It’s 2021, and the last thing you want to do right now is revisit 2020. Unfortunately, you won’t be able to completely erase 2020 from your mind until after you file your taxes.

Not only was 2020 a difficult year for your health, family life, and profession, but as a small business owner, “solopreneur,” or employee, you will also most likely encounter changes to your 2020 tax bill as a result of COVID-19. As a business owner, you may have applied for—and received—a Paycheck Protection Program (PPP) loan and/or an Employee Retention Credit. As an employee, you may have been laid off and collected unemployment. Or, you may be a freelancer, contractor, or someone who is self-employed and applied for unemployment for the first time. Many of us also received stimulus money, and some of us may have dipped into retirement savings in order to bridge the income gap. So, what does all this mean for you? Let’s find out!

Keep in mind, the information in this article was current as of December 30, 2020. Since COVID-19 relief efforts are fluid, please check with IRS.gov for up-to-the-minute information. This is not intended as tax advice.

Will my stimulus money be taxed?

No. Uncle Sam does not consider the $1,200 for each adult and $500 for each child you may have received in spring 2020 taxable income. Instead, the Internal Revenue Service (IRS) considers this money a refundable tax credit, which “is not includible in your gross income.”¹ Therefore, you will not include the Economic Impact Payment (as the IRS calls it) as taxable income on your federal income tax return, and you will not pay income tax on it. Also, your stimulus money will not reduce your refund or increase the amount you owe when you file your 2020 return, and it “will not affect your income for purposes of determining eligibility for federal government assistance or benefit programs.”²

Gig Economy Income

What is a gig economy? According to the IRS, a gig economy (also referred to as a sharing or access economy) is activity in which people earn income providing on-demand work, services, or goods—often through a digital platform (app or website), like:

• Driving a car for booked rides or deliveries

• Renting out property or part of it

• Running errands or completing tasks

• Selling goods online

• Renting equipment

• Providing creative or professional services

• Providing other temporary, on-demand, or freelance work

Note: This list does not include all types of gig work.

Is gig economy income taxable?

Yes. Just as with other freelance or side-hustle work, the IRS says you must report income earned from gig work on your tax return, even if the income is:

• Part-time, temporary, or side work

• Not reported on a return form (1099-K, 1099-MISC, W-2, or other income statements)

• Paid in any form, including cash, property, goods, or virtual currency

For more information, visit irs.gov/businesses/gig-economy-tax-center.

2020 Non-COVID Tax Changes¹⁶

• The standard deduction for those married and filing jointly increased by $400 to $24,800. For single filers (and married individuals filing separately), the standard deduction rose to $12,400. For heads of household, the standard deduction will be $18,650 for tax year 2020, up $300.

• The personal exemption remains at zero, which was a provision in the Tax Cuts and Jobs Act.

• The alternative minimum tax (AMT) exemption for single filers is $72,900 (phase-out begins at $518,400). For married couples filing jointly, the AMT exemption is $113,400 (phase-out begins at $1,036,800).

• Employer retirement plan contribution limits for 401(k)s, 403(b)s, most 457 plans, and the Thrift Savings Plan (TSP) increased to $19,500 (up $500). Catch-up contributions (employees aged 50 and older) increased to $6,500 (up $500). SIMPLE retirement account contributions increased to $13,500 (up $500).

• Marginal Rates: For tax year 2020, the top tax rate remains 37 percent for individual single taxpayers with incomes greater than $518,400 ($622,050 for married couples filing jointly). The other rates are 35 percent for incomes over $207,350 ($414,700 for married couples filing jointly); 32 percent for incomes over $163,300 ($326,600 for married couples filing jointly); 24 percent for incomes over $85,525 ($171,050 for married couples filing jointly); 22 percent for incomes over $40,125 ($80,250 for married couples filing jointly); 12 percent for incomes over $9,875 ($19,750 for married couples filing jointly). The lowest rate is 10 percent for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

• For 2020, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

What if I didn’t receive any stimulus money?

