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It doesn’t feel like it could be September already, but it is. And you know what that means: estimated payments are now due. The deadline for making your third quarter estimated tax payments for 2020 is September 15.

Who Needs To Make Estimated Payments?

Generally, you should make estimated tax payments if you are not subject to withholding. Realistically, this means that folks who rely on income reported on a Form 1099 (like self-employment income, interest, dividends, and retirement income) are most likely to be responsible for estimated tax. If you’re self-employed, a gig economy worker, a retiree with a pension or other income, or a partner in a partnership or LLC, this likely applies to you.

You will need to make estimated payments if you:

  1. You expect to owe at least $1000 in tax for the 2020 tax year after subtracting your withholding and credits.
  2. You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2020 tax return or 100% of the tax shown on your 2019 tax return.

Who Might Get A Break?

Those are the general rules. However, special rules apply to some groups of taxpayers, like farmers, fishermen, and victims of natural disasters, those who recently became disabled, recent retirees and those who receive income unevenly during the year. You can find out more in Publication 505, Tax Withholding and Estimated Tax (downloads as a PDF).

How Can You Make a Payment?

To figure the amount of your estimated tax, you can use form Form 1040-ES, Estimated Tax for Individuals (downloads as a PDF).

You can write a check or IRS pay electronically. You can schedule tax payments up to 30 days in advance with Direct Pay or up to 365 days in advance with the Electronic Federal Tax Payment System (EFTPS).

What Happens If You Don’t Make Your Payment On Time?

Don’t be too casual about your payments. If you do not pay enough tax by the due date for each quarter, you may be charged a penalty even if you are due a refund when you file your income tax return (nice, huh?).

If you are subject to a penalty for not making enough estimated tax payments throughout the year, you can figure the penalty by using federal form 2210 (downloads as a PDF).

A good example of when a form 2210 comes in handy is when your income is uneven throughout the year; for example, instead of receiving a regular paycheck every other week, the bulk of your income comes in summer due to seasonal employment. When this happens, your estimated tax payment is figured at the end of each period based on a reasonable estimate of your income, deductions, and other items from the beginning of the tax year through the end of the period. While this method can save you from unwanted penalties, it can also be tricky.

You will not file form 2210 with your return unless the instructions on the form say as much. Typical situations that would require the filing of Form 2210 include a request for a waiver of part or the entire penalty. There is an exception to this rule for weather-related issues: if you lived in a federally declared disaster area and were granted a break on making estimated payments, you do not have to do anything special and you do not need to file form 2210. The IRS will automatically identify taxpayers located in a covered disaster area and will apply the appropriate penalty relief. If you still owe a penalty after the waiver is applied, the IRS will send you a bill.

What If You Screw Up?

If you miss a payment, there’s no need to panic. Just pay when you can. The penalty is worth, roughly, the unpaid interest on the estimated payment.

What’s Next?

Your fourth estimated tax payment for 2020 is due January 15, 2021.

Scrambling to make estimated payments? Don’t worry! The Internal Revenue Service (IRS) is reminding taxpayers that estimated tax payments for the tax year 2020, ordinarily due April 15, 2020, and June 15, 2020, are now due July 15, 2020.

The extended deadline means that any individual or corporation that has a quarterly estimated tax payment due April 15, 2020, or June 15, 2020, has until July 15 to make that payment without penalty. The extension is part of the IRS response to the COVID-19 pandemic.

Generally, you should pay estimated tax if you are not subject to withholding. Realistically, this means that folks who rely on income reported on a Form 1099 (like self-employment income, interest, dividends, and retirement income) are most likely to be responsible for estimated tax. If you’re self-employed, a gig economy worker, a retiree with a pension or other income, or a partner in a partnership or LLC, this likely applies to you.

You will need to make estimated payments if you:

  1. You expect to owe at least $1000 in tax for the 2020 tax year after subtracting your withholding and credits.
  2. You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2020 tax return or 100% of the tax shown on your 2019 tax return.

To figure your estimated tax, you can use form Form 1040-ES, Estimated Tax for Individuals (downloads as a PDF). 

You can write a check or IRS pay electronically. You can schedule tax payments up to 30 days in advance with Direct Pay or up to 365 days in advance with the Electronic Federal Tax Payment System (EFTPS).

