By Mark E. Battersby / Published April 2022
With the pressure cleaning operation’s 2021 taxes finished, filed, or postponed until later, it might be time to think about the new ballgame that is the 2022 tax situation. Oh, sure, the controversial Build Back Better Act may or may not emerge, in whole or in part, to foil any planned tax savings. But, far more certain, are the many changes and new taxes to be faced in 2022.
There are various changes affecting employment taxes, especially the status of those operating as or doing business with independent contractors and coping with worker shortages, as well as new reporting requirements for payments from third-party providers and digital assets such as cryptocurrencies all taking place in 2022.
Many of the potential tax savings—and currently misunderstood or neglected law provisions—were already on the books. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer deposits and payments of their share of Social Security taxes from March 27 through December 31, 2020. While 50 percent of those deferred amounts were required to be deposited by December 31, 2021, any remaining amount must be deposited by January 3, 2023.
The deferment of payroll taxes isn’t the only potential problem—and opportunity—many pressure washing contractors, distributors, and manufacturers will face in the months ahead. Consider the controversy over who is and isn’t an independent contractor that continues to rage in 2022. Under our federal tax law, independent contractors are self-employed individuals who are responsible for their own tax filings and payments. Independent contractors pay both income and self-employment taxes on their earnings.
To make it easier for the IRS to track those using or claiming independent contractor status, instead of reporting compensation for independent contractors on Form 1099-MISC (Miscellaneous Income), a new form, Form 1099-NEC (Nonemployee Compensation), was introduced for the 2021 tax year. The new form will, presumably, allow the IRS to better track independent contractors.
Now is the time to ensure that the independent contractors used by the pressure cleaning business and those calling themselves independent contractors really are. Fortunately, the IRS has a form, Form SS-8, that either workers or an employer can fill out to obtain an IRS determination on worker status.
Properly labeling workers can occur only after they are on the payroll. Attracting workers to the pressure washing operation poses its own problems. Consider the following:
Many pressure cleaning contractors and other business owners recently discovered—or will discover, should they face an IRS audit—that even seemingly common business deductions have a dark side. Among the moves that should be considered in the months ahead are such things as the following:
Whether innocently or otherwise, many pressure washing business owners and operators overlook some of their operation’s reportable income. Today, as a reminder or check, the IRS has new reporting requirements.
Manually kept records satisfy the tax law if they are accurate and can be understood or explained if questioned, but what happens if the original paper records are exposed, scattered, or lost in a hurricane, tornado, or similar catastrophe?
If records are stored someplace that is vulnerable, at least put some roadblocks, such as a safe, in place to deter crooks or combat natural disasters. However, most businesses are going paperless and storing everything electronically, with many contractors and other businesses routinely making PDFs of important papers and records or storing backups in a safe place.
According to the IRS, electronic records are just as official as the paper originals. Utilizing a software program, math errors are eliminated and profit and loss statements, along with the operation’s other financial statements, can be produced with the click of a button.
Much has been written and said about the special treatment of income from so-called “pass-through entities” such as partnerships, S corporations, etc. While we anticipate future changes in the tax rates for individuals, incorporated pressure cleaning businesses, and those pass-through entities, there is no doubt discrepancies will continue in the months ahead. This makes understanding how the operation’s business entity is labeled important. Consider the following:
The structure of the pressure cleaning business will obviously impact how taxes will be filed. Changing the business structure used to be rare as the top corporate tax rate was 35 percent. However, the Tax Cuts and Jobs Act (TCJA) of 2017 dropped the top corporate rate to only 21 percent. While Congress has proposed an increase in the corporate tax rate to 26.5 percent, the tax bills of many businesses—and their owners—might benefit from an entity change, especially those with pass-through businesses.
Changing business entities may help reduce risk exposure, help the operation attract investors, or lower the pressure washing operation’s tax bill. Naturally, the IRS will require adjustments in income and deductions to ensure they won’t lose revenue as a result of the switch. In general, entity switches must occur within the first few months of a tax year although there are numerous exceptions.
Our tax laws may change, and the IRS may impose new rules and/or limit write-offs. However, one thing that will never change is the importance of tax planning. Substantial tax savings are possible with planning, especially planning not at year’s end but during the year as the pressure cleaning business operates.