Archives for November 2024

Self-Employment Taxes Explained: Strategies to Manage and Reduce Your Tax Burden

Ken Botwinick, CPA | 11/22/2024

Understanding Self-Employment Taxes

If you’re a self-employed individual or own a growing, unincorporated small business, understanding self-employment (SE) taxes is crucial. The SE tax serves as the mechanism through which Social Security and Medicare contributions are collected. While these taxes fund important social programs, they can result in hefty bills for business owners.

SE Tax Basics: What You Need to Know

For 2024, the self-employment tax rate is 15.3% on the first $168,600 of net SE income. This rate includes:

12.4% for Social Security.
2.9% for Medicare.

For 2025, the threshold increases to $176,100. However, once your income exceeds these limits, the 12.4% Social Security portion no longer applies, leaving only the 2.9% Medicare tax in effect.

How to Calculate Your SE Tax

Follow these steps to determine your SE tax bill:

Take your net income from self-employed activities (commonly listed on Schedule C of Form 1040).
Multiply that income by 0.9235 to get your net SE income.
If your income is $168,600 or less (2024):
- Multiply the amount by 15.3%.
If your income exceeds $168,600:
- Apply 12.4% to $168,600 for Social Security.
- Apply 2.9% to the total income for Medicare.
- Add these two amounts for your final SE tax.

Example:
In 2024, if your net SE income is $200,000, your SE tax calculation would be:

12.4% × $168,600 = $20,906 (Social Security).
2.9% × $200,000 = $5,800 (Medicare).
Total SE Tax = $26,706.

The Rising Cost of SE Taxes

SE taxes aren’t just high now; they’re projected to increase. As Social Security tax ceilings rise with inflation, small business owners may face growing tax burdens.

Here are the Social Security tax ceilings projected by the Social Security Administration (SSA):

2026: $181,800
2027: $188,100
2028: $195,900
2029: $204,000
2030: $213,600
2031: $222,900
2032: $232,500
2033: $242,700

A Disconnect Between Taxes and Benefits

While the Social Security tax ceiling increases yearly, the growth in Social Security benefits does not keep pace. For example:

The 2024 tax ceiling rose by 5.24% compared to 2023.
However, Social Security benefit payments only increased by 3.2% during the same period.

This discrepancy occurs because different inflation measures are used:

Tax ceilings are based on wage inflation.
Benefit increases are tied to general inflation rates.

A Smart Tax-Saving Strategy: S Corporations

If the weight of self-employment taxes feels overwhelming, there’s a potential solution: restructuring your business as an S corporation.

Here’s how it works:

Pay yourself a reasonable salary.
Distribute the remaining corporate profits to yourself as dividends.

This strategy ensures that only your salary is subject to Social Security and Medicare taxes. Dividends, on the other hand, are not subject to SE taxes, potentially saving you thousands each year.

Take Control of Your SE Taxes

Self-employment taxes are a reality for business owners, but careful planning can help you manage and reduce your tax burden. Whether you’re exploring restructuring options like an S corporation or want help calculating your SE tax obligations, expert advice is just a call away.

Contact Us Today!
Our team specializes in tax strategies for small business owners and self-employed individuals. Let us help you keep more of what you earn. By understanding SE taxes and implementing strategies to manage them, you can focus on growing your business without unnecessary financial stress.

2025 Retirement Contribution Limits: How to Boost Your Savings This Year

Ken Botwinick, CPA | 11/13/2024

With new cost-of-living adjustments from the IRS, 2025 brings slight increases to retirement contribution limits, allowing you and your employees to save even more. These updates, detailed in IRS Notice 2024-80, apply to 401(k) plans, IRAs, SIMPLE plans, and more, though the adjustments are more modest than in recent years due to easing inflation.

401(k) Contribution Limits for 2025

Starting in 2025, employees contributing to a 401(k) plan can save up to $23,500—an increase from $23,000 in 2024. This limit also applies to 403(b) plans, most 457 plans, and the federal Thrift Savings Plan. For employees aged 50 and over, the catch-up contribution remains at $7,500. However, under the SECURE 2.0 Act, those aged 60 to 63 can take advantage of a higher catch-up amount of $11,250, boosting their total potential contribution to $34,750 in 2025.

SEP and Defined Contribution Plan Limits

Defined contribution plans, including SEP plans, will see an increase in contribution limits from $69,000 to $70,000 in 2025. To be eligible for a SEP plan, employees must earn a minimum of $750 annually—a threshold that remains unchanged from 2024.

SIMPLE Plan Contribution Limits

For 2025, the deferral limit for SIMPLE plans rises to $16,500 (up from $16,000). For employees 50 and over, the catch-up contribution stays at $3,500, but those between 60 and 63 can now contribute an additional $5,250, potentially saving up to $21,750.

Additional Retirement Plan Limits

In 2025, other plan limits also increase, allowing more flexibility for certain high-earning employees and plan participants:

Defined Benefit Plans: The annual benefit cap rises from $275,000 to $280,000.
Top-Heavy Plan Key Employee Limit: Increases from $220,000 to $230,000.
Highly Compensated Employee Threshold: Increases from $155,000 to $160,000.

