Prepare for Next Tax Season Now

You are probably still stinging from the pain of filing your 2021 income tax return. That pain might have been sharper if you had to pay when you filed. The memory of that pain could be just the incentive you need to start preparing for next tax season now. Starting to prepare for next tax season now reduces stress and gives you time to implement tax planning strategies early in the year.

Whether you file your own tax returns or engage a tax professional, these three tips will help you prepare for next tax season now:

 

  1. Check Withholdings and Estimated Payments

Did you owe a lot when filing your 2021 returns, or did you get a big refund? Either way it turned out for you, the IRS has online tools to help make sure that your tax withholdings or estimated payments will cover your anticipated tax liability. Employees who earn wages should use information at this link to verify that their tax withholdings are sufficient https://www.irs.gov/individuals/tax-withholding-estimator. Taxpayers with investment, self-employment or other non-wage income should use this link to figure out their quarterly estimated tax payments due in April, June, September, and January https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

  1. Organize Tax Documents

Use your 2021 tax return to identify documents that you’ll need to accumulate in preparation for next tax season. Start printing the charitable donation letters and real estate tax bills to cut the delay when the 1099s and W-2s are released or mailed to you. As life events happen in 2022, such as buying a home, starting a business, or changing your marital status, check into how the event impacts your taxes. You might need a tax professional to help you plan for and understand the tax impacts of life changes.

  1. Pending Tax Changes 

The last two tax filing seasons involved reporting some unusual information that was related to pandemic tax changes, like the expanded Advance Child Tax Credit and Economic Impact Payments. As of today, no tax law changes are pending; however, you never know. Keep an eye on the news for any announcements indicating that a law is about to pass and see if it could impact next year’s tax reporting. Keep in mind that a reporting change could happen even if the change does not impact your tax liability, 

If the pain of filing your 2021 income tax return is still stinging, these tips to prepare for next tax season now are just what you need. Preparing now not only reduces stress; the earlier in the year you start, the more time you have to implement tax planning strategies. Whether you file your own tax returns or engage a tax professional, checking your withholdings and estimates, organizing you tax documents, and being aware of tax law changes will go a long way to help you prepare for next tax season now.

Worker Classification Rules

Worker classification sounds boring until it becomes big news. Like back in 2020 when businesses like Uber and Lyft were fighting in court over whether drivers are classified as employees or independent contractors. Uber and Lyft won their legal battles to classify drivers as independent contractors. Good news for them – classifying workers as independent contractors saves businesses money in employer payroll taxes and other employee-related expenses. On the flip side, the independent contractors assume more costs, like self-employment taxes and health benefits.

Employers have always tried to push the rules to their limit; but, as you can imagine, worker classification issues have gotten bigger as the gig economy has exploded. That means an explosion in the confusion about worker classification among employers and workers. So, about a year ago, the U.S. Department of Labor (DOL) stepped in to help everyone comply with applicable tax law by issuing a final rule  to clarify the standards for when a worker should be considered an employee or an independent contractor.

Three things that employers and workers should know about the final DOL rule:

  1. An “economic reality” test is used to determine whether a worker is an independent contractor or is “economically dependent on an employer for work” (i.e., an employee). The rule defines two “core factors” to help businesses determine whether a worker is economically dependent on someone else’s business or is in business for her- or himself.
  1. The first core factor isn’t just one thing; it relates to a series of conditions, including the degree of control of the employer over the work, the amount of skill required to perform the work, and the degree of permanence of the working relationship. An independent contractor is free from the control and direction of the hirer, is sufficiently skilled to work autonomously, and is providing services that are temporary or intermittent.
  1. The second core factor relates to whether the work being performed is integrated with or separate from the overall business. An independent contractor performs work that is outside the usual course of the hiring entity’s business, either a specialized skill or temporary need for additional resources.

Worker classification issues have gotten bigger with the explosion in the gig economy. Determining whether a worker is considered an independent contractor or an employee can be complicated, which is why DOL issued clarifying rules. The decision about worker classification assigns the responsibility and cost to the employer or the worker, so it’s important to get it right.

Need more information? The IRS has more details about worker classification at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.