For S-corporation owner-employees, health insurance premiums offer potential tax advantages, though the rules differ from other business structures. If you’re an S-corp shareholder who owns more than 2% of the company, here’s what you should know to make the most of your health insurance expenses.
As a reminder, the open enrollment period for health insurance launched November 1, 2024, and concludes January 15, 2025. You can enroll in, renew, or change your health insurance plans through the Affordable Care Act (ACA) marketplace or your state’s exchange after comparing plans for one that fits your needs best.
This is the third of a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses.
Deducting Health Insurance Premiums
S-corporation owner-employees can deduct health insurance premiums, but the process involves several steps. The S-corp must pay the premiums directly or reimburse the owner-employee, recording these payments as wages on the owner’s W-2. These wages are then subject to income tax but not to Social Security and Medicare taxes.
Once the health insurance premiums are reported as income, the owner-employee can take an “above-the-line” deduction on their personal tax return, which reduces adjusted gross income (AGI). This deduction is only available if the S-corp had a net profit, meaning the deduction can’t exceed business income.
Health Insurance and Eligibility for Other Benefits
If you qualify for other tax-advantaged health benefits, such as Health Savings Account (HSA) contributions, keep in mind that health coverage from the S-corp must align with IRS requirements. For example, to contribute to an HSA, the S-corp owner-employee must have a high-deductible health plan (HDHP), as required for HSA eligibility.
ACA Premium Tax Credit
Owner-employees may not qualify for the Premium Tax Credit (PTC) on health plans purchased through the Health Insurance Marketplace, as the S-corp health insurance deduction reduces the PTC. It’s essential to consider this when choosing a health insurance plan, especially if other family members are included on the policy.
Spousal and Family Coverage
If an owner-employee’s spouse or family members work for the S-corp, their health insurance premiums may also be eligible for this deduction. The same rules apply: premiums must be paid by the S-corp and reported as wages to the employee-family member, and they must meet the AGI and net profit limitations.
Important Considerations
For S-corp owner-employees, balancing health insurance expenses with tax efficiency requires careful planning. Open enrollment is an ideal time to ensure your coverage aligns with these tax rules. Consulting a tax professional can provide personalized insights, especially for those balancing multiple tax considerations within the S-corp structure.
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a valuable option for small businesses looking to provide healthcare benefits to employees in a cost-effective, flexible way. Designed specifically for companies with fewer than 50 full-time employees, a QSEHRA allows employers to reimburse employees tax-free for health insurance premiums and other qualifying medical expenses. Here’s a closer look at the benefits, requirements, and extensive list of covered expenses that make QSEHRA a strong choice for small businesses.
This is the second in a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses.
As a reminder, the open enrollment period for health insurance launched November 1, 2024, and concludes January 15, 2025.
Benefits of Offering a QSEHRA
Cost Control: Unlike traditional group health insurance, where premium costs can fluctuate and increase, a QSEHRA gives employers the ability to set a defined budget, providing full control over healthcare spending.
Tax Advantages: QSEHRA reimbursements are tax-free for both employers and employees, provided employees have minimum essential coverage (MEC). Employers also benefit from a tax deduction on these contributions, making it a win-win for both sides.
Employee Flexibility: With a QSEHRA, employees can select the health insurance plan that best meets their needs and budget. This personalization enhances employee satisfaction, as they can tailor their health benefits to fit their unique healthcare circumstances and family requirements.
Requirements for Establishing a QSEHRA
To offer a QSEHRA, businesses must meet certain requirements as outlined by the IRS:
– Size Limitation: Only employers with fewer than 50 full-time employees can offer a QSEHRA.
– No Group Health Plan: Employers offering a QSEHRA cannot provide a separate group health plan to any employees. The QSEHRA is intended as an alternative for small businesses that do not offer group health insurance.
– Employee Coverage Requirement: Employees must have minimum essential coverage (MEC) to receive QSEHRA reimbursements tax-free. If an employee lacks MEC, any reimbursements are treated as taxable income and must be reported on their tax return.
How the QSEHRA Works
Set a Budget and Define Reimbursement Limits: Employers decide how much they wish to offer in reimbursements, with annual IRS-set limits. For 2024, the maximum reimbursement amounts are around $5,850 for individual employees and $11,800 for families (2025 limits are $6,350 and $12,800 respectively). Employers have the flexibility to set limits below these maximums based on their budget.
