(Note: everything in section 1 applies to rental activity as well as self-employment activity. Sections 2-4 are for self-employment activity only.)
There are four main topics that need to be discussed with regard to self-employment income in 2020: 1) filing requirements with the City of Portland and Multnomah County; 2) home office deductions; 3) self-employment tax deferral; and 4) PPP and EIDL funds.
1. Filing requirements with the City of Portland and Multnomah County
The City of Portland and Multnomah County have a tax filing requirement for anyone who earns any amount of money from self-employment from activity within city/county limits. No tax is owed if your (plus your spouse’s) total revenue from all self-employment is under $50k. But if you have even $1 of revenue from self-employment or rental property, you need to submit a filing, regardless of the $50k threshold.
You might think that the City/County would work with the Oregon Dept of Revenue to make it a simple process to submit the annual filing as part of the annual Oregon state income tax return. No such luck. The City has devised a totally separate system, with its own access point, and — importantly — no way for me to submit the electronic filing on clients’ behalf without spending a lot of time jumping through hoops.
(It used to be fairly simple for me to submit these filings. But the City rolled out a new system in mid-2020, and that’s no longer the case.)
So, here’s how things will work for 2021 and beyond:
- I will continue to prepare a Portland/Multnomah self-employment tax return for you, as I have in the past. A copy of the prepared return will be included in your 2020 tax return pdf. It will be partially incomplete — it won’t show your account number, which I don’t have access to — and therefore it cannot be filed as-is.
- You will be responsible for filing your own return via the City’s “Portland Revenue Online” (PRO) website. You can use the information in the return that I’ve prepared for you, or you can use … different numbers. Since I’m not the one filing it, I don’t particularly care what you choose to tell the City.
- In order to submit returns via the PRO website, you’ll need to create a username first, so that you can access to your online account. This isn’t necessarily simple. You can try to do it online using information from a prior-year tax return, but my experience so far is that this doesn’t work. I wouldn’t try it. It’s very likely to be a waste of your time, and there’s a good chance that you’ll inadvertently set up a duplicate account, which can create a real mess.
- Instead, what you should do first is call the City Revenue Division at (503) 823-5157 and request that a “Welcome Letter” be mailed to you. (Edit: apparently, they can also email it to you, at least in some circumstances.) The letter will contain your Account ID# and a Letter ID# that you can use to create a PRO username. DO THIS NOW. The sooner you take care of this step, the better.
- [Note: If you call them up and they tell you that you need to “register” your business first, then you’ll need to take that step. This is fairly easy to handle online, without a username. On the PRO website, click on “Register My Business”. If you don’t know what type of business entity you have, then you’re almost certainly a sole proprietor — which includes single-member LLCs, in this case — and you should register under your own SSN, with your own name as the business name. Be sure you don’t indicate a “business start date” before Jan 1 2020, or they’re going to want to see previous year’s filings.]
- [If you’re unsure whether your “business” is already registered with the City, it probably already is — but you can use the “Business Lookup” tool on the PRO website to verify that. Search by your last name, and then filter by your first name if there are too many results. If you’re not listed, try searching by your spouse’s last name. If you’re still coming up empty, you’re probably not registered, either because 2020 was your first year in “business”, or because your self-employment income in the past has always been low enough that I didn’t think it worth putting you on the City’s radar.]
- When you receive the “Welcome Letter”, go back to the City’s website and click on “Create PRO Username”. Click “Yes” for “Do you expect to file/pay Portland Taxes for yourself or your business?”; select “Business Tax” in the next step, with “Account ID and Letter ID” as your verification option. If all goes well, you’ll be able to create a username and password.
- When you log in, you should be able to see a “Business Tax” account (and probably also an “Arts Tax” account). This account is an umbrella account that includes all of your (and your spouse’s) self-employment and rental activities, and any single-member LLCs owned by you or your spouse.
- When it comes time to file your return, you’ll need to navigate to Business Tax section of your account. Click on “Returns”, then “Tax Year End Dec-2020”, then “File or Amend Return”.
- Once you’ve filed the return, there’s an additional nuisance piece of uploading “supporting documentation”. The pdf of your federal and state tax return will suffice for this step; it’s more information than they need, but that’s easier than trying to tease out only the pages they’re requesting.
- If you owe any tax, you’ll be able to make payment via the website, once the return has been submitted.
