “self-employed health insurance” deduction. The guaranteed payment offsets the self employed health insurance deduction for a net zero effect on taxable income, thus the single deduction described above on the K-1.

(When a partner pays his (her) own medical insurance premiums, the self-employed medical insurance deduction is allowed if there is self-employment income.)

Correct reporting for partnership:

Income (Expense)	Partnership	Owner’s K-1	Owner’s Personal Return	Net Taxable Income
Medical insurance premiums paid and deducted	$(10,000)	$(10,000)	$(10,000)	$(10,000)
Guaranteed payment to partner		10,000	10,000	10,000
Self-employed medical insurance deduction		(10,000)	(10,000)	(10,000)
Total effective deduction on owner’s return				$(10,000)

Partnership: by following the IRS rules, the $10k premium remains a $10k net deduction.

S-CORPORATIONS

S-Corps are a bit more complex because owners who work for the company are paid payroll via W-2 (rather than guaranteed payments to partners). Keep in mind that these rules only apply to shareholders who own more than 2% of the company. Owners below 2% are not eligible for the self-employed medical insurance deduction.

The S-corporation deducts the expense as compensation and includes the amount on the shareholder’s W-2 — in Box 1, but not in Boxes 3 or 5, which means they are not subject to Social Security or Medicare taxes (commonly known as “payroll taxes” or “employment taxes”). The amount should also be reported in box 14 of the W-2 — this is only for informational purposes, so that the personal tax preparer knows to take the deduction. Some payroll companies will track this reporting properly throughout the year, but others require a call at year-end to make sure this amount shows up properly in Box 1 and 14. (See my blog post on how to handle this for Gusto Payroll.)

The shareholder reports the compensation from their W-2, then deducts the health insurance amount noted in Box 14 on the W-2 as a “self-employed health insurance” deduction on the personal 1040. Because the amount is subject to income taxes, but not employment taxes, taking the self-employed health insurance deduction leads to a net-zero impact to taxable income. The actual deduction is achieved at the corporation level and passed to the shareholder in the form of lower income reported on the K-1.

Correct reporting by S Corporation for 2% or greater shareholders:

Income (Expense)	S-Corp	Shareholders’s K-1	Owner’s Personal Return	Net Taxable Income
Medical insurance premiums paid and deducted as owner wages lower ordinary income	$(10,000)	$(10,000)	$(10,000)	$(10,000)
Owner’s W-2			10,000	10,000
Greater than 2% shareholder medical insurance premium (Noted in Box 14 of W-2)		(10,000)	(10,000)	(10,000)
Net taxable income reported by shareholder				$(10,000)

S-Corp: by following the IRS rules, the $10k premium remains a $10k net deduction.

Either way — partnership or S-Corp, the net result is that the amount paid by the company for health insurance on behalf of owners should only be deducted once, on the entity return, and as payments for services. On the personal return these payments will net to zero after the deduction for self-employed health insurance is taken.

Education, IRS, Tips

Rejoice! IRS Delays Challenging 1099-K Reporting Changes Until Next Year

December 23, 2022 Nancy McClelland Leave a comment

Accountants, small business owners, IRS representatives, bookkeepers, and tax attorneys everywhere are breathing a sigh of relief today as the IRS — awaiting relief from Congress that never came — finally made the decision to push off the confusing and troublesome changes to 1099-K reporting for another year.

The change in law requires Payment Servicing Entities (PSEs) and Third-Party Settlement Organizations (TPSOs) such as PayPal, CashApp, Venmo, Etsy, Poshmark, and eBay to lower their reporting thresholds — from 200 transactions and $20,000 to anyone receiving $600 or more; a pretty massive net that would inadvertently ensnare plenty of folks who do not actually have taxable income, but who would be receiving a 1099-K under the new rules. As a result, many who sold personal items at a non-deductible loss might end up with unexpected tax filing requirements. The point of the changes was to catch the many “side hustles”, where folks are providing services or buying and reselling goods on online platforms, in cases where the taxpayer is either intentionally or unintentionally evading taxes on the unreported income.

Although the intention was made in good faith to close the tax gap and encourage under-reporters to comply with the law, the unintended consequences threatened to overburden already struggling IRS representatives, accountants and bookkeepers, and their small business clients.

Contrast a side gig where someone is buying items from thrift stores and reselling them on Etsy for a sizable profit — a taxable event — with someone who is cleaning out their childhood home and selling their family’s old clothing and housewares at a loss. Both would receive a 1099-K, but the second person isn’t running a business, and the loss isn’t deductible. However, if either of these folks doesn’t declare the income, they can expect an underreporting notice from the IRS. At the end of the day, the person selling old personal possessions would get a “pass” from the IRS, but not before having to deal with confusing and scary notices, resulting in required responses that won’t be reviewed for months, given the backlog of unprocessed snail mail that persists at the IRS.

You can imagine why so many of us were concerned about this imminent change — statements from the AICPA, NATP, National Taxpayers Union Foundation and other professional organizations made it clear that the burden on the beleaguered IRS and tax preparers was simply unreasonable, and the timeframe for implementation too short. Some issuers were going to be issuing exponentially more forms than previously and did not have the systems in place yet to manage the increase. Per the NATP, “the new rules create an undue burden on taxpayers and the IRS, which is still wading through a backlog of returns.”