If you didn’t receive stimulus money and you’re eligible, you can claim the Recovery Rebate Credit on your 2020 Form 1040 or 1040-SR. These forms can also be used by people who are not normally required to file tax returns but are eligible for the credit. The Recovery Rebate Credit was authorized by the CARES Act. Generally, this credit will increase the amount of your refund or decrease the amount of the tax you owe.³

I collected unemployment due to COVID. Will that money be taxed?

Yes. Any unemployment income received is considered taxable income. This includes unemployment income collected from the Pandemic Unemployment Assistance program, which offered unemployment compensation to freelancers, contractors, and the self-employed for the first time. According to the IRS, any unemployment compensation is taxable and must be reported on your federal income tax return, which includes any “special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.”⁴

Is my side-hustle income taxable?

Yes. If you earned $400 or more, you owe regular income tax on any monies earned, plus you’ll also have to pay self-employment tax, which amounts to 15.3 percent for your share of your Social Security and Medicare taxes.⁵

What happens if my employer deferred payroll taxes in 2020?

In August 2020, President Trump signed an executive order, due to COVID, that allowed employers to suspend payment of the 6.2 percent Social Security tax that is normally deducted from employee paychecks. If your employer chose to defer these payments, your paychecks were likely boosted from March 27–December 31, 2020.⁶ The downside to this deferral is that your employer will have to make up that money, reducing your paychecks temporarily. As of December 28, 2020, the deferrals were to be repaid between January 1 and April 30, 2021. But the Fiscal 2021 Omnibus and COVID-19 Relief Bill extended the repayment period through December 31, 2021. Penalties and interest on deferred unpaid tax liability will not begin to accrue until January 1, 2022.⁷ Please keep in mind that, as an employer, if you deferred payroll taxes, you have the obligation to repay them even if you are unable to collect from the employee or former employee.

What about deferred self-employment taxes?

As with deferred payroll taxes, self-employed individuals were able to defer the payment of 50 percent of their Social Security tax on net earnings from self-employment income for the period of March 27–December 31, 2020.⁸ Again, these deferrals will have to be repaid between January 1 and April 30, 2021, according to the latest guidance provided as of December 28, 2020. According to IRS Notice 2020-65, deferred taxes not repaid by this time will be subject to interest, penalties, and additional amounts on the tax.

How will my PPP loan affect my taxes?

The CARES Act was created to provide monetary assistance to small business owners struggling to keep their doors open. One of these assistance programs was the PPP loan program, which was designed to be forgiven as long as the loan was used for certain business expenses like rent, payroll, mortgage interest, and utilities. An unexpected consequence of the PPP, though, is that small business owners will not be allowed to deduct normally deductible expenses like payroll, rent, and utilities that were paid with PPP loan proceeds if their PPP loan is forgiven.⁹ As of December 21, 2020, businesses that already received a PPP loan became eligible to get a second one under the new terms of the Fiscal 2021 Omnibus and COVID-19 Relief Bill.¹⁰

Does the Employee Retention Credit affect my taxes?

No. The Employee Retention Credit, a refundable tax credit against certain employment taxes, is not taxable. If you received a tax credit for qualified wages and health plan expenses paid to employees (50 percent) after March 12, 2020, and before January 1, 2021, do not include this credit in your gross income for federal taxes. Neither the portion of the credit that reduces the employer’s applicable employment taxes nor the refundable portion of the credit is considered income.¹¹

As of December 21, 2020, the Fiscal 2021 Omnibus and COVID-19 Relief Bill extended the Employee Retention Credit through June 30, 2021, and the credit rate was increased from 50 percent to 70 percent of qualified wages. It also expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50 percent to 20 percent and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility. The new bill also allows businesses with PPP loans to qualify, which was not allowed previously.¹²

What if I used money from my retirement account to keep myself afloat?