Employee Submission of Expenses: Employees pay for eligible health expenses out-of-pocket, then submit documentation to the employer for reimbursement. Eligible expenses encompass a broad spectrum of healthcare costs, providing extensive coverage and flexibility.
Tax-Free Reimbursement: As long as employees have MEC, QSEHRA reimbursements are tax-free for them, with no need to report the reimbursement as income. Employers benefit from a tax deduction on these reimbursements, enhancing the overall tax efficiency of the arrangement.
Extensive List of Eligible Expenses
One of the standout features of a QSEHRA is the broad range of health expenses it covers, providing employees with a flexible benefit that can be tailored to their healthcare needs. This extensive list includes more than just insurance premiums and helps employees manage various out-of-pocket costs. Some of the main categories of eligible expenses include:
– Health Insurance Premiums: Premiums for individual health policies, COBRA, and even Medicare are covered, making QSEHRA funds versatile across different coverage needs.
– Out-of-Pocket Medical Costs: Reimbursements can be applied toward co-pays, deductibles, and other costs for doctor visits, hospital stays, surgeries, and lab tests.
– Prescription Medications and Insulin: Both prescription drugs and insulin are eligible, which can be a significant relief for employees managing ongoing medication costs.
– Dental and Vision Care: Dental expenses, including exams, cleanings, braces, and dentures, as well as vision costs like eye exams, glasses, and contact lenses, are covered. This is especially valuable as these areas are often excluded from standard health insurance.
– Mental Health Services: QSEHRA reimbursements can cover therapy sessions, psychiatric services, and other mental health treatments, aligning with the growing focus on mental wellness in the workplace.
– Medical Equipment and Supplies: Eligible expenses include items such as crutches, hearing aids, bandages, and durable medical equipment like wheelchairs, offering support for various health needs.
– Over-the-Counter (OTC) Health Products: Following recent updates, many OTC products are also covered. Eligible items include common medications (e.g., pain relievers, allergy medications), health aids (e.g., first-aid kits, thermometers, blood pressure monitors), and feminine hygiene products (e.g., tampons, pads). This feature makes QSEHRA funds useful for day-to-day healthcare needs, not just major medical expenses.
Additional Rules and Considerations
– Impact on Premium Tax Credit: Employees who are eligible for a Premium Tax Credit (PTC) through the Health Insurance Marketplace may see an adjustment if they receive QSEHRA reimbursements. The amount of QSEHRA reimbursement reduces the PTC since employees cannot receive full benefits from both.
– Annual Reporting: Employers are required to report the QSEHRA amount on employees’ W-2 forms each year, ensuring compliance with IRS rules and transparency for both parties.
– Communication Requirements: Employers must provide employees with a written notice about the QSEHRA each year, including the annual reimbursement limit and a reminder that MEC is required to receive tax-free reimbursements.
QSEHRA vs. Group Health Insurance
For small businesses, a QSEHRA can be an ideal solution, offering healthcare benefits without the administrative and financial burdens of traditional group health insurance. With a QSEHRA, employers set a defined benefit amount, giving them control over costs while providing employees with greater choice and flexibility in their healthcare decisions.
Is a QSEHRA Right for Your Business?
A QSEHRA can be a smart choice if you’re a small business owner who wants to offer healthcare support to employees without committing to the cost and complexity of a group health plan. It’s especially appealing for companies that value flexibility, budget control, and a customizable approach to healthcare benefits. Consulting a benefits advisor or tax professional can help ensure you’re setting up and managing a QSEHRA in a compliant, strategic way tailored to your business needs.
With the health insurance open enrollment period underway, it’s time to review your health insurance options and understand the potential tax benefits associated with your healthcare coverage. Health insurance expenses can impact your taxes in several ways, and taking advantage of available deductions, credits, and employer arrangements can help you save.
As a reminder, the open enrollment period launched November 1, 2024, and concludes January 15, 2025. You can enroll in, renew, or change your health insurance plans through the Affordable Care Act (ACA) marketplace or your state’s exchange after comparing plans for one that fits your needs best.
This is the first of a series of articles we are publishing regarding tax implications related to health insurance for individuals and small businesses. Below are the top six things you should consider regarding taxes and health insurance.
Self-Employed Health Insurance Deduction
If you’re self-employed, open enrollment is an ideal time to explore health insurance plans, as you may be eligible for a 100% deduction of health insurance premiums paid for yourself, your spouse, and dependents. This deduction reduces your adjusted gross income, which lowers your taxable income and applies regardless of whether you itemize deductions. One key factor is that the deduction cannot exceed your net profit from the business. This deduction can be a valuable way to lessen the tax impact of health insurance costs if you’re self-employed.