And one more thing: don’t be too casual about your payments. If you do not pay enough tax by the due date for each quarter, you may be charged a penalty even if you are due a refund when you file your income tax return (nice, huh?).

Over a month ago, I wrote an article about the home office deduction that attracted very little notice. I figured folks were either overwhelmed with COVID-19 coverage, or the article didn’t apply to them. More recently, I realized that I was wrong: taxpayers assumed the article didn’t apply to them.

Since then, I’ve received tweets, comments, and emails from workers asking about the deduction because they’re sure that it applies to them. They are, after all, working from home through no reason of their own. They cannot physically return to the office or other workplace. And their employer may require them to work from home as a condition of their employment. In other words, for many, it’s work from home or lose a paycheck.

Those all feel like excellent reasons to be able to deduct the cost of the internet and other home office expenses. But they are not enough. As a result of the Tax Cuts and Jobs Act (TCJA), for the tax years 2018 through 2025, you cannot deduct home office expenses if you are an employee. 

To be clear, there is no hardship exemption or coronavirus waiver. It’s a very bright-line rule: employees who work from home can no longer claim the home office deduction. The reason you are working from home does not matter.

The TCJA did not change the home office expense rules for self-employed persons and independent contractors. To be clear, you are not self-employed just because you are working from home. If you are receiving a paycheck from an employer, and those wages will be reported on a W-2, you are an employee. Working from home is not enough, on its own, to cause a switch to a 1099.  And while you certainly may receive a form W-2 and a form 1099 in the same tax year, you should not receive a form W-2 and a form 1099 for the same work from the same employer.

If you are self-employed – even as a gig worker – you can continue to deduct qualifying home office expenses. Typically, you would report the home office deduction on federal form 8829, Expenses for Business Use of Your Home, which is filed along with your Schedule C, Profit or Loss From Your Business, on your 1040.

To qualify for the home office deduction, the part of your home attributable to business must be “exclusively and regularly for your trade or business” and that part of your home must be your principal place of business; a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business. In other words, to be deductible, your home office must be your actual office and not just at your home for convenience. And more importantly, if you use part of your home as a workspace, it must be space that is used solely for business.

A dedicated space doesn’t mean that you have to have a separate room. You can have a dedicated space – a table in the corner that’s just used for your office work – in a room used for other things. You just need to calculate the space and figure the deduction appropriately.

If you have more than one business location, including your home, that doesn’t disqualify you: you just need to make sure that you meet the criteria for the home office deduction. Again, to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business.

In a gig economy, you might also have more than one business. The same home office can be the principal place of business for two or more separate business activities. But you can’t combine the tests: whether your home office is the principal place of business for more than one business must be determined separately for each of your trades or businesses.

Calculating the deduction used to take a bit more math. For years, the rule was that you must figure the amount of space attributable to your business and compare it with the total and use that amount to figure the deduction. So, if your home office space is 200 square feet and your home is 2000 square feet, you would claim 10% (200/2000) of your home-related expenses (insurance, taxes, mortgage interest, etc.) as a home office deduction. That’s still an option.

However, since the 2013 tax year, there’s also a simplified option for the home office deduction. With the simplified option, you may claim a standard deduction of $5 per square foot of home used for business up to a maximum of 300 square feet. Using the same numbers as above, if your home office is 200 square feet, the simplified option for the home office deduction would allow you to claim $1,000 (200 square feet x $5) as a home office deduction.

But remember: those rules don’t apply if you’re an employee in 2020: you cannot deduct home office expenses if you are an employee. It’s one of several changes on Schedule A. Those changes were intended to be absorbed or mitigated by the doubling of the standard deduction.

A lot of taxpayers didn’t mind so much when the law changed in 2017, but now they do. If this bugs you, don’t shoot the messenger. Instead, contact your Congressional official: 

The loss of the home office deduction for employees has some taxpayers wondering whether it makes sense to quit their day jobs and become self-employed. That’s an individual decision, but if you’re focusing simply on the home office piece, the numbers probably don’t support that kind of shift. For more to consider when it comes to business-related decisions in light of tax reform, check out this article.

As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. Most recently, Congress passed a massive stimulus package that was signed into law by the President. The stimulus bill (also called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act) has several moving pieces for taxpayers, including those stimulus checks for taxpayers. But the law also offers some provisions intended to combat rising unemployment: 6.6 million Americans filed for unemployment benefits last week. 

