State Resources for Your Business

Even the most organized companies may find themselves running behind as the tax filing deadline approaches. If tax information needed to complete a return is missing or you simply need more time for any reason, the IRS allows business taxpayers to buy some extra time by requesting an extension. Filing a business tax extension is relatively quick and painless. However, there are some things you should know.

Avoid Late-Filing Penalties

Check your filing due date so you can file on time or obtain a filing extension to avoid penalties. There's no penalty if there's a filing extension in place and the return is filed by the extended due date. The filing extension must be obtained by the due date of the return. The deadline for a business tax extension form depends on the type of business entity (assuming they all report on a calendar year and not on a fiscal year). For 2022 returns, the extension request deadline is:

• Partnerships (including limited liability companies with two or more members): March 15, 2023
• S corporations: March 15, 2023
• C corporations: April 18, 2023

Businesses located within federal disaster areas may not need to request an extension. They may enjoy an automatic extension—anywhere from 60 days up to one year as the IRS announces—to file the business return.

Sole proprietorships, self-employed individuals, and one-member limited liability companies can obtain an extension to report their business activities by getting an extension for their personal income tax returns. The due date for obtaining a self-employed tax extension is April 18, 2023.

Extensions for State Income Tax Returns

Most states impose their own taxes and have their own rules for filing returns and obtaining filing extensions. In some states, if you don't owe any federal income tax, a federal filing extension also extends the time for filing a state income tax return. Check with your state to find the deadline and procedure for obtaining a filing extension. You can find your state income information from the Federation of Tax Administrators.

Penalties

If you don't request a filing extension, filing a return after the original due date, even by the extended due date, triggers federal late-filing penalties—and they're stiff. For example, a 2022 Form 1065, U.S. Return of Partnership Income, that's due on March 15, 2023, but isn't filed on time for a calendar-year partnership results in a penalty of $220 multiplied by the number of partners who were in the partnership at any time during the year, multiplied by the number of months the return is late (up to 12 months). In other words, if the Form 1065 is three months late and there four partners, the penalty for this late filing amounts to $2,640 ($220 x 3 months x 4 partners).

Use the Correct Business Tax Extension Form

The IRS provides designated forms for filing a tax extension for federal income tax purposes.

Businesses—partnerships, multi-member limited liability companies, S corporations, and C corporations—must complete Form 7004, which allows for a six-month extension.

Sole Proprietorship or Self-Employed

Sole proprietors or self-employed individuals whose business income is reported on their individual tax form (1040 or 1040-SR), file Form 4868 to request an extension. One-member limited liability companies that haven't elected to be taxed as a corporation also file Form 4868 to request an extension. This form grants taxpayers an additional six months to file.

Filing the form is not necessary for individuals who pay their taxes online through the IRS payment portal. Through the option for "Bank Account (Direct Pay)," you will see the "reason for payment" listed as "extension."

No filing extension is needed in some situations because you get an automatic extension if:

• You live and work abroad. This gives you an additional two months to file your return. If you want more time, file Form 4868 to get another four months.
• You or your spouse works in a combat zone in support of the U.S. Armed Forces. The extension runs through the period in the combat zone, plus 180 days after the last day in the combat zone.
• You live in an area designated as a federal disaster area. This gives you anywhere from 60 days to one year as the IRS announces—to file your return.

Owners of Pass-Through Entities

Owners of pass-through entities—partnerships, multi-member limited liability companies, and S corporations—whose businesses have requested a filing extension should file for an extension for their personal returns on which they report their share of business income or loss. Again, individuals use Form 4868 to request a filing extension or make payment through the IRS payment portal (explained earlier in Sole Proprietorship or Self-Employed).

Estimate Tax Owed

Filing a business return extension does not give more time to pay taxes owed. As the IRS website states, "An extension of time to file is not an extension of time to pay." If taxes are not paid by the original due date of the return, there are late-payment penalties.

Are Federal Taxes Owed?

Businesses may or may not owe taxes. They may have already paid taxes via through estimated taxes throughout the year. For example, a calendar-year C corporation paid estimated taxes for 2022 in four installments on April 18, 2022, June 15, 2022, September 15, 2022, and December 15, 2022. If these payments equaled or exceeded the tax figured on the return, no additional tax needs to be paid.

Businesses that are pass-through entities usually do not pay taxes; owners pay taxes on their share of business income. However, S corporations may owe taxes in special situations and should make timely tax payments to avoid a late-payment penalty:

• Excess net passive income tax is owed if the corporation has passive investment income in excess of 25% of gross profits.
• LIFO recapture, payable in four equal installments, if the corporation had been a C corporation that used LIFO inventory pricing method for its last year as a C corporation or a C corporation transferred LIFO inventory to the S corporation in a nonrecognition transaction. The C corporation pays one fourth of the recapture tax in its last year; the S corporation pays the tax for the remaining installments.
• Built-in gains tax on appreciated assets held at the time a C corporation became an S corporation and sold within five years.