Health Savings Account (HSA) Contributions
Enrolling in a high-deductible health plan (HDHP) during open enrollment can give you access to a Health Savings Account (HSA), which offers triple tax benefits. Contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free when used for qualified medical expenses. In 2024, the contribution limits are $3,850 for individuals and $7,750 for families (2025 limits are $4,300 and $8,550 respectively), with an additional $1,000 catch-up contribution for those aged 55 or older. HSAs can be a powerful tax-saving tool, especially if you’re preparing for healthcare expenses in retirement or aiming to reduce your current taxable income.
Premium Tax Credit for Marketplace Plans
If you’re purchasing health insurance through the Health Insurance Marketplace, you may qualify for the Premium Tax Credit (PTC) based on household income and family size. The PTC can help lower the cost of premiums, and you can receive it in advance or claim it on your tax return. The open enrollment period is the time to update your income and household information with the Marketplace, as this affects your PTC eligibility. Properly adjusting these details can help you make the most of this credit and avoid potential surprises during tax season. Be sure to obtain and retain your 1095-A from your provider; you’ll need it to claim the credit on your taxes!
Long-Term Care Insurance Premiums
If you’re considering long-term care insurance, premiums paid for a qualified policy may be deductible as medical expenses, subject to age-based limits. These premiums contribute to the medical expenses deduction threshold mentioned above (7.5% of AGI). Although this deduction is not exclusively tied to open enrollment, this is a good time to review any long-term care needs and their potential tax impact as you assess overall health coverage.
Employer-Sponsored Plans and QSEHRA Reimbursements
If you’re an employee with health insurance premiums paid through an employer-sponsored plan, those premiums are generally paid with pre-tax dollars, meaning they’re not deductible since you’re already benefiting from a tax break.
For employees of small businesses, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers a unique benefit. Under QSEHRAs, small employers (those with fewer than 50 full-time employees) can reimburse employees for health insurance premiums and other medical expenses on a tax-free basis, as long as the employee has minimum essential coverage. Employers can deduct these reimbursements as a business expense, while employees receive the funds tax-free, making it a win-win for both parties.
For 2024, QSEHRA reimbursement limits are set at around $5,850 for individuals and $11,800 for family coverage families (2025 limits are $6,350 and $12,800 respectively). Note that if you qualify for the Premium Tax Credit through the Health Insurance Marketplace, the amount reimbursed through QSEHRA can affect the credit, as you can’t receive full benefits from both. Additionally, QSEHRAs may impact Health Savings Account (HSA) eligibility, as an employee with QSEHRA reimbursement for all medical expenses may not be able to contribute to an HSA.
Itemized Deduction for Medical Expenses
If you plan to itemize deductions this tax year, you can potentially deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI), including health insurance premiums. For instance, if your AGI is $50,000, medical expenses over $3,750 are eligible for deduction. Deductible expenses go beyond premiums and can include out-of-pocket costs for doctor visits, surgeries, dental and vision care, mental health services, and more.
It’s important to remember that only expenses that exceed the 7.5% threshold count toward the deduction, so if your total medical costs are below this, you may benefit more from taking the standard deduction rather than itemizing.
Make the Most of Open Enrollment
As you navigate the open enrollment period, take a moment to review how health insurance decisions impact your taxes. Whether you’re eligible for specific deductions, contributions to an HSA, or potential tax credits, understanding these options allows you to tailor your health coverage to both meet your needs and maximize tax savings. Open enrollment is more than just selecting a plan; it’s an opportunity to optimize your financial health alongside your physical well-being. For personalized guidance, consult a tax professional or use reputable tax software to ensure you’re making the most tax-savvy decisions for the year ahead.
Self-employed individuals face unique challenges when qualifying for Social Security Disability Insurance (SSDI). However, by leveraging optional methods for figuring self-employment tax, you can enhance your eligibility for SSDI benefits and unlock potential tax benefits like the Earned Income Tax Credit (EIC). Here’s how you can make the most of these optional methods.
Key Requirements for SSDI Eligibility for Self-Employed Individuals
Work Credits:
SSDI eligibility hinges on accumulating enough work credits, which self-employed individuals earn based on net earnings.