To be clear: the delay in implementing these lower thresholds for receipt reporting on a 1099-K does not mean that income from providing services or buying and reselling goods is not taxable. It already was, it continues to be, and starting next year, it will be much harder for those trying to shirk their reporting responsibilities to do so.

For 2022, reporting in early 2023, the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect.

But the year’s delay gives taxpayers and their advisers more time to set up bookkeeping systems — especially for those who have not previously recognized that this type of income is in fact taxable — and allows the IRS some time to catch up on their backlog and come up with an approach for mitigating the countless numbers of folks who do not have reporting responsibilities but will likely get caught with an underreporting notice. Similarly, those taxpayers using Payment Servicing Entities like PayPal can use the extra time to get educated about what types of receipts are NOT taxable — gifts, for example, or resale of your own personal goods at a loss — and work with their PSE to make sure they’re processing these types of receipts in a way that is more likely to exempt them from receiving a 1099-K (hopefully PayPal, Venmo and the like will set up more clearly established instructions about “personal” vs “business” transactions).

Lastly, there’s some hope that Congress will revisit the situation and raise the reporting threshold from $600 — which many have argued is archaic — to something more like $5000 or $10,000. Time will tell.

I, for one, am glad for the opportunity to get back to spending my time working with clients on value-added activities, such as tax planning and managerial decision-making — rather than jumping through more compliance hoops — after a very long three years.

IRS

Rising inflation may result in some taxpayers paying smaller tax bills

December 1, 2022 Nancy McClelland Leave a comment

“Money” by Got Credit is licensed under CC BY 2.0.

The IRS recently announced that tax brackets would widen by nearly 7% for next tax year, to combat rapidly rising inflation. As a result of these and other changes made in an attempt to match the rising costs of groceries and other daily necessities, some Americans will find that when they file their 2023 tax returns, they may actually have lower tax bills than in the prior season.

Due to these new, wider tax brackets, taxpayers whose incomes have not kept pace with inflation may find that more of their taxable earnings fall into lower groupings–and therefore will owe comparatively less tax when they file than those whose incomes have increased with inflation.

According to the Bureau of Labor Statistics, consumer prices increased by around 8.2% in September compared to the same month last year, with grocery costs up by 13%. However, many workers have yet to see salary increases sufficient to keep up with inflation. In fact, in September, seasonally-adjusted average hourly wages decreased by 3% from the previous year.

According to the IRS, some 60 tax rules–including standard deductions for single and married taxpayers–will be adjusted to reflect these increased costs. Married couples’ standard deduction will increase by $1,800 to $27,700 from the prior year. For single filers, the standard deduction will be $1,3850–a $900 increase.

Marginal tax rates are also being updated for inflation. The lowest marginal tax rate of 10% now applies to single filers making $11,000 or less annually, which is up from $10,275. From $20,550 previously, couples can now earn $22,000 and still qualify for the 10% bracket. The qualifying transportation and parking benefit cap will increase by $20 to $300 per month.

What modifications are anticipated for 2023?

This year’s inflation rate also impacts the adjustments the IRS will make for next tax season, so that taxpayers can plan for 2023. Kiplinger provides a good breakdown and explanation, as well as charts for each filing status and income range, for both 2022 and 2023.

Substantial changes to tax brackets

The top income limit for married couples filing jointly for the 12% tax bracket will increase from $83,550 in 2022 to $89,450 in 2023. This could prevent some taxpayers from falling into a higher tax rate (and potentially a higher bill). The standard deduction, a fixed amount taxpayers can utilize to lower their taxable income, is also anticipated to increase significantly. According to Wolters Kluwer, married couples filing jointly in 2023 may claim up to $27,700, an increase from $25,900 in 2022.

Additional tax credits and limits on tax-advantaged contributions

The Child Tax Credit was modified substantially by the Biden Administration for tax year 2021 and increased to $3,600 to support those with families struggling from the pandemic, but it’s reverting to $2,000 for this tax year (absent any last-minute tax extenders from Congress). That could lead to what is called “refund shock”–where expectations of large pandemic-related refunds are unsubstantiated.

The Earned Income Credit, which benefits lower-income working taxpayers, was expanded to include both younger and older taxpayers last year, a change that has been made permanent.

In some situations, increasing taxpayers’ contributions to certain tax-advantaged accounts can also reduce their taxable income. You can make an IRA contribution of up to $6,500 in 2023, up $500 from 2022–and those over 50 are allowed an additional catch-up contribution of $1,000. The contribution caps for 401(k) and other employer-sponsored retirement accounts will see significant hikes as well. People with health savings accounts (HSAs) may contribute up to $3,850 for individuals or $7,750 for a family in 2023. HSAs allow pre-tax contributions to pay for medical bills.

Conclusion

There is no assurance that tax bills will be lower, even though these changes may allow taxpayers to take a more generous standard deduction or put more money into accounts that could cut taxable income. This is because several things affect overall tax liability. Codification changes are intended to mitigate the effects of inflation; as a result, people whose earnings may not have kept pace with inflation may benefit, and others who did receive cost-of-living raises may at least avoid moving into a higher tax bracket. And a select number of us may be fortunate enough to pay less tax.

About The Co-Author: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.

The Dancing Accountant

Monthly Archives: December 2022