- Lastly (but definitely not least!), if you choose to skip the registration and/or filing process, that’s entirely up to you. For those of you who have only a small amount of self-employment income each year, or who have a one-time 1099 gig, this is going to be an an attractive option. I get it. It’s not allowed, but I’m not going to judge you harshly if you make that choice! I’ll continue to prepare the annual filing for you, but since I can’t file it for you, it’s up to you what you to do with it.
- … Ok, really lastly this time: There is an annual rental registration fee ($60 per long-term rental unit, within Portland) that is filed an paid as part of the annual business tax filing, even though it is not an income tax. Because it’s a fee and not an income tax, the $50k threshold does not apply. If you have any amount of revenue from a residential rental, you need to file and pay. As above, I will prepare the filing for you, but it’s up to you to submit it and pay the appropriate fee.
Expect problems. If it goes smoothly the first time through, you’ll be the exception, not the rule!
Note that once you’ve set up an account, you will need to submit a filing every year, unless/until you close your account.
Also note that you and your spouse’s self-employment and rental activities are combined into a single filing. That is, everything that gets reported on your joint federal income tax return also gets reported under a joint City/County return. So, if you bring in $15k from self-employment, your spouse brings in another $15k from self-employment, and you have a rental property that brings in $20k, then you’ve hit the $50k threshold and you’ll owe tax. The filing and tax for all of the above activities will be under a single account name and number. This gets very confusing if you’re trying to “register” your business with the City of Portland; you may very well already be registered if your spouse has already registered a completely separate business or rental property. Expect to spend some time on the phone with the City trying to clear it all up!
2. Home Office Deductions
If you’re unsure whether your home office qualifies for a tax deduction, it probably doesn’t.
There is no “home office” tax deduction, actually. What does exist in the tax code is a deduction for “business use of home”. So, your home office qualifies for a tax deduction only if it meets the tests for “business use of home”. And one of those tests — the “exclusive-use test” — is very strict: if you used your home office space for anything other than business/self-employment, then you are not eligible for a tax deduction for that space. Period. This includes working from home as an employee, looking at job listings, sending out resumes, etc. Even personal computer use in your off hours, such as paying your bills, is grounds for disqualification.
(The Tax Court has ruled that you are allowed to walk through the space on your way to another part of your house, but essentially nothing else. Seriously, that’s how strictly the law is written and interpreted.)
Now, it’s possible that Congress will make changes to the “exclusive-use test” for 2020 (retroactive). But I wouldn’t count on it. The “business use of home” tax deduction is intended for something other than what most people consider to be their “home office”. A desk and a computer and some bookshelves might be a convenient place for you to work while you’re at home, but it’s probably not what Congress was handing out a tax deduction for when drawing up the relevant tax code — Section 280A(c).
So: if you have a space in your home that you use regularly for self-employment, and that you don’t use for any other purpose at all because you’re using it regularly for self-employment, then — that’s probably a qualifying space for a tax deduction. Anything else probably isn’t. Again, think “business use of home”, not “home office”. If you make a living selling computer parts online, and you’ve got your inventory stored in your garage, and you don’t use the garage for anything else, then that would qualify. If you’re a massage therapist and you have a room in your home that you use only for appointments with clients, that would qualify.
Note that a tax-deductible space doesn’t need to be an entire room, and it doesn’t need to be a full year. If part of a room qualifies, and part of it doesn’t, then you’re absolutely allowed to claim a deduction for the part of the room that does qualify. Likewise, if your home office qualifies for a tax deduction for only part of the year, you’re allowed to claim a deduction for that portion of the year.
3. Self-employment tax deferral
Details on this one are still being worked out, but the general idea is that self-employed individuals are allowed to defer half of the FICA tax due on their self-employment earnings (approximately 7.5%), with half of that amount being due at the end of 2021, and the other half due at the end of 2022.
Unless you have significant self-employment earnings, this … isn’t going to be worth the effort. If I think it is worth the effort in your case, I’ll let you know. But unless you’re in a temporary cash crunch, its generally better to pay the tax now, rather than force it onto your future self.
4. PPP and EIDL funds
Legislation continues to evolve. For now, the best I can say is: along with the rest of your tax information, let me if you received PPP and/or EIDL funds, and if so, how much (if any) you’ve paid back or anticipate having to pay back. I’ll make sure it shows up on your tax return if and only if we’re required to report it.