If you took money out of your retirement account in 2020 specifically due to COVID-related issues, you were not charged the 10 percent penalty tax for early distributions up to $100,000. The IRS also allowed borrowing up to an additional $100,000 from 401(k) plans. According to the IRS, these coronavirus-related withdrawals:

• May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual’s option

• Are not subject to the 10 percent additional tax on early distributions that would otherwise apply to most withdrawals before age 59½

• Are not subject to mandatory tax withholding

• May be repaid to an IRA or workplace retirement plan within three years

What about my flexible spending account?

The Fiscal 2021 Omnibus and COVID-19 Relief Bill, passed on December 21, 2020, allows a rollover of unused amounts in health and dependent care flexible savings accounts from 2020 to 2021 and 2021 to 2022. This change also allows employees to make a 2021 midyear change in contribution amounts.¹³

Are there any other COVID-related tax changes?

Yes. Two that you may not be aware of are deductions for charitable donations and business meals. For charitable deductions, taxpayers (who take the standard deduction) can claim a cash donation of up to $300.¹⁴ Also, the business meal deduction has been increased to 100 percent (up from 50 percent) for food and beverage expenses provided by a restaurant that are paid or incurred in 2021 and 2022.¹⁵

Notes

   1.  IRS, “Economic Impact Payment Information Center—Topic J: Reconciling on Your 2020 Tax Return,” updated December 8, 2020, accessed January 2021, www.irs.gov/newsroom/economic-impact-payment-information-center-topic-j-reconciling-on-your-2020-tax-return.

   2.  IRS, “Economic Impact Payment Information Center—Topic J: Reconciling on Your 2020 Tax Return.”

   3.  IRS, “Recovery Rebate Credit,” updated November 27, 2020, accessed January 2021, www.irs.gov/newsroom/recovery-rebate-credit.

  4.  IRS, “IRS: Unemployment Compensation is Taxable; Have Tax Withheld Now and Avoid a Tax-Time Surprise,” last reviewed November 25, 2020, accessed January 2021, www.irs.gov/newsroom/irs-unemployment-compensation-is-taxable-have-tax-withheld-now-and-avoid-a-tax-time-surprise#:~:text=By%20law%2C%20unemployment%20compensation%20is,2020%20federal%20income%20tax%20return.

   5.  IRS, “Self-Employment Tax (Social Security and Medicare Taxes),” accessed January 2021, www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes.

   6.  IRS, “Deferral of Employment Tax Deposits and Payments through December 31, 2020,” updated November 27, 2020, accessed January 2021, www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020.

   7.  Society for Human Resource Management, “Fiscal 2021 Omnibus and Covid-19 Relief,” accessed January 2021, https://advocacy.shrm.org/issue/fiscal-2021-omnibus-and-covid-19-relief/?_ga=2.250935749.219299692.1609269655-936848421.1609174529.

  8.  IRS, “Deferral of Employment Tax Deposits and Payments through December 31, 2020.”

   9.  IRS, “Notice 2020-32,” accessed January 2021, www.irs.gov/pub/irs-drop/n-20-32.pdf.

10.  Society for Human Resource Management, “Fiscal 2021 Omnibus and Covid-19 Relief.”

  11.  IRS, “COVID-19-Related Employee Retention Credits: Special Issues for Employers FAQs,” updated December 3, 2020, accessed January 2021, www.irs.gov/newsroom/covid-19-related-employee-retention-credits-special-issues-for-employers-faqs#special-issues-employers-income-and-deduction.

12.  Society for Human Resource Management, “Fiscal 2021 Omnibus and Covid-19 Relief.”

13.  Society for Human Resource Management, “Fiscal 2021 Omnibus and Covid-19 Relief.”

14.  IRS, “Special $300 Tax Deduction Helps Most People Give to Charity This Year—Even If They Don’t Itemize,” www.irs.gov/newsroom/special-300-tax-deduction-helps-most-people-give-to-charity-this-year-even-if-they-dont-itemize.

15.  Society for Human Resource Management, “Fiscal 2021 Omnibus and Covid-19 Relief.”

16.  IRS, “IRS Provides Tax Inflation Adjustments for Tax Year 2020,” updated December 17, 2020, accessed January 2021, www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2020.