Four Year-End Tax Planning Tips for Small Business Owners

The past two years presented many small business owners with unprecedented challenges. This year’s tax planning preparations include necessary measures for small business owners to satisfy existing, new, and modified tax laws that may help manage 2021 tax liabilities.

Taking the time to learn about the 2020 pandemic tax changes may make a difference. Some laws have extensions into 2021 for eligible tax credits and deductions. Here is a tax planning list for small business owners preparing for year-end tax filings. Incorporating these tips into monthly, quarterly, and annual tax planning routines may prevent errors, could help you avoid delays, and may help to manage stress levels for small business owners.

Get Organized

Early tax planning may help integrate monitoring and reporting practices that authenticate small business year-end tax liability. Small businesses that qualified for one of the federal assistance programs must ensure that the information compiled is accurate to take advantage of the tax credits.

Reconcile All Business, Credit, and Bank Accounts

Following the end of each month, these reports should support the final tax reports and the entity’s financial statements. Start by cross-referencing and reviewing expense classifications. Deductible expenses may be forgotten or incorrectly classified.

The process gives an overview of an entity’s taxes and financial condition — valuable information for making good business decisions.

Payroll Tax, Credits, and Deductions

Payroll data reports sent to federal, state, and local agencies need to be verified and accurate. Submissions include withholding information for each employee used for computing a company’s tax obligations. Depending on the state of residence, states have specific payroll form numbers, filing frequency, and due dates. Be sure to check the submission dates to remain compliant. Late or inaccurate reporting may come with penalties.

IRS submission schedules are quarterly. Small businesses must report income, Social Security, wages and workers’ compensation, unemployment, and Medicare taxes.

In 2020, Form W-4 changes were enforced for new and current employees withholding revisions. 2020 also brought changes for non-employee compensation requiring FORM 1099-NEC to report paid services of $600 or more. Not to be confused with the Form 1099-MISC that reports other paid income.

2021 Pandemic Tax Credits

The Taxpayer Certainty and Disaster Tax Relief Act, enacted December 7, 2020, changed employee retention tax credits for small-business owners. Under the Coronavirus Aid, Relief, and Economic Security Act, the Employee Retention Credit extended benefits into the first two quarters of 2021.

Eligible employers should have received the allowable tax credits on payroll liabilities for the first two quarters of 2021 as a refundable tax credit against the employer’s share of Social Security payments equal to “70% of the qualified wages they paid to employees after Dec. 31, 2020, through June 30, 2021.” The Internal Revenue Service said, “qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.”

A second tax credit program for eligible employers is the American Rescue Plan Act, enacted in March 2021 for ERC wages paid during the third and fourth quarters of 2021. ARPA guidelines are available from the Department of the Treasury and the IRS.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Sources

Depositing and Reporting Employment Taxes | Internal Revenue Service (irs.gov) https://www.irs.gov/businesses/small-businesses-self-employed/depositing-and-reporting-employment-taxes

New law extends COVID tax credit for employers who keep workers on payroll | Internal Revenue Service (irs.gov) https://www.irs.gov/newsroom/new-law-extends-covid-tax-credit-for-employers-who-keep-workers-on-payroll

IRS provides guidance for employers claiming the Employee Retention Credit for first two quarters of 2021 | Internal Revenue Service https://www.irs.gov/newsroom/irs-provides-guidance-for-employers-claiming-the-employee-retention-credit-for-first-two-quarters-of-2021

Treasury, IRS provide additional guidance to employers claiming the employee retention credit, including for the third and fourth quarters of 2021 | Internal Revenue Service https://www.irs.gov/newsroom/treasury-irs-provide-additional-guidance-to-employers-claiming-the-employee-retention-credit-including-for-the-third-and-fourth-quarters-of-2021

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