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Archives for October 2024

Maximize Your Retirement: Building a Golden Nest Egg with a Solo 401(k) for Self-Employed Professionals

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Building a robust retirement plan is essential, especially if you’re self-employed. If you’re a small business owner without employees (other than your spouse), a Solo 401(k) plan can be an ideal choice for setting up a solid retirement foundation. This type of plan, also known as an individual 401(k), offers greater contribution potential, tax benefits, and flexibility, particularly compared to SIMPLE IRAs or SEP plans.

What is a Solo 401(k) Plan?

A Solo 401(k) is a retirement savings plan tailored for self-employed individuals, including sole proprietors, consultants, and owners of single-member LLCs. It’s designed to maximize contributions and tax savings for those who don’t have traditional employees. This plan offers significant advantages in terms of contribution limits and investment options, making it an appealing choice for individuals aiming to grow their retirement savings.

Contribution Limits: How Much Can You Invest in 2024?

For the 2024 tax year, the Solo 401(k) offers two types of contributions: elective deferrals and employer contributions. Here’s a breakdown:

  1. Elective Deferral Contribution: You can defer up to $23,000 of your net self-employment (SE) income into the plan. If you’re 50 or older by December 31, 2024, this contribution limit rises to $30,500, which includes a $7,500 catch-up contribution.
  2. Employer Contribution: On top of the elective deferral, you can contribute an additional 20% of your net SE income. This is termed an “employer contribution” for tax purposes, even though self-employed individuals are both employer and employee in this scenario. Importantly, net SE income for this purpose isn’t reduced by your elective deferral.

    For 2024, your total contributions—both elective deferral and employer—can’t exceed:

    • $69,000 (or $76,500 if you’re 50 or older).
    • 100% of your net SE income.

    Net SE income is calculated as the net profit reported on IRS Form 1040, Schedule C, E, or F, minus the deduction for 50% of self-employment tax.

Key Advantages and Disadvantages of a Solo 401(k)

Advantages:

  • High Contribution Limits: Solo 401(k) plans allow for substantial deductible contributions, which can lead to significant tax savings.
  • Flexibility in Contributions: Contributions are discretionary, meaning you can adjust them based on your financial situation.
  • Loan Options: If your Solo 401(k) plan allows loans, you can borrow up to 50% of the account balance or $50,000 (whichever is less), a helpful feature for business funding or emergencies. This option isn’t available in SEP plans.

Disadvantages:

  • Administrative Requirements: Solo 401(k) plans require more paperwork and compliance than simpler plans. A written plan document is mandatory, and contributions must be recorded and paid into the account. Additionally, once your balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
  • No Employees Allowed: You cannot have a Solo 401(k) if your business has non-spousal employees. However, you can exclude employees under 21 or those working fewer than 1,000 hours in any 12-month period.

Is a Solo 401(k) Right for You?

A Solo 401(k) plan can be a powerful retirement tool for self-employed individuals who:

  • Have a high net SE income and are looking to make sizable contributions.
  • Want flexibility in contributions, especially if cash flow fluctuates.
  • Are age 50 or older and can benefit from the additional catch-up contributions.

While Solo 401(k)s offer generous tax advantages and savings potential, they do come with administrative complexities. For those who are serious about retirement savings and can manage the paperwork, these plans provide an excellent way to build wealth for retirement.

If you’re ready to start planning for your future and want to know if a Solo 401(k) is right for your financial goals, reach out to us today. We’ll help you weigh the pros and cons of a Solo 401(k) alongside other retirement options so that you can secure your financial future confidently.

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Employers: Prepare for the 2025 Social Security Wage Base Increase

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As 2025 approaches, employers need to prepare for updates to the Social Security wage base. The Social Security Administration recently announced that the wage base will rise to $176,100 for 2025, up from $168,600 in 2024. Wages and self-employment income above this threshold will remain exempt from Social Security taxes.

For businesses, particularly those with high-earning employees, this increase means potential adjustments in payroll budgeting to account for additional Social Security tax costs.