In 2024, one work credit is earned for every $1,730 in net earnings, up to a maximum of four credits per year.
Recent Work Test:
This test checks your work history prior to becoming disabled, with varying requirements based on age:
Under 24 of age: 6 credits in the 3 years before disability.
Ages 24-31: Credits for half the time worked between age 21 and the onset of disability.
31 and older: Typically, 20 credits in the 10 years before disability.
Duration of Work Test:
Ensures sufficient work history under Social Security, with requirements depending on your age at disability onset.
Example: At age 50, you need 28 credits (7 years of work).
Medical Requirements:
You must have a condition meeting the SSA’s definition of disability, preventing substantial gainful activity (SGA) and expected to last at least one year or result in death.
Leveraging Optional Methods for Self-Employment Tax
If your Schedule C net income is negative, you may be able to effectively “purchase” those credits by using optional methods to calculate your net earnings from self-employment! These can significantly impact your SSDI eligibility and other tax benefits.
Farm Optional Method:
Ideal for farmers with gross farm income of $8,640 or less, or net farm profits under $6,960.
Allows you to report two-thirds of your gross farm income (up to $6,960) as net earnings, even if your actual earnings are lower. This can help you meet the income threshold for work credits.
Nonfarm Optional Method:
Suitable for nonfarm businesses with net nonfarm profits under $6,960 and less than 72.189% of gross nonfarm income.
Lets you report your actual net earnings or a minimum of $5,640 (whichever is lower), aiding in meeting work credit requirements.
Benefits of Using Optional Methods
Enhanced SSDI Eligibility:
Optional methods can ensure you earn sufficient income to qualify for work credits, crucial for maintaining SSDI eligibility during low-earning years.
Consistent Work Credits
By consistently meeting work credit requirements, you avoid gaps in your work history that could jeopardize your SSDI eligibility.
Increased SSDI Benefits:
Reporting higher net earnings can result in higher SSDI benefits, as the benefit amount is based on your average lifetime earnings.
Tax Benefits:
Utilizing optional methods can also qualify you for the Earned Income Tax Credit (EIC), a refundable tax credit that can reduce your tax liability and potentially result in a
Conclusion
Self-employed individuals can significantly benefit from understanding and utilizing optional methods for calculating self-employment tax. These methods not only help in qualifying for SSDI benefits by ensuring consistent work credits and potentially higher benefit amounts, but they also unlock valuable tax benefits such as the EIC.
You might end up having to pay something in SE taxes, essentially “buying” your credits, but just think of this as a cheap way of buying disability insurance. You can even amend past returns (up to the last 3 years) to make this happen.
Important note: If the Schedule C business is in the name of only one spouse, then the credits only accrue to that spouse, even if you file your return jointly. Think carefully about this!
If you aren’t eligible, review your past three years of tax returns to see if your Self Employment Income was reported as negative and then re-figure the SE income using the appropriate method.
If eligible, file that amendment!
For tailored advice, consider consulting with a tax professional or a Social Security expert to navigate these strategies effectively and maximize your financial support in case of disability.
This is just a quick note to Connecticut business owners and taxpayers:
We attended a recent presentation by representatives of the Department of Revenue Services (DRS), where it was mentioned that the audit department is creating new teams focused on small businesses and sales tax issues. One particular interest for these teams? Cash-intensive businesses (hairdressers, laundromats, etc.).
We wanted to alert the small business owners in our audience as a reminder to keep good records in general in addition to track and remit sales tax properly and on time. The IRS has helpful publications with tips on general business record keeping. For Connecticut information, the DRS webinar page is a good first stop.
In addition, the Connecticut General Assembly has asked the DRS to make an estimate of the “tax gap” (the difference between what is collected in taxes and what that number should be if everyone was compliant). That’s not in itself alarming, but we’ve seen this play out before at the Federal level. The US Treasury and IRS began making such estimates which, along with a GAO report on the number of non-filers, provided the motivation for Congress to increase IRS funding a few years later.
While there’s no indication at this time of history repeating itself in the Nutmeg State, we do recognize that, in a world where state budgets feel squeezed, a set of figures that justifies increased tax collection efforts probably would be of interest to lawmakers. Keep an eye on this one!
Sunstone Bookkeeping and Tax Solutions can help with these issues:
If you want general assistance on a particular bookkeeping or tax item, a One-Hour Bookkeeper session might be right for you.
