August 2023 Newsletter

- Filing deadline for 2022 calendar-year S corporation and partnership tax returns on extension - Due date for 3rd quarter installment of 2023 estimated income tax for individuals, calendar-year corporations and calendar-year trusts & estates

Multiple Jobs: Be Prepared for Tax Surprises

Working more than one job can help maximize income, but also potentially create a tax surprise. Here are several be aware of:

Social Security Surprise: As a full-time employee, the most you’ll have to pay in Social Security taxes in 2023 is $9,932. The problem is each employer you work for will withhold Social Security taxes up to this threshold.

Example: Jane Smith works two jobs. Employer #1 has withheld $6,000 in Social Security taxes so far in 2023, while Employer #2 has withheld $4,000. Jane has already paid more than the annual limit of $9,932 in Social Security taxes for 2023. Jane will get back the excess Social Security taxes, but she’ll need to wait until she files her 2023 tax return in 2024.

What you can do: Work as a contractor for your second job. You’ll be responsible for paying your own income, Social Security and Medicare taxes, but you’ll be able to manage Social Security taxes to avoid overpayment.

Phaseout Surprise: As your income increases, the number of deductions and tax credits available to you will get smaller as benefit phaseout limits are reached.

Example: The Child Tax Credit provides a $2,000 tax credit for each qualifying child. You don’t qualify for this credit, however, if you file a joint tax return with taxable income above $440,000, or are single and file a return with taxable income above $240,000.

What you can do: Certain deductions and adjustments can help decrease taxable income below a phaseout’s limit. This will potentially allow you to still take advantage of a tax break, such as the Child Tax Credit.

Benefits Surprise: Every retirement and medical account limits how much you can contribute annually.

If you exceed these limits, you may have to pay taxes twice on the same income.

Example: The 401(k) contribution limit in 2023 is $22,500. You inadvertently contribute $27,500. The first $22,500 of contributions won’t be taxed until you start making withdrawals after you retire. The excess $5,000 contribution could be taxed twice - you must include the $5,000 as taxable income on your 2023 tax return; you’ll also pay taxes on that $5,000 when you withdraw it from your 401(k) after you retire.

What you can do: Correct any over-contribution before filing that year’s tax return. Up-to-date record keeping throughout the year can alert you to when you’re close to the annual contribution limit.

Estimated Tax Surprise: If your extra job is a contract position, you’ll receive a Form 1099 summarizing how much you billed a particular client in all of 2023. If this is the first time receiving a 1099, you may be surprised to learn that you’re responsible for making all tax payments to the IRS. If you are making a net profit, tax payments for 2023 will need to be made in September and January 2024.

What you can do: Estimated tax payments can sometimes be rather large, especially if you’re making a decent amount of money, so keep good bookkeeping records so you can budget for these payments.

Please call if you have questions about these or any other job-related tax topics. ▪

Time for an Employee Retention Credit Review

Be prepared for the IRS

Plans are underway by the IRS to review the more than two million claims for the Employee Retention Credit, with special attention being given to new applications. This COVID-19 relief measure, commonly referred to as the ERC, is now fully under the IRS spotlight. Here is what you need to know.

BACKGROUND

The ERC is a credit taken on employment tax returns for businesses (not individuals) impacted by the pandemic between March 12, 2020 and January 1, 2022.

The credit, which has been amended three times since it was enacted, can still be taken by amending previouslyfiled payroll tax returns. For payroll tax returns filed in 2020, you have until April 15, 2024 to file an amended return to claim the credit. For 2021 returns, the deadline is April 15, 2025.

To receive the credit, your business had to be shut down by government order OR have a calculated decline in gross receipts OR qualify as a recovery startup business in identified calendar quarters.

You also can’t double dip with other relief measures. For example, you cannot claim the ERC credit if you already used the same payroll records to receive money from the Paycheck Protection Program (PPP).