Understanding Social Security Tax Basics

Under the Federal Insurance Contributions Act (FICA), employers, employees, and self-employed individuals are subject to two main taxes:

  1. Social Security Tax: Also known as the Old Age, Survivors, and Disability Insurance (OASDI) tax, this is capped at the wage base.
  2. Medicare Tax: Known as the Hospital Insurance (HI) tax, this has no wage base cap.

The FICA tax rate for employers in 2025 will remain 7.65%—comprised of 6.2% for Social Security and 1.45% for Medicare, the same as in 2024.

2025 Tax Rate Updates for Employers and Employees

For employees, the updated tax rates mean:

  • Social Security Tax: 6.2% on the first $176,100 in wages, with a maximum of $10,918.20.
  • Medicare Tax: 1.45% on the first $200,000 in wages ($250,000 for joint returns, $125,000 for married taxpayers filing separately).
  • Additional Medicare Tax: An extra 0.9% on wages exceeding $200,000 ($250,000 for joint returns, $125,000 for separate returns), bringing the rate to 2.35% for those earnings.

For self-employed individuals:

  • Social Security Tax: 12.4% on the first $176,100 in self-employment income, with a maximum of $21,836.40.
  • Medicare Tax: 2.9% on the first $200,000 in self-employment income ($250,000 for combined joint returns, $125,000 for separate returns).
  • Additional Medicare Tax: 3.8% on self-employment income exceeding $200,000 ($250,000 for joint returns, $125,000 for separate returns).

A Brief History of the Social Security Wage Base

Since its inception in 1937, the Social Security wage base has periodically increased to align with economic growth and inflation. Initially set at $3,000, it rose gradually, reaching $25,900 by 1980 and $76,200 by 2000. In recent years, it has continued to adjust, reaching $137,700 in 2020 and continuing upward to match inflation and wage growth trends.

Special Considerations: Employees with Multiple Employers

If your employees hold second jobs, both employers are required to withhold Social Security tax up to the wage base limit. If combined withholdings exceed the maximum, employees will receive a credit on their tax return for any over-withheld amount.

Preparing for 2025 Payroll Tax Compliance

With Social Security and Medicare tax changes on the horizon, it’s essential to review payroll systems and ensure compliance. If you have questions about managing payroll taxes or filing requirements for the coming year, contact us for guidance. We’re here to help you navigate the updates and stay in compliance as payroll costs shift in 2025.

Q&A below:

What is the new Social Security wage base for 2025?

The Social Security wage base for 2025 will increase to $176,100, up from $168,600 in 2024. Wages and self-employment income above this amount will not be subject to Social Security tax.

What are the FICA tax rates for employers and employees in 2025?

For 2025, employers and employees will continue to pay a total FICA tax of 7.65%, which includes 6.2% for Social Security (up to the $176,100 wage base) and 1.45% for Medicare. Employees earning more than $200,000 will also be subject to an additional 0.9% Medicare tax.

How will the Social Security wage base change impact self-employed individuals in 2025?

Self-employed individuals will pay 12.4% in Social Security tax on the first $176,100 of self-employment income, and 2.9% in Medicare tax on income up to $200,000. Any income over $200,000 will incur a 3.8% Medicare tax (2.9% regular Medicare tax plus 0.9% additional Medicare tax).

What happens if an employee works for multiple employers and exceeds the wage base?

If an employee works for more than one employer and exceeds the $176,100 Social Security wage base across multiple jobs, each employer is still required to withhold Social Security taxes up to the wage base limit. The employee can claim a credit on their tax return for any excess withholding.

 

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Essential Steps for Your Business to Prepare for and Respond to an IRS Audit

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The IRS has recently increased its audit efforts, particularly targeting large businesses and high-income individuals. By 2026, audit rates for large corporations with assets over $250 million will nearly triple, while partnerships with assets exceeding $10 million will experience a tenfold increase in audits. This surge in audit activity is fueled by the Inflation Reduction Act, with a clear focus on addressing high-dollar noncompliance and wealthier entities.