If you are starting a business (or, at a point where you need to “re-start” your recordkeeping) we have a Right Start Bookkeeping Service to get your accounting processes set up for both tax compliance and business success.
If you’ve gotten bad news in the form of a notice from the DRS or IRS, our tax expert can review your filing and represent you if necessary to help you get the best possible resolution.
Are you a freelancer, consultant, or entrepreneur? Being self-employed comes with its own set of challenges, but it also offers unique and attractive opportunities when it comes to retirement planning. While employer-sponsored retirement plans like 401(k)s are familiar, self-employed individuals also have a variety of tax-advantaged options at their disposal. By taking advantage of these options, you can not only save for your future but also reduce your tax burden along the way.
Let’s have a look!
Solo 401(k)
The Solo 401(k), also known as a one-participant or individual 401(k), is designed specifically for self-employed individuals and business owners with no employees (other than a spouse, if applicable). One of the key benefits of a Solo 401(k) is its high contribution limits. As of 2024, the maximum contributions are up to $69,000 annually (and an extra $7,500 if you’re over 50) including both employee and employer contributions. That’s right, in this case you are both employer and employee and the contribution formula reflects this fact. Your “employee contributions” are elective up to 100% of earned income. Your “employer” nonelective contributions have a technical calculation for determining the maximum (consult the IRS website or a tax professional for assistance).
SEP IRA (Simplified Employee Pension Individual Retirement Account)
The SEP IRA offers a straightforward and flexible retirement savings option for self-employed individuals and small business owners. Contributions to a SEP IRA are tax-deductible, and the contribution limits are generous – up to 25% of your net earnings from self-employment, with a maximum contribution of $69,000 for 2024. One of the advantages of SEP IRAs is their simplicity and minimal administrative requirements, making them an attractive option for those who want to save for retirement without the complexity of other plans.
SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account)
SIMPLE IRA is another retirement savings option available to self-employed individuals and small businesses with 100 or fewer employees. Contributions to a SIMPLE IRA are tax-deductible, and the plan offers higher contribution limits than traditional IRAs. In 2024, you can contribute up to $16,000 (and an additional $3,500 if you’re over 50), plus an employer match of up to 3% of your compensation. SIMPLE IRAs are easy to set up and maintain, making them a convenient choice for self-employed individuals who want to save for retirement while also providing a retirement benefit for their employees, if applicable.
Solo Defined Benefit Plan
A Solo Defined Benefit Plan is a type of pension plan that allows self-employed individuals to contribute a potentially significant amount of money on a tax-deductible basis. Contributions to a defined benefit plan are based on factors such as age, income, and desired retirement benefit, and the plan is funded by the business owner. While the administrative requirements and contribution limits for defined benefit plans are higher than other retirement savings options, they can provide substantial tax benefits and retirement income for self-employed individuals with high incomes. Here, you’ll want to engage with a specialist service provider given the complexity of the rules and administration.
Roth IRA
While not specifically designed for the self-employed, Roth IRAs can still be a valuable retirement savings tool. Unlike traditional retirement accounts, contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Roth IRAs offer flexibility in terms of investment options and withdrawals, making them a popular choice for individuals who expect to be in a higher tax bracket in retirement or who want tax-free income in their later years.
In conclusion, self-employed individuals have a variety of tax-advantaged retirement savings options to choose from. By exploring these options and taking advantage of the tax benefits they offer, you can build a secure financial future while minimizing your tax burden. Whether you opt for a Solo 401(k), SEP IRA, SIMPLE IRA, Solo Defined Benefit Plan, Roth IRA, or a combination of these options, investing in your retirement is investing in yourself and your future success. Start planning today for a more financially secure tomorrow.
2023 taxes new year symbol. Businessman turns a wooden cube and changes words Taxes 2022 to Taxes 2023. Beautiful white table white background, copy space. Business 2023 taxes new year concept.
Much like the days of early January bring about thoughts of making life changes in the wake of the Holiday Season, the aftermath of Tax Season sparks in many people thoughts of improving their financial situation and management.
Here’s our short list for the self-employed small business owner. You are one of these if you are a sole-proprietor (including a single member LLC or independent contractor), a partner in a partnership, or a member of a multi member LLC. (Yes, this includes you side-hustlers and gig-economy entrepreneurs!)
Avoid a big tax bill in April – Make your estimated self-employment tax payments!
First, you should be reviewing your financial results routinely. Quarterly is good, monthly is better.
