Let’s get one thing out of the way: although it is 2021, we are strictly referring to your 2020 taxes—the ones you will be filing now. We’re always filing taxes for the previous year, so you will be completing your 2020 taxes in 2021.
Although that might be a little confusing, rest assured that you’re not alone. At the year’s end, there’s a lot of work to get done. To help you, here’s a list of things you will need to assemble, execute, or reference before filing your 2020 taxes.
There were several tax-related consequences that came out of the COVID-19 pandemic. Legislation such as The Coronavirus Aid, Relief, and Economic Security (CARES) Act, was passed. One important piece of it was the employee retention credit.
If you retained your employees during the pandemic, you are able to obtain a refundable tax credit for up to 50% of your employees’ wages. This only pertains to money paid to your employees between March 12, 2020 and the end of the year.
The first thing you need to do is calculate your employee retention credit. If you received a PPP loan, then you will not be eligible for this credit.
Another important piece of legislation that requires your attention is the Families First Coronavirus Response Act (FFCRA). This was directly targeted towards small businesses (fewer than 500 employees). If your employees had to take paid sick leave for themselves or had to take care of a family member due to COVID-19, then you can take advantage of this important piece of legislation that was meant for people like you.
If this applies to your employees, the government will reimburse what you paid out while they were on leave. You will need to have these totals.
File a 1099-NEC
The 1099-NEC is an old form that has not been used since 1982. Due to recent tax legislation, the IRS has brought it back.
In lieu of going over why it is now being used again, simply know the difference between a 1099-NEC and a 1099-MISC form. Both are for your independent contractors (employees would receive a W-2).
The key difference between the two forms is the amount in which you paid each contractor. If you paid $599 or less, you will issue a 1099-MISC. It doesn’t matter if this contractor worked two minutes or two weeks. The only factor is how much you paid them.
If the amount you paid is $600 or more, then you will need to supply the contractor with a 1099-NEC.
Affordable Care Act
The purpose of the Affordable Care Act (ACA) was to provide affordable health care insurance to more people. If your business is subject to the mandates set forth within the ACA, then you must give a 1095-C to any full-time employees and their health insurance offer.
The accompanying form, the 1094-C, is a cover sheet that you, the employer, will need to send to the IRS (along with a 1095-C). The deadline for which is determined by your method of filing. If you are sending paper copies, they must be submitted by February 28th. If you choose to e-file, the deadline is March 31st.
Although there is a considerable amount of work that needs to be done at the end of the year, don’t make it harder. The critical element to making the tax season manageable is ensuring that you’ve been precise with your payroll.
Choose a payroll software that was designed to work with you and make running a business that much easier.