While small businesses and individuals making less than $400,000 annually are unlikely to see a significant uptick in audits, the IRS is concentrating on more complex returns. For example, one focal point includes taxpayers who use business aircraft for personal purposes—while businesses can deduct expenses for corporate planes, non-business travel isn’t tax-deductible.

How to Prepare for an IRS Audit

The best way to navigate an IRS audit is to be prepared well in advance. Here are some critical steps your business can take to safeguard itself:

  1. Maintain Accurate Records
    Keep organized documentation of all business transactions, including invoices, bills, canceled checks, and receipts. Properly maintaining these records will serve as vital proof for items reported on your tax returns.
  2. Know Common Red Flags
    Certain entries on your tax returns may trigger scrutiny. Be mindful of potential red flags such as:

    • Significant inconsistencies between previous returns and your latest filing.
    • Gross profit margins or expenses that differ dramatically from others in your industry.
    • Miscalculations or unusually high deductions that stand out to auditors.

    Pay particular attention to deductions with strict recordkeeping requirements, like auto and travel expenses. Additionally, owner-employee salaries that are out of sync with similar businesses can attract attention, especially for corporations.

  3. Stay Proactive
    Regularly review your business’s tax filings to ensure accuracy and compliance. By identifying discrepancies early, you can address issues before the IRS flags them for an audit.

How to Respond to an IRS Audit

If the IRS selects your business for an audit, you’ll be notified by letter. Contrary to some scams, the IRS does not initiate audits over the phone, email, or text message. Here’s how to handle the situation if you receive a legitimate audit notice:

  1. Stay Calm
    Many audits are routine, and not all require face-to-face meetings with an auditor. In fact, some audits may only request that you mail in supporting documentation for specific deductions.
  2. Gather Your Documentation
    Once notified, collect and organize all relevant financial records to support the information on your tax return. If some documents are missing, attempt to recreate them using other supporting evidence.
  3. Understand the Discrepancies
    The IRS will outline the specific items it is questioning. Be sure to understand exactly what is being disputed before responding.
  4. Respond to the Audit Properly
    If an in-person audit is required, ensure that all necessary documents are in order and ready to be reviewed. For mail-in audits, send the requested documentation promptly. Ignoring notices can result in further IRS actions.

How Our Firm Can Help

Facing an IRS audit can be overwhelming, but you don’t have to go through it alone. Our team can assist in:

  • Clarifying what the IRS is disputing (sometimes it’s not entirely clear),
  • Gathering the necessary documents and information to support your case,
  • Preparing the most effective response to the IRS inquiries.

Remember, the IRS typically has three years from the date of filing to audit your returns. By taking a proactive, organized approach to your tax filings, you can mitigate the chances of being audited in the first place and make the process more manageable if it does occur.

By implementing these best practices, your business will be well-prepared to navigate an IRS audit with confidence and minimize potential disruptions. Don’t wait until an audit happens—proactive preparation is key to safeguarding your business. If you need expert guidance or assistance with your tax documentation, our team is here to help. Contact us today to ensure your business is fully equipped to handle any IRS audit with ease.

Q&As

How can businesses prepare for an IRS audit?

To prepare for an IRS audit, businesses should maintain detailed and organized documentation of all financial activities. This includes keeping invoices, receipts, bills, and other proof of expenses in one central location. It’s also essential to be aware of common audit triggers, such as significant inconsistencies in returns, unusually high deductions, or financials that differ greatly from industry standards.

What are some red flags that might lead to an audit?

Certain tax return entries can attract IRS scrutiny, including significant differences between past returns and the most current one, gross profit margins or expenses that are out of line with other businesses in the industry, and high or miscalculated deductions. Specific deductions, like auto and travel expenses, often require strict documentation, and salary discrepancies for owner-employees in corporations may also raise red flags.

What should you do if the IRS notifies you of an audit?