Second, know your payment periods and deadlines for payment:
Payment Period
Payment Deadline
January 1 to March 31
April 15
April 1 to May 31
June 15
June 1 to August 31
September 15
September 1 to December 31
January 15th of following year
Third, put it in your calendar to calculate your net income for each payment period and the amount of your self-employment tax. This process has the added benefit of forcing you to keep your books in order so you aren’t scrambling (AGAIN!) every single March.
The calculation is straightforward: Multiply your quarterly net earnings by 92.35%, then multiply that amount by 15.3%.
Fourth, send in the payment. The easiest thing in the long run is to set up your online account with the IRS and then you can submit your payment electronically. If you prefer to mail a check, send it a week ahead of the deadline. However, an electronic payment doesn’t depend on how well-funded or overworked the USPS is at any particular time. You can find more info at this link: https://www.irs.gov/taxtopics/tc554
Get smart at keeping your books in order!
You don’t need to get an accounting degree to be an intelligent user of your financial information. We recommend Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know Paperback by William G. Droms as a good starting point (here’s an admission: this book helped us when we were working on our MBAs). There are other similar books to help you out too if that one doesn’t appeal to you. We’d also say to “watch this space” as we’re working on our own course to help you appreciate the form and function of your financial information.
Get smart on tax deductions!!
Knowing what’s deductible is the first step and then you just keep receipts. Don’t like a pile of paper in the corner or a cardboard box overflowing with receipts? Use your smart phone and take a picture of the receipt and store it in the cloud. It’s simple.
To get knowledgeable on the basics of tax-deductible small business expenses, we recommend the following free IRS Publications as a good start (bonus: these resources are relatively easy to read):
In addition, we recommend Tax Savvy for Small Business as a comprehensive primer on the topic if you want a one-stop guide and don’t want to wade through the IRS website. In addition to many of the basics covered in the above IRS publications, this book also provides guidance on pros-and-cons of various business structures, retirement plan options, and dealing with IRS examinations.
Income tax text background. Tax-filling concept. Stock photo.
Much like the days of early January bring about thoughts of making life changes in the wake of the Holiday Season, the aftermath of Tax Season sparks in many people thoughts of improving their financial situation and management.
For individual tax filers, here are our top suggestions:
Fix your withholdings
The biggest headache we see year-in and year-out are people under withholding and ending up with a large tax bill. It’s become clear to us that employer HR departments are not helping people out with this adjustment in the way we would expect and remember.
The easiest thing to do is go to the IRS Tax Withholding Estimator. It’s a good time to do it while the issue is fresh in your mind, you still have time to course-correct, and you have your tax return handy. All you need is a couple of your most recent paystubs and tax return handy and fill it out. Then, print out the instructions and go see your HR department to adjust your W-4. It’s that easy.
Set up your IRS Online Account
We preach this. We give discounts for this. Go set up your IRS account and put in your calendar reminders to check it a few times a year to monitor for identity theft and IRS activity in your account. That simple. Added benefit: you can pull your tax transcripts to double check your records in case you lose or don’t receive a 1099 or other informational filing (or if the IRS gets one with your name on it that is not yours!).
Keep an eye on your financial investments
If you have a brokerage account of any type, be sure to check it quarterly at least and we strongly suggest speaking with your advisor/broker in the late summer/early fall around year-end tax planning. If your account is actively managed by another person, you need to know what that person is doing so you can prepare for the tax consequences. Don’t view your brokerage account in isolation; if you are generating capital gains or losses elsewhere, there may be opportunities to save with careful planning. Think about looping your tax planner into the conversation since your broker/advisor isn’t necessarily focused on these concerns.
Talk to your tax planner
We get bored and lonely after tax season is finished; we miss you. Drop us a line when you are making any moves that might have tax implications. We can’t speak for every tax pro out there, but we’ll answer a quick question for free for our clients and let you know ahead of time if it gets more involved.
Bonus: Non-Tax Book recommendation
We aren’t financial planners or investment advisors, but we do have a favorite book to get you started thinking about investing: A Random Walk Down Wall Street by Burton Malkiel. In addition to an introduction to the theory behind financial markets, the book provides a well-thought-out life-cycle approach to investments. Even if you don’t want to follow this plan, it provides a good benchmark for framing your investment goals. If nothing else, reading this book will give you the tools to think carefully about investment opportunities.