One of those provisions is the Employee Retention Credit or ERC. It’s found in the CARES Act in Section 2301. The ERC is designed to help businesses keep employees on payroll. 

The credit is available to employers, no matter the size of the business. Unlike some of the other relief, there is no cap on the number of employees. The average number of employees in 2019 will, however, affect how the credit is calculated. If you have more than 100 full-time employees, you would include wages paid to employees when they are not providing services due to a government order related to COVID-19. If you have 100 or fewer full-time employees, all employee wages qualify for the credit, even if the employee is not providing services.

Most employers are eligible for this relief, including corporations, LLCs, S corporations, partnerships, and sole proprietors who pay wages. But there are three significant exceptions:

  1. State and local governments (and their agents) are not eligible for the credit;
  2.  Self-employed individuals are not eligible for the credit for their self-employment services or earnings; and
  3. Small businesses that take out a Small Business Interruption Loan (SBIL) under the Paycheck Protection Program (PPP) are not eligible for the credit. I’ve seen a lot of questions about this to be clear, the language in the Act says that “If an eligible employer receives a covered loan under paragraph (36) of section 7a) of the Small Business Act (15 USC 636a)), as added by section 1102 of this Act, such employer shall not be eligible for the credit under this section.” So, no double-dipping: if you take out a SBIL under the PPP, you don’t qualify for the ERC (try saying that three times quickly).

To qualify, employers must fall into one of two categories:

  1. Your business is wholly or partially suspended by government order due to COVID-19 (like a stay-at-home or non-essential business order) during the quarter; or
  2. Your gross receipts for 2020 are below 50% of the comparable quarter in 2019. 

The ERC is calculated each calendar quarter for wages paid after March 12, 2020, and before January 1, 2021. That means, the ERC is generally available for quarters 2, 3, and 4 for the 2020 year (and part of quarter 1). However, once your numbers creep back above 80% of receipts compared to the same quarter a year ago, you will no longer qualify after the end of that quarter (but you can still claim the ERC for that quarter).

The amount of the credit is 50% of qualifying wages paid up to $10,000 per employee for all quarters. So, if you pay your employee $6,000 in qualified wages in Q2, your available credit is $3,000. If you pay your employee an additional $6,000 in Q3, your available credit is $2,000 in Q3 (not $3,000) because of the overall limit of $10,000 on wages for all calendar quarters. Qualifying wages may not exceed $5,000 – or 50% of $10,000 – for any employee for all calendar quarters.

Wages include actual payments, as well as a portion of the cost of employer-provided health care. Qualified health plan expenses will be allocated pro- based on the number of employees and timing of benefits.

Qualified wages don’t include those wages attributed to a credit for sick or family leave. And you can’t include wages paid to employees for whom you will take a work opportunity tax credit (WOTC) during the respective quarter.

Here’s the good part: If you have qualified wages eligible for the ERC, you can reduce your required deposits of payroll taxes by the amount of the credit.

And remember: the credit is refundable. That means that you may get a refund if the amount of the credit is more than the federal employment taxes that you owe. And, so long as you meet the criteria, you do not have to repay the credit or the refunds.

If you don’t have sufficient employment taxes to cover the cost of qualified sick and family leave wages and the ERC, you can file Form 7200, Advance Payment of Employer Credits Due to COVID-19 (downloads as a PDF) to request an advance payment from the IRS. You will need to reconcile your advance credit payments and reduced deposits on your employment tax return.

You can file the form for an advance payment at any time before the end of the month following the quarter in which you paid the wages. That means, if necessary, you can file Form 7200 several times during each quarter. 

I know it sounds confusing, but you don’t have to file Form 7200 at all. If you can reduce your employment tax deposits to account for the credits – and don’t need an advance – you can simply reconcile your advance credit payments and reduced deposits on your employment tax return.

Also, you can’t file a corrected Form 7200. If you make an error, simply fix it when you file your respective payroll tax returns.

As with all tax matters, you’ll want to keep good records to support your credit. Keep all records of employment taxes, including any Forms 7200, for at least 4 years. 

Things are happening at a rapid-fire pace these days. Keep checking back for details.

It’s true: Simple is hard.