Are State Income Taxes Owed?

In addition to federal income tax, state income tax may be owed. Owners are subject to state income tax in all states other than Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, New Hampshire, and Wyoming.

Different tax rules apply to corporations when it comes to state income taxes. For example, Florida imposes a corporate tax even though sole proprietors have no state income tax on their business profits.

Companies that conduct business in more than one state may owe taxes in multiple locations. Apportionment rules, which vary by state, determine what portion of federal income is subject to state tax.

How Much Additional Tax Is Owed?

If a business expects to owe taxes, they must estimate the amount due to the best of their ability and pay as much as possible to minimize or avoid late-payment penalties. Even if tax forms are not complete, most businesses should be able to reasonably calculate annual income and figure the tax due. If required information is missing or needs to be corrected, a professional tax preparer can help with tax estimates or provide advice on what should be sent to the IRS.

Complete the Business Tax Extension Form

The business extension Form 7004 is relatively easy to complete. Include the correct code for the type of return to which the extension relates. For example, a C corporation filing Form 1120 enters code "12" in Part I the extension request form. The estimated amount of total tax expected to be owed when the return is completed and the amount of payments already made must also be listed to calculate the estimated balance due which will accompany the extension request.

No reason for requesting the extension is necessary. No signature is required on the form.

Send the Extension Request to the IRS

Can I file a business tax extension online? Extensions may be filed electronically. If using tax software, the current year's extension forms should be available for transmittal within the program. Alternatively, you can use a tax professional who can submit the extension request for you. More specifically:

• Filing Form 7004 electronically: the form must be filed through the Modernized e-file (MeF) platform that tax professionals can access.
• Filing Form 4868 electronically: access IRS e-file with your tax software or use a tax professional who can access e-file.

If the form is completed on paper, mail it to the address in the instructions to the form. Filing an extension request on paper does not preclude you from filing the tax return electronically. But watch the timing of your actions because a paper extension may be processed by the IRS later than the time when an electronic form is filed.

Make a Tax Payment

Corporations must make their tax payments electronically using EFTPS.gov. There's no cost for using this payment method, but you have to register with EFTPS in advance to obtain a PIN number for access. Those that do not want to use EFTPS.gov can arrange for tax payments through a tax professional, financial institution, or other trusted third party to make electronic deposits on their behalf.

Other businesses can choose to use EFTPS.gov. It is an easy and secure payment method.

Individuals can also pay online using EFTPS.gov as well as pay from their bank account using Direct Pay or by a credit or debit card. They can also pay by phone.

If funds are not paid electronically, send a check payable to the U.S. Treasury to cover estimated tax liability.

What's Next?

Hold onto confirmation that the extension was mailed or e-filed. The IRS does not inform filers that an extension is granted because the extension is automatic. When the complete tax information is available, all required forms should be filed and any additional tax remitted.

Again, remember that Form 7004 extension only applies to federal taxes. State and local tax extensions must be researched and requested separately.

Prepare To File Taxes in Full

A filing extension only postpones the inevitable task of filing a return for 2022. Be sure to understand the full process for filing your business return. Business should consider working with a tax professional to ensure their final return complies with tax rules and takes advantage of every tax-saving opportunity available.

Paychex offers tax services that can help your business navigate the complexities of filing taxes.

Pay transparency continues to be a major focus among state legislatures moving into 2023. In late December 2022, the governor of New York State signed into law legislative bill S.9427-A/A.10477 that will require covered employers in the state to comply with obligations related to pay transparency in job advertisements.

New York is one of seven states as of this publication date that have passed pay transparency legislation, and joins California, Rhode Island, and Washington in implementing such a law in 2023. New York’s law, which applies to employers located in New York state, goes into effect Sept. 17, 2023.

What is Pay Transparency?

Pay transparency is the act of sharing compensation information for positions within your business, including but not limited to pay rates for available positions, pay increases, bonuses, benefits, and more.

The primary goal of pay transparency laws are to help close pay gaps. In 2020, women made 83 cents for every dollar made by men, according to the U.S. Department of Labor. The gender pay gap was greater for black women (64 cents) and Hispanic women (57 cents).

Companies can demonstrate various degrees of pay transparency. For example, one company might choose to share pay ranges for open positions while another business might choose to share specific pay rates for every job. However, all businesses are required to comply with the applicable pay transparency laws in their state or local jurisdiction.

What is Required of Covered Employers Under the NY Pay Transparency Law?

An employer with four or more employees has an obligation to comply with the following requirements*:

• Include the minimum and maximum annual salary or hourly range when advertising a job, promotion, or transfer opportunity that can or will be performed, at least in part, in the state¹
• Disclose the job description if one already exists when advertising a job, promotion, or transfer opportunity
• Maintain records that support compliance. Some examples include:
  • History of compensation ranges for each job, promotion, or transfer opportunity
  • Job descriptions for such positions, if they exist

Are There Other Pay Transparency Laws in NYS?