According to the non-partisan Congressional Research Service article dated October 20, 2022, discussing IRS funding in the Inflation Reduction Act, Congress authorized an additional $79.6 billion over regular annual appropriations for the IRS to improve taxpayer services and enforcement. The funding is available through 2031.
The allocation of the funding includes the following increases: 69% for Enforcement, 53% for Operations Support, 9% for Taxpayer Services, and 153% for Business Systems Modernization (all relative to prior projections).
Why it matters TO YOU:
COVID derailed IRS initiatives to pursue non-filers as it was swamped with a succession of changes in the tax code while struggling to move staff into remote work. New funding and normalization of operations means those initiatives are back and better funded.
On top of that, the other areas of increased funding should lead to a more efficient IRS. That’s good if you need a question answered or refund processed, but it also means they’ll do a better job a catching non-filers and under-reporters.
If you are out of compliance in filing your taxes, we’re here to help. For a deeper look, read on:
More details:
Let’s first explain our headline for this article. It’s common to see articles labeled “Things You Should Know” or the like, and it’s tempting to assert one’s insight and superior knowledge with such a lead-in. However, when managing financial risks, we feel it’s better to take a bit more cautious approach of surveying both the hard facts (e.g., the IRS has almost $46 billion in new money for enforcement coming its way) and the more nebulous implications (e.g., who are they targeting) to arrive as an assessment of what are reasonable concerns to have and actions to take.
We’ll return to Enforcement spending in a bit, but first let’s look briefly at the other items.
Operations Support includes routine costs like rent, information technology, printing, and postage. In other words, routine business costs, because even the IRS has to deal with increasing expenses.
Taxpayer Services includes items like processing of filings and refunds, phone support for taxpayers, and education. With a return backlog of 13.3 million and only 18% of phone calls answered at the end of 2022’s filing season, the necessity of this funding in order for you to get a refund processed or a question answered seems self-apparent to us, and we all should welcome it.
While the percentage increase for Business System Modernization looks big, the actual amount of $4.8 billion is small relative to the overall package, but hopefully will fuel an improvement in processing speed and fewer errors.
Reflecting on these allocations, we can hope for better service to taxpayers, but let’s also be clear: a more efficiently operating IRS means the agency will likely do a better job of monitoring for fraud and non-compliance as part of its routine operations. Improved systems probably will more accurately track and match informational returns like W-2s and 1099s to income tax filings and spot those who aren’t filing or failing to report their full income.
Now, let’s talk about enforcement.
The $45.6 billion for enforcement sent some people all a-titter about “87,000 armed agents coming for you” or similar nonsense. This is clearly untrue and has been roundly debunked. The 19% decline in the inflation-adjusted enforcement budget between 2010 and 2019 has probably aided tax evasion to the tune of an estimated annual unpaid “tax gap “of $600 billion a year according to the US Treasury in 2021. It is worth noting that almost a third of the “tax gap” is generated by the top 1% of income earners.
Importantly, the decline in funding drove a 40% reduction in non-filer investigations between 2010 and 2018 which allows that “tax gap” to persist. As a result, the IRS announced an initiative in 2020 to pursue “high income” non-filers, defined as those with income over $100,000. In May of that year, the IRS claimed to have identified over 10 million non-filers.
Automated substitute for return: if you didn’t file and the IRS has your income information (W-2s, 1099s, K-1s etc.) they’ll make a return for you. Based on examples of such returns, you can expect no favorable treatment from these. So, they create your return, bill you for any taxes due, and start the clock ticking on penalties and interest.
Increased case creation: in other words, putting more people on the job of finding non-filers and looking to collect.
Automated employment tax compliance program: using algorithmic alerts, employers would be alerted to potential employment tax problems.
Delinquent Return Refund Hold: you haven’t filed at some point in the last five years? Guess what? They’ll hold your refund until you fix that.
The events of 2020-2021 crippled that effort as the IRS struggled to manage the flood of emergency tax measures and diverted its resources to that end. With normalization of tax policy and increased funding, that 2020 initiative is getting a massive boost. The automated employment tax compliance program had letters going out this past summer.
Also, for what it’s worth, it appears state tax agencies are seeking to piggyback on the IRS effort to find their own non-filers.
What you should be thinking about:
If you are in that “high income” bracket, you should be thinking about being sure you’ve filed all your returns. (Special note: if you receive most of your income through self-employment, the IRS is looking at that top-line 1099 or K-1 number and not thinking about your expenses.) If your income makes you a high value target, an investigation or audit may be in your future.