If selected for an audit, the IRS will notify you by letter. It’s important to respond promptly, gather the necessary documentation, and stay calm. Many audits simply request documentation by mail, while more thorough audits may require in-person meetings. The IRS will provide time to collect all relevant records, and if anything is missing, you’ll need to reconstruct the information accurately from available sources.

How can a CPA firm help you during an IRS audit?

A CPA firm can assist by helping you understand what the IRS is disputing, gathering the specific documents and information needed to support your case, and responding effectively to the IRS’s inquiries. Having professional support can make the process more manageable and ensure that all responses are timely and accurate.

 

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The Benefits of Separating Your Business from Its Real Estate

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If your business requires real estate to operate or holds property under its business name, it might be time to reconsider this approach. Separating business operations from real estate ownership offers several long-term benefits, including tax savings, liability protection, and enhanced estate planning options. This strategy could be a smart move for business owners looking to maximize their financial advantages.

Tax Benefits of Separating Real Estate from Your Business

For businesses structured as C corporations, real estate is often treated like any other business asset such as equipment or inventory. Expenses related to owning these assets are typically deductible, appearing as ordinary business expenses on income statements. However, issues arise when it comes to selling the real estate. In a C corporation, the profits from the sale of property are subject to double taxation—once at the corporate level and again when distributions are made to individual shareholders.

By transferring ownership of the real estate to a pass-through entity such as an LLC or an LLP, you can avoid double taxation. With this setup, profits from a real estate sale are taxed only at the individual level, helping you retain more of your earnings and reducing your overall tax burden.

Asset Protection and Liability Shield

Separating real estate ownership from the business can also safeguard your assets. If your business faces a lawsuit or creditors seek compensation, they could potentially target all assets, including real estate owned by the business. However, if the real estate is held under a separate legal entity, it becomes much harder for plaintiffs or creditors to seize that property.

This separation can also protect you during bankruptcy proceedings. Generally, creditors cannot recover real estate held by a separate entity unless the property was used as collateral for business loans. This makes separating real estate an excellent way to shield valuable assets from legal risks.

Estate Planning Advantages

Keeping real estate separate from the business can provide more flexibility in estate planning. For instance, if you own a family business and not all of your heirs are interested in managing the company, you have the option to pass the business to one heir and the real estate to another. This separation of assets allows for smoother inheritance and distribution of wealth among family members.

How to Separate Real Estate from Your Business

If you’re ready to explore this strategy, you can transfer ownership of the business property to a different entity and lease it back to the company. One option is for the business owner to purchase the real estate from the business, holding the title under their own name. However, this approach could expose the owner to liabilities, putting their personal assets at risk.

A better alternative is to transfer the property to a separate legal entity, typically an LLC or LLP, specifically formed to hold real estate. LLCs are easier to set up, requiring just one member, while LLPs require at least two partners and are not permitted in every state. An LLC, with its pass-through taxation structure, allows any real estate expenses to be deducted on your individual tax return, offsetting rental income from leasing the property to the business.

Risks and Considerations

While separating your business from its real estate offers many advantages, it may not be the best strategy for every situation. It’s important to assess the potential costs, capital gains taxes, and the risks of transferring liabilities. In some cases, the liabilities associated with the property could still pose risks to the business, especially if an incident like a client injury occurs on-site, leading to a lawsuit.

Take the Next Step

Deciding whether to separate your business from its real estate can be complex. The best approach depends on your specific business needs, tax considerations, and long-term financial goals. Consulting with tax and legal professionals can help you determine the most effective strategy for minimizing transfer costs, reducing taxes, and protecting your assets. By separating your business from its real estate, you can unlock significant tax benefits, protect your assets, and enhance your estate planning. For expert guidance tailored to your unique situation, contact us today to learn how we can help you maximize these advantages and secure your financial future.

Q&As:

How do taxes affect the sale of real estate owned by a business?

If a C corporation owns real estate, the profits from its sale are taxed twice: first at the corporate level and then at the individual level when profits are distributed. This double taxation can be avoided by transferring the real estate to a pass-through entity, where the sale is taxed only at the individual level.

