When you think back on this spring, you may fondly recall a substantial deposit made to your bank account by the federal government (if you were eligible). Economic Impact Payments were a focal point of the American Rescue Plan Act (ARPA), signed into law in March, and the payments were even larger for parents with dependent children. But ARPA contains two other provisions that benefit parents:
1. Child credit expansion and advance payments. For 2021, this refundable tax credit has been increased from $2,000 to $3,000 per child — $3,600 for children under six years of age. In addition, qualifying children now include 17-year-olds.
The child credit is subject to modified adjusted gross income (AGI) phaseout rules and begins to phase out when MAGI exceeds:
$400,000 for married couples who file a joint return, and
$200,000 for other taxpayers.
The increased credit amount ($1,000 or $1,600) is subject to lower income phaseouts than the ones that apply to the first $2,000 of the credit. The increased amount begins to phase out when MAGI exceeds:
$150,000 for joint filers,
$112,500 for heads of household, and
$75,000 for other taxpayers.
ARPA also calls for the IRS to make periodic advance payments of the child credit totaling 50% of the estimated 2021 credit amount. The IRS has announced the payments will begin on July 15, 2021. They’ll then be made on the 15th of each month (unless the 15th falls on a weekend or holiday).
Recipients will receive the monthly payments through direct deposit, paper check or debit cards. The IRS says that it is committed to maximizing the use of direct deposit.
2. Child and dependent care break increases. For 2021, the amount of qualifying expenses for the refundable child and dependent care credit has been increased to:
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- $8,000 (from $3,000) if there’s one qualifying care individual, and
- $16,000 (from $6,000) if there are two or more such individuals.
The maximum percentage of qualifying expenses for which credit is allowed has been increased from 35% to 50%. So the credit ultimately is worth up to $4,000 or $8,000. But the credit is subject to an income-based phaseout beginning at household income levels exceeding $125,000.
The amount you can contribute to a child and dependent care Flexible Spending Account (FSA, also sometimes referred to as a “dependent care assistance program”) also has been increased. For 2021, it’s $10,500 (up from $5,000 for 2020). The FSA pays or reimburses you for these expenses. But you can’t claim a tax credit for expenses paid by or reimbursed through an FSA.
Over the last year, many companies have experienced workforce fluctuations and have engaged independent contractors to address staffing needs. In May, the U.S. Department of Labor (DOL) announced that it had withdrawn the previous administration’s independent contractor rule that had been scheduled to go into effect earlier this year. That rule generally would have made it easier to classify certain workers as independent contractors for the purposes of the Fair Labor Standards Act (FLSA), and thus make them ineligible for minimum wage and other FLSA protections.
While worker classification for DOL purposes isn’t necessarily the same for IRS purposes, now is a good time to revisit the federal tax implications of worker classification.
Tax obligations
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. And there may be state tax obligations as well.
These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).
No uniform definition
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.
The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)
Asking for a determination
Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Consult a CPA before filing Form SS-8 because doing so may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to ensure you are properly treating a worker as an independent contractor so that the relationship complies with the tax rules.
With growth in the “gig” economy and other changes to the ways Americans are working, the question of who is an independent contractor and who is an employee will likely continue to evolve. Stay tuned for the latest developments and contact us for any help you may need with worker classification.
