Tax tables, forms, and filing regulations are subject to change each year. If you’re responsible for business taxes, payroll, or other financial operations, you’ll need to reacquaint yourself with the tax code prior to every filing season. For those preparing to file business and employer tax documentation for the upcoming year, here are a few important changes to keep in mind.
New Flat Tax Rate for Corporations
Before the Tax Cuts and Jobs Act, C corporations paid graduated federal income tax rates at either 15%, 25%, 34%, or 35%. Personal service corporations, or PSCs, paid a flat 35% rate. The Tax Cuts and Jobs Act has since established a flat 21% rate for both C corporations and PSCs. This means the tax costs for these types of businesses is significantly reduced.
Changes to Qualified Business Income Deductions
Effective last year, the Tax Cuts and Jobs Act established a new business income deduction for owners of “pass-through” entities, including S-corporations, partnerships, and sole proprietorships. These entities can now deduct up to 20% of their qualified business income. Around 11% of taxpayers claimed this deduction on their 2018 returns. There are a few more specific changes to qualified deductions, including changes to net operating losses, meal and entertainment expenses, fines and penalties paid to governments, and payments under state or local tax credit programs.
Small Business Accounting Methods
Small business taxpayers are eligible to use the cash method of accounting, and they are also exempt from certain accounting rules for inventories, cost capitalization, and long-term contracts if they have an average annual gross receipt of $25 million or less in the prior three-year period.
Some employers reimburse employees for driving personal vehicles while on company business. If this reimbursement is conducted under an accountable plan in an amount no more than the standard mileage rate provided by the IRS, there is no reportable taxable compensation. The mileage rate for 2019 is $0.58 per mile, up $0.035 from 2018.
Fringe Benefit Changes
There are several new rules for fringe benefits beginning in the 2019 tax season.
- Health Savings Accounts: Companies with high-deductible health plans can contribute to an employee’s health savings account. This benefit is tax-free to employees and exempt from employment taxes. It is capped at $3,500 in 2019 for self-only coverage and $7,000 for family coverage.
- Transportation: Employers cannot deduct the cost of transportation fringe benefits. The IRS has a helpful guide on figuring the deductible and nondeductible portions of rent that include parting spaces. That said, if a company provides free parking, van pooling, or monthly transit passes, employees can receive the benefit tax-free up to $265 per month in 2019.
Changes to 2020 W-4
A revised draft of the 2020 W-4 was released by the IRS toward the end of summer 2019. The redesign reduces the form’s complexity and increases withholding accuracy. Employees who have submitted Form W-4 in years prior will not need to submit new copies, but all new employees must be provided with the redesigned form.
Payroll Software can Do the Work for You
Each year brings changes to tax tables, tax forms, and filing processes. Keeping up with those changes can be difficult, especially if you own or operate a small business. Rather than relying on the IRS to provide you with the appropriate information, consider investing in an accounting software to do the work for you. AMS products can automatically update tax tables and provide the most up-to-date versions of forms available. Save yourself the time and headache by investing in 1099 accounting software before the upcoming tax season.