How can separating real estate from a business safeguard assets?

By keeping real estate ownership separate from the business, you protect the property from creditors and lawsuits targeting the business. In the event of a lawsuit or bankruptcy, property owned by a separate entity is generally shielded unless it was used as collateral for business debts.

What are the estate planning benefits of separating real estate from a business?

Separating real estate from a business provides flexibility in estate planning, especially in family-owned businesses. If not all heirs are interested in running the business, you can distribute the real estate to one family member and the business to another, offering more balanced asset distribution.

What are the considerations when handling a real estate transfer from a business?

When transferring real estate ownership, an LLC or LLP is often used to hold the property. An LLC is typically easier to establish and offers liability protection. The business owner could also personally purchase the real estate, but this carries the risk of assuming property-related liabilities, which could impact the business if lawsuits arise.

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Does Your Business Need to Report Employee Health Coverage? Key Obligations Explained

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Offering employee health coverage is a vital part of many businesses’ benefits packages, but navigating the reporting requirements can be challenging. As a business owner, it’s essential to understand your obligations under federal laws like the Affordable Care Act (ACA) to ensure compliance and avoid potential penalties. So, does your business need to report employee health coverage to the IRS? Let’s dive into the details and answer some common questions.

How Many Employees Trigger Reporting Requirements?

Under the ACA, businesses with 50 or more full-time employees, known as Applicable Large Employers (ALEs), are required to report employee health coverage to the IRS. Specifically, ALEs must file Forms 1094-C and 1095-C to report details of the health coverage offered and the enrollment status of each employee.

  • Form 1094-C: This form serves as a summary that provides details on health coverage offers made to employees and transmits the individual employee forms to the IRS.
  • Form 1095-C: Each full-time employee receives this form, which outlines the health insurance offered, the months they were covered, and the share of costs.

These forms are also used to determine if an employer is liable for any payments under the “employer mandate.” ALEs that fail to offer affordable minimum essential coverage to their full-time employees and their dependents may face penalties. Form 1095-C also helps the IRS determine employee eligibility for premium tax credits.

For businesses with fewer than 50 full-time employees, including equivalents, the employer is not considered an ALE and therefore is exempt from the employer mandate and related reporting requirements for that year.

What Information Needs to Be Reported?

On Form 1095-C, ALEs must include the following information for each full-time employee who was employed during any month of the calendar year:

  • The employee’s name, Social Security number (SSN), and address.
  • Employer’s EIN (Employer Identification Number).
  • Contact person’s name and phone number.
  • A description of the health coverage offered, using designated codes.
  • The monthly cost of the lowest-cost plan available to full-time employees.
  • Safe harbor codes related to the employer mandate penalty, if applicable.

Reporting for Self-Insured and Multiemployer Plans

If your business offers a self-insured health plan, you’ll need to include additional information on Form 1095-C. A self-insured plan may offer both insured and self-insured enrollment options, so ensure all necessary details are reported accurately.

For employers that offer coverage through a multiemployer health plan, the plan sponsor or insurance issuer is responsible for providing health coverage information to employees. However, if your business provides self-insured health coverage but is not subject to the employer mandate, you’ll need to file Forms 1094-B and 1095-B for covered employees instead.

Keep in mind that these reporting requirements become more complex if your business is part of an aggregated ALE group or uses a multiemployer plan. Be sure to consult with an expert if this applies to your situation.

What Are the W-2 Reporting Requirements?

In addition to Forms 1094-C and 1095-C, employers must also report certain health coverage information on employees’ W-2 forms. This information is for reporting purposes only and does not affect the taxability of the coverage provided. It’s essential to remember that W-2 reporting and Form 1095-C reporting are separate obligations.

Get Help with Health Coverage Reporting

Understanding your business’s employee health coverage reporting requirements is crucial for avoiding penalties and ensuring compliance. While this guide provides an overview of the essential obligations, the regulations can be complex, especially for businesses with unique circumstances like self-insured plans or multiemployer coverage.