If you aren’t in that “high income” bracket, you should also be thinking about being sure you have filed all your returns. While you might not be the focus of the enforcement initiative, you might just be noticed with improved systems and staffing and have an automated substitute return in your future. More importantly, many non-filers outside the “high income” bracket are actually owed refunds and there is a three-year deadline from when the original return was due to claim it.
If you wait for the IRS to create a substitute-for-return for you and then seek to file an amended return, you should be aware that your amendment is likely to be very closely checked to see if it matches the information they used.
No matter your income bracket, coming into filing compliance is in your best interest. Tax years with unfiled returns remain open indefinitely to investigation, whereas filing starts the clock on the statute of limitations. Filing is a good way to prevent or become aware of identity theft. Also, the sooner you come into compliance, the sooner you limit the possible penalties and interest that you could be facing if you owe taxes.
If you haven’t filed in a number of years or have lost track of when you have filed, it’s worth setting up your IRS online account and reviewing your transcripts as a starting point. You can see what the IRS has as records of your filings, adjustment they have made to those filings, and what they have as your wages and income. Careful scrutiny of these records can give you an early warning of IRS interest in you or of identity theft.
If you are looking to come into filing compliance, it’s a good idea to seek out a qualified preparer who can efficiently help you through the rigors of:
bringing your bookkeeping up to date,
analyzing your tax transcript for the extent of non-compliance, errors, or identity theft,
preparing accurate returns,
applying for payment plans that allow you pay your bill over time,
making offers-in-compromise if you can never hope to pay the full amount,
seeking penalty abatements if you have good cause.
The good news for small businesses is that there aren’t a ton of changes to the tax rules for you to consider for your 2022 tax year filing, certainly fewer than for individuals. Below is a non-exhaustive highlight of things to keep in mind.
We are going to start with something that might have slipped under the radar for some: the requirements for third-party payment settlement networks, such as PayPal and Venmo, to send you and the IRS a Form 1099-K if you receive over $600 during the year for the sale of goods and services. Previously, that requirement kicked in at $20,000 and if you had more than 200 transactions. So, if you’ve had a small side-hustle selling for profit online, you need to be aware that not only has the obligation to report that income always existed, but now the IRS is much more aware of you receiving that income. (Accepting personal payments through channels like personal Venmo or PayPal’s “Friends and Family” option should not trigger a Form 1099-K filing. Important note: YOU SHOULD NOT use personal electronic payment options for business transactions; it’s a violation of the Terms & Services and could lead to you losing your account, not to mention possible penalties for underreporting your income if you forget to include them in your tax filing).
The phase out of the 20% self-employment income deduction for pass-through income begins at $340,100 in income for joint filers ($170,050 for all others) this year, rising from $329,800 ($164,900).
Standard Mileage Rates got an unusual two-stage bump for 2022; the rate for business was 56 cents per mile in 2021, increased to 58.5 cents for the first six months of the year, and increased again to 62 cents for the second half. Charity rates remain at 14 cents per mile (you get the feeling our lawmakers aren’t great fans of charities).
On the reporting side (as opposed to pure money items), the requirement for the completion of the K-2 and K-3 for partnerships and S-corps kick-in in full in 2022 after certain relief was granted in 2021. These schedules are meant to help partnerships and S-Corporations report certain international tax information to their partners so that the partners can better comply with their taxes. This is a complex topic so keep in mind if you have an interest in a partnership or S-Corporations, be sure to ask your tax preparer what you need to do.
If you took advantage of deferral of Social Security taxes as an employer, remember that the last half is due 31 December 2022. Don’t mess this one up; the penalties are steep.
Starting in 2023, bonus depreciation is limited to 80%, so if you want to take advantage of the 100% write off, make that acquisition by 31 December 2022.
If your business was impacted by a natural disaster (as declared by the federal government), consider accelerating any disaster losses and filing Form 4466 to apply for a quick refund of overpayment of estimated tax.
As in each year, think about year-end items to optimize Qualified Business Income deductions or look at how retirement plan changes could be beneficial.
Lastly, looking ahead to doing business in 2023, the 100% deduction for food bought in restaurants goes away; feel free to call your lawmakers on this one.
We’ll be back with some thoughts on key items to consider for 2023 for possible tax implications of your business decisions. While we believe that taxation implications rarely provide a good sole justification for a decision, we also know that knowing those implications can help you avoid bad tax outcomes and occasionally benefit from the tax code.
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