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Amended-Tax-Return

Do You Need To Amend Your 2020 Return?

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Congress amended the tax code in March to exempt $10,200 ($20,400 for a couple) of unemployment from taxable income (only for those with adjusted gross income less than $150,000 before the unemployment income).   By the time the IRS implemented the change, which was retroactive for 2020, many had already filed their tax return.

The IRS has since come out and said not to worry, they will review previously filed returns and issue refunds beginning in May if taxes were paid on unemployment benefits (up to the $10,200/20,400 limits).  However, it may still be beneficial to file an amended return.

While the IRS will refund federal taxes that were paid on the unemployment, it will not recalculate any changes for tax deductions or credits that you might now qualify for after your adjusted gross income is reduced.   (It will recalculate credits if they were on your original return, but if you didn’t qualify on the original return, but now you do, you need to file an amended return.)  The credits include the Earned Income Credit, college credits, etc.

You may also need to file an amended return to receive a refund from your state.  You need to first check to see if your state is offering the same exemption (13 states have not done so).

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Unreimbursed Employee Expenses

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The Tax Cuts and Jobs Act of 2017 eliminated the deduction for unreimbursed employee expenses, however, for most ministers, it still pays to keep track of them.  While the law did remove this schedule A deduction for employees, there is an exception for licensed ministers.

Unreimbursed employee expenses incurred by minsters are deducted on Schedule SE rather than Schedule A. The impact of this deduction reduces the amount of self-employment tax owed by a minster.  Some examples of deductible expenses include ministry or professional dues, educational fees, travel and mileage, religious materials, subscriptions, work related meals, etc.

Of course, if you have opted out of Social Security then you don’t file a schedule SE, so these expenses cannot be deducted.

While being able to deduct these expenses does help reduce self-employment taxes, the minster employee is still better off getting reimbursed from the church for all business-related expenses. If the reimbursement is properly documented, the reimbursement is tax free.  I would much rather get a 100% reimbursement than a 15% tax deduction.

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Form 1099-NEC or Form 1099-MISC?

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Historically, when you have paid $600 or more during a year to a nonemployee, you were required to file form 1099-MISC (using box 7) by January 31 of the following year.  This would include anyone who performed a service (non-employee compensation) for the business or church (independent contractors, guest speakers, etc.).

Beginning in 2020, the IRS has replaced form 1099-MISC with form 1099-NEC for any “nonemployee compensation”.   Form 1099-MISC will still be used for other forms of payments.  Also, form 1099-MISC  box 7 will instead be used for “Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale”.

Form 1099-NEC is not new, but it has not been used since 1982.  “NEC” stands for “non-employee compensation”.  What gets reported on form 1099-NEC?  “fees, commissions, prizes, awards and other forms of compensation paid to an independent contractor”.

In summary:  Form 1099-NEC, Box 1 will replace any payments you previously filed on Form 1099-MISC, box 7.

The deadline for filing Form 1099-NEC is January 31.  The deadline for form 1099-MISC is March 31.

As always, you are required to obtain a signed form W-9 from any independent contractor prior to payment.

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Tax Refunds

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75% of Americans received a refund last year, with an average refund of $2,881.  You’ve heard it before but let me remind you – getting a refund is essentially giving the government an interest free loan.  Many use a large refund as a way to set aside money for a large purchase or to pay off debt.

Here are two options to consider.  First, create an automatic monthly transfer to a separate bank savings account (either as a payroll deduction or a transfer from your checking account).  At least this way you can earn interest on your money throughout the year.

If you use the refund to pay off debt, especially credit card debt, then you will be significantly better off by reducing your withholding and making weekly or monthly payments toward the debt. This reduces the amount of interest that you will pay on the debt.

I once counseled with a couple who was $500 short each month in meeting their monthly bills, yet they received a tax refund each year of around $6,000.  They were literally giving the IRS the money they needed to make ends meet.

The IRS created a new w4 form for 2020, which no longer uses dependents or allowances.  Next month we will provide guidance on how to use the new form.

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Do You Have Form I-9 For Each Employee?

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Under federal law employers, including tax-exempt organizations, are required to verify the identity and employment eligibility of all individuals they hire, and to document that information using the Employment Eligibility Verification Form I-9.   In an effort to reduce illegal employment, I-9 audits increased significantly (nearly 400%) in 2018. Job site visits are often unannounced.

Both the employer and the employee must complete their part of the form, which can be found at https://www.uscis.gov/i-9.    The employee must also present his or her employer with acceptable documents evidencing identity and employment authorization. The employer must examine the document(s) an employee presents to determine whether the document(s) reasonably appear to be genuine and record the document information on the Form I-9. The list of acceptable documents can be found on the last page of the form.

Employers must maintain the completed Form I-9 in their files for three years after the date of hire or one year after the date employment ends, whichever is later.  (You do not have to send the form to USCIS).  Penalties for failing to produce a Form I-9, range from $110 to $1,100 per violation.

In order to limit the review/audit of other employment documents, it is recommended that you keep all I-9 forms in a separate folder, rather than keeping them in each individual employee’s file with other employment documents.