In an effort to make things easier for taxpayers and tax forms issuers, the Internal Revenue Service (IRS) is bringing back form 1099-NEC, Nonemployee Compensation. If that rings a bell, you’re showing your age: we haven’t seen this form since 1982.

The IRS initially announced the return of form 1099-NEC in August of this year. Now, we have an updated draft. Here’s what it looks like:

1099-NEC draft to replace 1099-MISC

The form will replace parts of the everything-but-the-kitchen-sink form 1099-MISC, Miscellaneous Income, for some taxpayers. Ironically, form 1099-MISC was the form that replaced form 1099-NEC in the first place (is your head spinning yet?).

Why the need for the change again? The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) that was enacted on December 18, 2015, made several changes to the way we file taxes. Specifically, under the PATH Act, employers were required to furnish some forms 1099-MISC to taxpayers by January 31. However, the PATH Act didn’t change the due dates for all forms 1099-MISC. Remember – it’s a catch-all form. The due date for certain forms 1099-MISC was January 31, while the due date for other forms 1099-MISC was February 15.

That was confusing for employers and taxpayers, and it was no less confusing for IRS systems and employees. The solution? Bring back form 1099-NEC to report non-employee compensation for independent contractors and freelancers. 

Under the draft form, forms would be due to the taxpayer and the IRS by February 1 (I expect that might change to January 31 for the sake of consistency).

The form is expected to make its debut for the 2020 tax year, which means that you will still receive a form 1099-MISC for non-employee compensation (among other things) for the 2019 tax year.

You can view the draft form, which downloads as a PDF, on the IRS website.

When the Tax Cuts and Jobs Act was passed last December, it wasn’t quite clear how it might affect self-employed and freelance taxpayers, as well as other taxpayers not subject to withholding like landlords, S corporation shareholders, partners in a partnership or taxpayers with significant investments. The Internal Revenue Service (IRS) has finally issued some guidance in the form of a revised tax form – with instructions – for taxpayers who must file and pay estimated tax. You can see the new federal form 1040-ES, Estimated Tax for Individuals, here (downloads as a PDF).

The form is available online (link in the paragraph above). However, you might already have one in your mailbox: The IRS also mailed one million form 1040-ES vouchers with instructions in late March to taxpayers who filed form 1040-ES last year.

Who needs to review the form? Typically, if you expect to owe more than $1,000 at tax time, you’ll want to make estimated payments using form 1040ES. Estimated taxes are typically paid quarterly. For the 2018 tax year, you can pay all of your estimated tax by April 17, 2018, or you can pay in four equal amounts on April 17, 2018; June 15, 2018; September 17, 2018; and January 15, 2019. You don’t have to make the January payment if you file your 2018 tax return by January 31, 2019, and pay the entire balance due with your return. If you skip a payment or pay late, you may be subject to a penalty.

What’s new on the form? Many taxpayers who file a form 1040-ES have gotten used to making regular payments of the same amounts from year to year. But, with tax reform, tax rates have changed. The standard deduction has doubled and itemized deductions have largely been trimmed back as compared to last year. Add in a loss of personal exemption amounts, an expanded child tax credit, and sweeping changes in the way that small businesses and pass-through entities are taxed, and your tax picture could look a lot different.

With those changes in mind, the IRS is urging taxpayers who are subject to withholding to check out the new withholding calculator and consider whether to make changes on form W-4.

However, guidance for the self-employed and others who may pay estimated tax was not available until now. In addition to form 1040-ES, the IRS has released Publication 505, Tax Withholding and Estimated Tax, (downloads as a PDF) for 2018. Pub 505 includes worksheets and examples that can help you determine whether you need to pay estimated tax – and how much you’ll need to pony up before next Tax Day.

Taxpayer asks:

If I’m paid in cash can they make me fill out a w-9?

Taxgirl says:

Yes. How you’re paid – in cash, by check, in Bitcoin or barter – doesn’t matter when it comes to filling out a form W-9.

A form W-9 is used to provide your taxpayer identification number (such as your Social Security Number (SSN) or your Employer Identification Number (EIN)) to certain payers. The form is typically completed by U.S. persons (citizens or resident aliens), domestics trusts and estates, and a partnership, corporation, company, or association created or organized in or under the laws of the United States.