If you need help navigating these rules or ensuring proper filing, contact us today for expert assistance.

By optimizing this blog post for SEO, you can increase its visibility to businesses looking for information on employee health coverage reporting requirements. Keywords like “Affordable Care Act,” “employee health coverage reporting,” “IRS Forms 1094-C and 1095-C,” and “employer mandate penalties” can help your content rank higher in search results, driving more traffic to your website.

 

Q&A below:

What is the minimum number of employees a business must have before being required to report health coverage?

Under the Affordable Care Act (ACA), businesses with 50 or more full-time employees, known as “applicable large employers” (ALEs), must report health coverage information using Forms 1094-C and 1095-C. Businesses with fewer than 50 full-time employees are exempt from these reporting requirements.

What information needs to be reported by applicable large employers?

ALEs must report details for each full-time employee, including their name, Social Security number, address, the employer’s EIN, and information about the health coverage offered, such as cost and the months of coverage. They must also indicate if any safe harbor provisions apply under the employer shared responsibility provisions.

What if our business offers a self-insured health plan?

If an ALE provides health coverage through a self-insured plan, additional information must be reported on Form 1095-C. If a business offers self-insured coverage but is not subject to the employer mandate, reporting is done using Forms 1094-B and 1095-B for enrolled employees.

What health coverage information should be reported on employees’ W-2 forms?

Employers are required to report specific health coverage details on employees’ W-2 forms, though this information differs from what is reported on Form 1095-C. The W-2 reporting is for informational purposes and does not make employer-provided coverage taxable to employees.

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Essential Tax Deadlines for Businesses and Employers: 2024 Q4 Tax Calendar

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As the fourth quarter of 2024 approaches, businesses and employers must be aware of important tax deadlines to avoid penalties and stay compliant. Below are key tax dates that may impact your business, but keep in mind that this list isn’t exhaustive. Additional deadlines may apply depending on your situation, so be sure to consult with us to ensure you’re meeting all filing requirements and staying on top of any tax-related obligations.

Note: Tax-filing and payment deadlines may be extended for those in federally declared disaster areas. Contact us for more information if this applies to you.

October 1, 2024

  • SIMPLE IRA Plan Deadline
    If you’re looking to establish a SIMPLE IRA plan for your business, this is the last day to do so provided neither you nor any predecessor employer has maintained a SIMPLE IRA in the past. New employers that come into existence after October 1 can set up a SIMPLE IRA plan as soon as administratively possible after the business begins operations.

October 15, 2024

  • C Corporation Income Tax Return (Form 1120)
    If your C corporation operates on a calendar year and you filed for an automatic six-month extension, this is the deadline to file your 2023 income tax return. Be sure to pay any outstanding tax, interest, and penalties.
  • Employer-Sponsored Retirement Plan Contributions
    Calendar-year C corporations should also make any 2023 contributions to qualified employer-sponsored retirement plans by this date.

October 31, 2024

  • Third Quarter 2024 Income Tax Withholding and FICA Reporting
    Employers must report third-quarter income tax withholding and FICA taxes (Form 941) and make any payments due by this deadline. See the exception below if you qualify for a November 12 deadline.

November 12, 2024

  • Third Quarter 2024 Income Tax Withholding and FICA (Form 941)
    If you deposited all associated taxes for the third quarter on time and in full, you qualify for an extended deadline to report your income tax withholding and FICA taxes.

December 16, 2024

  • Fourth Installment of 2024 Estimated Income Taxes for C Corporations
    Calendar-year C corporations must make the fourth installment of their 2024 estimated income tax payment by this date to avoid penalties.

Stay Compliant with Your Tax Deadlines

Missing a tax deadline can result in costly penalties and interest. If you need assistance navigating your business’s tax obligations, contact us today. We’ll help ensure you meet all applicable filing requirements and stay on track with your quarterly tax payments.

Reach out to us for more information on filing requirements and to stay up to date with all relevant deadlines.

Optimize your tax planning today!

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