For gig workers, business owners, taxes get trickier

Tax time is always complicated for freelancers and business owners, but this year, it is especially swampy.

Pandemic relief programs that helped small companies and self-employed individuals created new tax challenges. And many people had unusually jumbled patchworks of jobs and income sources last year.

Even tax pros are struggling, thanks to a raft of last-minute changes Congress included in December’s economic relief package. “We have more than 100 clients, and if I have five that file on time this year, it’ll be a miracle,” said Meghan BlairValero, founder of Fogged In Bookkeeping.

Here are some of the tax issues small business owners are facing this year and advice for navigating them.

Paycheck Protection Program

The government’s primary small-business relief program backed $523 billion in loans last year — to more than 5 million businesses. The loans are to be forgiven by the government if the recipients comply with the rules. Forgiven debt is usually taxed as income, but Congress exempted PPP loans from that requirement.

In December, Congress went further and allowed recipients to deduct on their federal taxes expenses paid with PPP loan proceeds. That double dip is a windfall for business owners. But there is one PPP tax whammy still looming: Some states have broken with the federal approach and are either taxing the proceeds of a forgiven loan or barring businesses from deducting expenses paid for with them.

And in many, the issue is still being hashed out.

Dozens of states have not yet clarified whether they will follow the federal approach. In places where lawmakers are still considering legislation to adjust the rules, the decisions may not be made before tax filing deadlines.

Economic injury disaster loans

Another federal aid program, the Economic Injury Disaster Loan system, made $195 billion in low-interest, long-term loans to more than 3 million businesses last year. Unlike PPP loans, these must be paid back, so they are not taxable.

But the program also gave many applicants loan “advances” of up to $10,000 that are functionally grants because they do not have to be repaid. Congress exempted those advances from federal taxation, but some states are treating them as taxable income.

The employee retention credit

The coronavirus relief bill from 2020, a $2 trillion package signed into law last March, created an employee retention credit, giving employers an incentive to pay workers through the pandemic, but the law barred businesses that took Paycheck Protection Program loans from claiming the credit.

In December’s relief bill, Congress eliminated that restriction and allowed employers to retroactively claim the credit for quarters in 2020. It also expanded the credit for 2021 and lowered the threshold for qualifying for it. This year, the credit — which businesses usually claim through a quarterly filing — is available to businesses that had a 20% decline in 2020 quarterly gross receipts compared with the same quarter in 2019. They can get up to $10,000 an employee, per quarter, through June.

The revamped credit “is a better program; there’s more money, and it’s available to more employers,” said Shelly Abril, head of tax compliance at Gusto, a payroll services provider. “But with that comes all this extra complexity.”

Unemployment benefits

Self-employed workers are normally not eligible for unemployment compensation, but the coronavirus relief package from 2020 extended benefits to them. Holcomb filed for unemployment when her contract job temporarily eliminated her hours.

Some who collected the money are in for a tax-time shock, though: The payments are taxed as income. States are supposed to offer recipients the option of having federal taxes withheld, but in their scramble to deal with a deluge of claims, some states didn’t — and many people, faced with urgent bills and a reduced income, declined the option. Researchers at the Century Foundation estimate that fewer than 40% of unemployment payments last year had taxes withheld.

A bit of relief is on the way: the recent $1.9 trillion relief bill that makes the first $10,200 of benefits in 2020 tax-free for households with incomes of less than $150,000.