You might be asked to complete a form W-9 when you have provided services as an independent contractor or a freelancer. The person who is paying you for those services – no matter how you’re paid – may be required to report the payments to IRS (Internal Revenue Service), typically using a form 1099.

There are also circumstances when the IRS requires the person who is paying you to withhold a portion of your payment and remit that amount to the IRS. That withholding, which is a flat 28% of the amount to be paid, is called “backup withholding.” Backup withholding is required when:

  • You don’t provide your Taxpayer Identification Number (or “TIN,” generally, your EIN, SSN or ITIN) when required;
  • You provided the wrong TIN (or the IRS says that you did); or
  • You are required, but fail, to certify that you are not subject to backup withholding.

If you’re not subject to backup withholding, no other taxes will be withheld from your check (or cash, Bitcoin, etc.). Filling out a form W-9 does not trigger withholding for other taxes, such as income taxes or Social Security payments.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

From Uber to Dogwalker.com, there are tons of ways to make some money on the side while pursuing your dream job – or just digging out of debt. If you’re hoping to pick up some extra cash with a side gig this year, here’s what you need to keep in mind on the tax side.

1. Income is income. It doesn’t matter if your extra income is from driving a car or trading stocks, income is reportable unless it’s otherwise excluded.

2. Understand the difference between a real business and just a fun way to make money. Income may be income but how and where it’s reported can vary depending on whether you’re engaged in a business or making money with a hobby. Hobbies and businesses are reported on different spots on your federal income tax return (line 21 for hobby income versus Schedule C for business income), and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not).

When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income: if you spend more than you make, you’re out of luck. If, however, you earn income in the pursuit of a business, you can offset the income with deductions, and you can carry losses forward or backward to other years. These are sometimes referred to as the “hobby loss rules,” and they’re important.

To distinguish a real business from a hobby, the IRS looks at a lot of factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business)—so how seriously you treat your new pursuit will matter.

3. Keep good records. It may seem like all good fun when you’re renting out your apartment on the weekends, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously.

If you’re working by the hour, keep a log of your time. Save your invoices and document income: if you can stash it in a separate account, even better. When it comes to expenses, keep receipts and annotate the nature of the expense: you can write this right on the receipt, or use a scanner and upload the image with an explanation). And don’t ditch those receipts immediately after Tax Day: click here to find out how long to hold onto records.

4. You may need to pro-rate some expenses. Typically, you can only deduct expenses primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost: you can typically deduct the business portion of the expense. To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage (there are also apps that can help you do this). If at the end of the year, you find, for example, that 40% of the use was for business, then you can typically deduct 40% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline personal, even if you swear it’s used solely for business). Cars can be tricky: for more tips on the business use of your car, click here.

5. You may need to make estimated payments. The extra few hundred dollars you earn from ads on your blog might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead. If you expect to owe more than $1,000 at tax time, you’ll want to make estimated payments. To make estimated payments, you’ll use federal form 1040ES, Estimated Tax for Individuals (downloads as a pdf). Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.

6. Consider hiring a tax pro. If your tax situation becomes more complicated from your side hustle—especially since all of your income will not be reported by your employer on a W-2, you may need help. Don’t hire just on cost. Ask questions. Get a referral and check out local ads (but be on the lookout for these red flags). Sometimes, a side hustle is just that. But if it turns out to be something more, don’t ignore the business side of things. For more on running a small business, check out the Small Business and Startup Survival Guide.

Taxpayer asks:

Hi, Tax Girl,

With all the electronic sales these days, publishers and authors can promote their books for free for a period of time in order to gain readers and increase their rankings on sites like amazon.com. Even though there is no cost to author or publisher for the free electronic giveaways, can an author take a deduction for the royalties not received by giving away the books?

Thank you.

Taxgirl says:

Promotional expenses are certainly deductible for publishers and authors. To the extent you spend money to promote your books whether through giveaways, contests, or the like, then yes, you can deduct those expenses. This is something that I do for contests and giveaways on my site: I pay for the cost of the books plus shipping for the winners.

That said, you can’t take deductions for promotional expenses that don’t cost you any out of pocket. That includes spending your time to promote the book (important but not deductible) as well as foregone revenue (if you never had it to report, you can’t deduct it).

Silver lining from all of that promotion? You’re not out any cash and you may actually make a few more sales.