- Economic impact payments. Round one and round two of economic impact payments (EIP) are reconciled on the 2020 tax return. The EIPs were an advance. If the client received less than he or she should have, that individual will be able to claim an additional EIP credit on his or her 2020 return. Clients who received too much of an advanced rebate because the payment was based on their 2019 (or 2018 for the first-round payments if the 2019 return was not yet filed) income do not need to repay the excess when they file their 2020 tax return.
Two EIP problems exist at the moment. The first problem is that clients want to know when they will receive their $600 second-round payment. Direct deposit payments have already been made. If the client changed his or her bank account since filing the 2019 return, direct deposits were returned by the “old” bank to the IRS, and the credit is only available on the 2020 return. If direct deposit information was not included on the 2019 returns, EIP checks or debit cards are in the mail. The client can check on the status of his or her first- and second-round EIPs at https://sa.www4.irs.gov/irfof-wmsp/login. The status includes the payment date and the method (direct deposit or mailed payment date).
The second problem clients are asking about is the next promised round of stimulus payments. From the news, if additional relief legislation is passed, an additional $1,400 per adult and some amount for children under 17 will result. You already know the questions that will arrive by phone message, email, and text from your clients. Here is a question just for us in the tax practitioner community. Will an additional amount be reconciled on the 2020 return since it appears that the proposed rebate will again be based on the 2019 adjusted gross income (AGI)? Will the third round of EIPs delay finishing and filing our returns?
Tax practitioner note. New EIP FAQs have been posted. For the latest news on the second-round payments, check out https://www.irs.gov/coronavirus/get-my-payment.
- Sick leave and family credits on the Form 1040. Self-employed individuals may be entitled to sick leave and/or family leave credit on their 2020 Form 1040. With 25 million COVID-19 cases in the United States, it’s likely that when you ask your client how their year has been they will respond about (1) their own COVID-19 illness, (2) their exposure and quarantine, and/or (3) their awful homeschooling experience with the kids. If the self-employed person was instead an employee, The Families First Coronavirus Response Act required the employer to pay the affected employee their regular rate of pay for 10 days of sick leave (limited to $511 per day) or pay them two-thirds of their regular pay rate for 10 weeks of family leave (limited to a maximum of $200 per day). The government reimbursed the employer through payroll tax credits the amount paid to the employee. The self-employed individual (or a partner in a partnership) is entitled to the same sick and family credits on their individual tax return. The credit is calculated on the new Form 7202. The rules are strict, but the resulting credit can be as much as $15,000. It is worth checking IRS FAQs 60 to 68 at https://www.irs.gov/newsroom/special-issues-for-employees#specific-provisions-related-self-employed-individuals titled “Specific Provisions Related to Self-Employed Individuals” for the rules.
- Earned Income Tax Credit (EITC). The Consolidated Appropriations Act, 2021 lets taxpayers use their 2019 earned income if that results in a larger EITC. Watch for input changes in your computer software. Remind clients that refunds for taxpayers claiming the earned income tax credit or additional child tax credit can’t be issued before mid-February. This applies to the entire refund, not just the portion associated with this credit.
- Form 1099-NEC. Beginning in 2020, individuals may receive Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business. Please refer to the instructions for Form 1099-MISC and Form 1099-NEC to ensure business clients are filing the appropriate form and are aware of this change. Go to https://www.irs.gov/forms-pubs/about-form-1099-nec.
State reporting issue. The IRS has delayed including the Form 1099-NEC in its Combined Federal/State Filing (CF/SF) Program. If you prepare 1099s for your client, check to see if you must separately supply the Form 1099-NEC to the state, especially considering that source-based reporting may require (1) identifying where services were performed by the vendor, and (2) reporting the amounts paid for such services in the state boxes of Form 1099-NEC.
Example. A Nebraska business pays a California individual $2,000 to perform IT services for its website. The Nebraska business must file a Form 1099-NEC to report the $2,000 payment for federal purposes. Because services were performed in California, the state boxes should report the $2,000 as California income, and the 1099-NEC must be filed with California. A state payor number may be required.
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