CURRENT SITUATION

The IRS is well aware of promoters helping businesses claim the ERC for a fee or a percent of the credit. Many of these promoters are making incorrect claims, either to make a quick buck or due to a lack of understanding of the rules. In response to these numerous incorrect ERC credits that are attempting to be claimed, IRS made the following announcements:

• The IRS is ready to fully review ERC claims (IR2023–135). This notice is putting promotors and businesses alike on alert. You need to be prepared to defend your ERC claim and be ready for an immediate review of any amended payroll tax filing that includes a new ERC claim.

• Legal clarity on the definition of shutdown. A Generic Legal Advice Memorandum (GLAM) from the IRS Legal Counsel clarifies how they will look at supply chain disruptions as it relates to government shutdown claims (AM-2023-005).

WHAT THIS MEANS

• If you took the ERC: Review your claim and get your documentation in order, assuming your claim will be reviewed by the IRS. And consider having an independent authority review your claim. It’s better that you discover any errors now, and have the funds returned, prior to it being audited by the IRS.

• If you are considering an ERC: Be very careful who helps you file amended payroll tax filings to get the ERC. Credentials matter. There are a number of promoters and operators that will get you the credit, take their fee, but leave you holding the audit risk.

• If you have not taken the credit: With all the audit noise in the wind, taking the credit now is not for the faint of heart. But like any tax break, if your business is entitled to the credit you should conduct a review and take the ERC. This is especially true if you had a business disruption or a government-mandated shutdown, and you have taken no other government help during the pandemic between March 12, 2020 and January 1, 2022.

Just be careful to use a professional resource and prepare the proper documentation. ▪

Common IRA Plan Options for Your Business

Banking tips to help you cash in

Offering a retirement plan can be a powerful tool when you’re competing to attract the best employees. If you want to offer a retirement plan without the administrative costs and hassles of a 401(k), your choices usually come down to either a SIMPLE IRA or a SEP IRA.

SIMPLE IRA

Employers (and the self-employed) with 100 or fewer employees can establish a SIMPLE (Savings Incentive Match Plan for Employees) plan. In 2023, employees can contribute up to $15,500 of their own earnings, along with an extra $3,500 if the employee is age 50 or older. Employers are required to contribute to their employee’s SIMPLE account using one of two formulas:

1) Matching the employee’s contributions dollar-fordollar, up to 3 percent of the employee’s earnings, or

2) Contributing 2 percent of an employee’s earnings up to the 2023 compensation limit of $330,000.

New SIMPLE plans must be established between January 1 and October 1, so there is still time to create a SIMPLE plan this year.

SEP IRA

Any employer, including self-employed individuals, can establish a SEP (Simplified Employee Pension) plan. Only the employer contributes to the SEP account. In 2023, the contribution limit is either 25 percent of the employee’s salary or $66,000, whichever is lower. Unlike a SIMPLE IRA, employers are not required to make annual contributions to a SEP IRA.

Unlike a SIMPLE plan, SEP IRAs can be established and funded at any time prior to the tax filing due date (plus extensions). Because of this, SEP IRAs are a popular tax planning tool for sole-proprietors as a way to reduce taxable income when filing their tax return.

What you need to know

Here are some of the benefits of offering either an SEP or SIMPLE plan:

• Compete for employees with affordable retirement plans. The SEP IRA and SIMPLE IRA were created to help small business owners provide an easy and lowcost way to offer a retirement plan. You can differentiate your company by offering one of these plans and being transparent with how you calculate employer contributions.

• The employer and employee can both reap tax savings. Employees can reduce their taxable income with contributions to a SIMPLE IRA, while businesses can claim contributions to their employees’ retirement plan as a deduction on its tax return for SEP IRAs.

• Employees can still contribute to their own individual IRA. Let your employees know that in addition to having either an SEP or SIMPLE account through your company, they may also qualify to contribute to their own traditional IRA or Roth IRA.

• 401(k) plans are still an option. Being a small business doesn’t preclude you from establishing a traditional 401(k) retirement plan if you’re willing and able to deal with the extra administrative work. Please call if you have any questions about whether an SEP or SIMPLE retirement plan might be right for your business.

As always, should you have any questions or concerns regarding your tax situation please feel free to call. ▪