As we approach the end of 2022’s first quarter, now’s a good time to make sure you’re focusing on some strategic and money-saving items for the remainder of the year. The change in business during the pandemic, along with some programs from the government, have created many opportunities for public relations and marketing firms. There are things you need to look at for the remainder of the year, as well as items that will impact your tax position for 2021 now that you’re getting ready to file your 2021 tax returns (or extensions).
You’re suddenly a multi-state employer
Did you recently hire new employees in another state? Or have plans to grow your team this year and look outside of your normal local market? For any newly hired employees, you must provide information within 20 calendar days from the hiring date or rehiring date to the state in which the employee performs services. Failure to do so may result in penalties.
Reporting requirements differ from state to state. Your payroll processing company may or may not report new hires as part of the services provided. Contact your payroll service provider to determine whether this is being reported for you.
If you’re hiring new staff outside of the state your business operates, you should be aware of the tax implications.
Under normal circumstances, nexus is established by having a physical presence of employees within a state. This connection creates a tax obligation for state taxes such as income tax, payroll tax and sales and use tax. When businesses began permitting employees to work remotely in 2020, some states allowed companies with remote employees who were working temporarily in the state to do so without imposing nexus. Others like New York considered workers that were temporarily remote to be liable for New York income tax.
The expansion of remote work, and expansion to workers residing in different states other than the one where your company is located, may have nexus implications for you. Hiring employees outside your primary state may create a requirement to file income taxes in the state your remote employees are located in. Because of this, businesses must track where staff performs their services and then assess whether they need to file returns in those states—or have their tax professional take care of this.
According to the “convenience of the employer” rule, which is in use by some states, if an employer requires an employee to work in another state, withholding is taken only in the state where the work is performed. If, however, the employee chooses to work in another state, they may be subject to tax in both states: the employer’s location and the employee’s location. It’s important to note that each state’s interpretations of the law are constantly evolving as a result of changing workforce dynamics.
Meals are back on the table
Are you planning to meet with clients in-person this year? Did you spend money on business meals at restaurants in 2021? As many businesses are starting to travel again and feel comfortable meeting with clients face to face, one thing to note is that under the Consolidated Appropriations Act of 2021, business meals are 100 percent deductible for 2021 and 2022. Prior to 2021, meals were only 50 percent deductible.
Per IRS guidance issued last year, meals must be purchased from a restaurant, be for meetings with clients or prospects of the taxpayer, and the taxpayer or their employees must be present at the meeting. In addition, the meals cannot be lavish and if the meal is part of an entertainment event, such as a sporting event, then the meal is not deductible, as entertainment, amusement or recreational events continue to be non-deductible.
As your staff reconnects at employee events, any meals provided at a company event, such as a holiday party, would also be 100 percent deductible.
SALT deduction cap workaround programs are hot
Are you familiar with SALT deduction cap workaround programs in the states you do business? These optional programs, which are available in several states, including New York and California, can provide a workaround for the individual state and local tax deduction currently capped at $10,000 due to the Tax Cuts and Jobs Act.
These programs permit the entity to pay the state tax attributable to the income from the entities passed through to the owners at the entity level, taken as a partnership or S corporation deduction. This passes through to the partners as a credit on their individual state returns and creates a deduction at the entity level, creating a federal deduction. This deduction is in addition to the $10,000 itemized deduction limit on your personal return. For many taxpayers in high tax states, these programs can save you real money.
Under this rule, Partnerships and S corporations may annually elect to pay this tax on certain income for tax years. The election for many states needs to be made by March 15, 2022, for the 2022 tax year. Make sure reviewing these types of programs in your state is on your to-do list.
Employee retention credit reminder
The pandemic hit many PR and marketing firms hard, especially in 2020’s second quarter. The Employee Retention Credit is a program created under the CARES ACT designed to encourage businesses to maintain their staff throughout the pandemic. The ERC allows businesses to claim a cash refund of up to $26,000 per employee for qualified wages paid from March 13, 2020, through September 30, 2021.
More detailed information about the ERC and qualification information is covered in a previous O’Dwyer’s article. Note that after this article was published, the Infrastructure Investment and Jobs Act ended the ERC program early, making wages paid after September 30, 2021, ineligible for the credit, except for wages paid by an eligible recovery startup business. While the Build Back Better legislation may bring additional changes to the program, this development makes applying for the credit today more important than ever to ensure you get the relief your business needs.
In this new environment, your business likely looks different than it did a few years ago. Whether you’re hiring new staff in different locations, scheduling business meals and employee events again, or looking for ways you can maximize tax deductions and credits, make sure you review and consider these items sooner rather than later.
Dominic Rovano, CPA is a partner at Janover LLC and leads the firm’s Professional Services Group.