IRA Contributions Remain Unchanged

The annual contribution limit for IRAs will remain at $7,000, with a fixed catch-up contribution of $1,000 for individuals 50 and older.

Plan for a More Secure Future

The increased contribution limits for 2025 can help you and your employees build a more robust retirement fund. If you have questions about these updates or want to explore other tax-advantaged retirement options, contact us today. We’re here to help you make the most of your retirement savings strategy.

Maximizing Your Business Travel Deductions: Essential Tax Tips for Entrepreneurs

Ken Botwinick, CPA | 11/06/2024

As a business owner, travel may be essential for meeting clients, attending industry conferences, managing vendors, and much more. Understanding which travel expenses qualify as tax deductions can make a big impact on your business’s finances. By keeping careful records and knowing what’s deductible, you can ensure tax compliance and maximize savings on business travel.

What is Your Tax Home?

Eligible business travelers can deduct necessary and ordinary expenses incurred while traveling away from their “tax home.” In tax terms, “ordinary” means common in your industry, while “necessary” means beneficial and appropriate for your business. Personal, lavish, or extravagant expenses aren’t deductible. However, reasonable expenses like a first-class flight or luxury hotel stay may qualify as long as they align with business needs.

Your tax home is not necessarily where you live; rather, it’s the area around your main place of business. (Special rules apply if you have multiple business locations or don’t have a regular workplace.) Generally, you’re considered “away from home” if you’re away longer than a typical workday and need to rest to meet work requirements. Temporary assignments qualify, but expenses for indefinite assignments lasting over a year are not deductible.

Common Deductible Travel Expenses

If you meet the requirements for deductible travel, here are common expenses that may qualify:

Transportation: Airfare, train, or bus tickets, along with baggage fees.
Car Rentals or Mileage: Rental fees or the cost of using your own vehicle, plus tolls and parking fees.
Local Transportation: Taxis, rideshares, and other transport while at your destination for business purposes.
Lodging Costs: Hotel expenses while away on business.
Tips and Incidentals: Tips for service staff, laundry, and dry cleaning.
Meals: Generally, meals are 50% deductible, including solo meals and meals with clients if they serve a business purpose and aren’t extravagant.

Claiming Travel Deductions

If you’re self-employed, business travel expenses can be deducted on Schedule C. Employees, however, cannot deduct unreimbursed business travel expenses. Employers can deduct employees’ travel expenses if they provide advances, reimbursements, or pay directly under an “accountable plan.” This plan requires that expenses serve a business purpose and that employees substantiate expenses and return any excess funds.

Combining Business with Personal Travel

If a U.S. trip is primarily for business but includes personal days, you can still deduct the full cost of transportation to and from the destination. However, lodging and meal deductions apply only to the business days. To classify a trip as business, the majority of the time must be spent on business activities.

Recordkeeping Requirements

To deduct travel expenses, maintain adequate documentation, such as receipts and detailed records, noting the amount, date, location, and purpose of each expense. For non-lodging expenses under $75, receipts aren’t mandatory, but details must still be logged. Some employers may have stricter substantiation policies than the IRS requires.

If using your car for business travel, you may deduct either actual expenses or the standard mileage rate. For lodging, meals, and incidental expenses, employers can also use the per-diem method, which allows simplified record-keeping based on federal per-diem rates. Self-employed individuals can use this method for M&IE but not for lodging.

Alternatively, the optional high-low substantiation method allows using set per-diem rates for high-cost and other localities.

Need Help Navigating Business Travel Deductions?

Business travel tax rules can be complex, especially when considering international travel or traveling with family members. If you have questions or need assistance in managing these deductions, reach out to us for guidance to ensure you’re maximizing your tax savings.

Q&A below:

What is considered a “tax home” for travel deduction purposes?

A tax home generally refers to the city or general area where your principal place of business is located, not necessarily where you maintain your family residence. You’re considered to be traveling away from your tax home if your work duties require you to be away for substantially longer than an ordinary workday and you need rest to perform those duties. However, travel expenses aren’t deductible if you’re on an indefinite assignment expected to last more than a year.

What types of expenses can I deduct for business travel?

Common deductible business travel expenses include airfare, train or bus fare to your destination, car rentals or the cost of using your vehicle (plus tolls and parking), transportation at your destination, lodging, tips to service workers, and dry cleaning or laundry. Meals, including those eaten alone or with business contacts, are generally 50% deductible if they’re for a business purpose and not extravagant.

Can I deduct travel costs if I mix business and personal activities on a trip?

Yes, you can deduct the full cost of transportation to and from the destination if the trip is primarily for business. However, only the expenses directly related to the business portion of the trip, such as lodging and meals, are deductible. For the trip to qualify as primarily business-related, you generally need to spend more time on business activities than personal ones.

What documentation is needed to claim business travel deductions?

To claim travel deductions, you must substantiate each expense with adequate records, including receipts, canceled checks, or bills that show the amount, date, place, and nature of each expense. Non-lodging expenses under $75 don’t require a receipt, but they must still be documented in an expense report. Employers may choose to simplify tracking by using federal per-diem rates for meals and incidental expenses or the high-low substantiation method.