New York state, as of this publication, has three local jurisdictions with pay transparency laws that went into effect in 2022, including Ithaca (Sept. 1), New York City (Nov. 1), and Westchester County (Nov. 6). According to the state law, none of the provisions of the state law supersede the requirements of any local law, so businesses need to understand and comply with any additional requirements of the pay transparency laws in their local jurisdiction. For example, the NYC law covers employers of even one domestic worker, so the NY state law might not apply to them, but the NYC law would.

The state Labor commission is expected to release further guidance/regulations in advance of the effective date (Sept. 17, 2023).

What Are the Penalties for Noncompliance with NYS Pay Transparency Law?

According to the law, any business found in violation of the provisions will be subject to civil fines as follows:

• $1,000 for the first violation
• $2,000 for the second violation
• $3,000 for the third violation and beyond

There is no private right of action, but individuals may file a complaint with the NYS DOL commissioner. Employers should note that there is also an anti-retaliation provision in the law.

Looking Ahead

Paychex will continue to monitor this topic and provide updates on additional guidance provided by the NYS Commission of Labor. Also, has your business considered the benefits of working with an HR solutions provider that offers an HR Professional?  You’ll get help assessing your needs, simplifying management processes, and identifying employment laws and regulations so you can better navigate compliance challenges.  

* Certain employment agencies are considered eligible employees.

¹ A written statement that details that compensation will be based on commission might meet the disclosure requirements for commission-only jobs.   

Two programs — the Colorado Secure Savings and the New Mexico Work and Save — signed a first-of-its-kind agreement in the United States to partner for their state-run retirement programs. The Memorandum of Cooperation aims to create economies of scale and provide portable security for transient workers across state lines. The programs will collaborate on shared program administration and financial services, as well as marketing support, data collection, research and more.

Currently, Colorado's program is mandatory for covered employers, while New Mexico's is voluntary for employers and employees.

There are almost 40 million employees working in the private sector who do not have access to a retirement plan with their employer, according to the U.S. Bureau of Labor Statistics*. On July 21, 2020, Colorado moved to help reduce that by one million. The passage of the legislation establishing the Colorado Secure Savings Program mandates businesses with at least five employees offer access to an individual retirement account (IRA) funded by automatic payroll deductions. Employees will be enrolled automatically but can opt out

Businesses that currently do not offer a retirement savings plan will be obligated to do so through the Colorado state treasurer and under the guidance of an advisory board. The program was implemented in early 2023 ahead of its scheduled march launch and employers can begin registering.

Why are state-mandated retirement plans becoming popular?

Studies over the past decade have shown that the retirement-readiness of the average household with working adults has worsened. Although data vary from study to study and year to year on the amount households have saved, all studies agree on a similar conclusion: private-sector employees either do not have enough saved for retirement or they aren’t saving at all.

A 2018 consumer spending report from the U.S. Bureau of Labor Statistics showed that the average American spent almost $3,900 a month on basics (food, housing, health care). The average Social Security retirement benefit was about $1,470 at that time. An individual’s retirement savings is supposed to make up the difference.

Realizing the crisis facing residents of their state, Colorado joins 10 others that have enacted legislation for state-mandated retirement plans by private employers for employees: California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington.

What employers should know about the Colorado Secure Savings Program

Employers must implement the Colorado Secure Savings Program for their employees if they have:

• Five or more employees at anytime during the calendar year
• Been in business at least two years, and
• Not offered a qualified retirement plan in the preceding two years

There is a phased rollout for employers with deadlines as follow:

• March 15, 2023: Employers with 50-plus employees
• May 15, 2023: Employers with 15 to 49 employees
• June 30, 2023: Employers with 5 to 14 employees

Employers are not required to make contributions to this program and those with 5 to 25 employees may qualify for a $300 program grant. Also, self-employed may voluntarily participate in the program.

Employers can face a penalty for noncompliance such as failure to enroll eligible employees, of $100 per eligible employee per year (up to max of $5,000 annually). Enforcement of this rule begins one year after the due date set for the employer enrollment based on the number of employees in the business’ workforce.

What employees should know about the Colorado Secure Savings Program

The Colorado Secure Savings Program provides a portable retirement plan for employees who are 18 years of age or older, have been employed by a Colorado employer for at least 180 days, and who earn taxable wages in Colorado.

They will be enrolled automatically in the program but can opt out, and the default rate that will be withheld from each paycheck will be 5 percent with an auto-escalation each year of 1% with a cap of 8%. Participants will be able to change the percentage withheld after enrolled.

Looking forward

Paychex will continue to monitor the situation and provide updates when information is available. One notable advantage for small businesses is providing a benefit similar to larger companies, acting as a perk to attract and retain younger employees and help them start building a retirement savings.

Colorado businesses do not have to wait for the program to launch and can open a retirement plan such as a 401(k) through a provider such as Paychex to satisfy the mandate. No matter where you are in the process, make sure to stay up-to-date on state retirement plans for the most relevant information.

*Consumer Expenditure Survey, 2018