Archives for April 2025

Boost Employee Retention and Cut Taxes with an Educational Assistance Plan

Ken Botwinick, CPA | 04/29/2025

Investing in Employee Education Pays Off for Your Business

Offering educational benefits to your team isn’t just a nice perk — it can deliver real tax advantages for your business. By setting up an Educational Assistance Program under Section 127 of the IRS Code, your company can provide each eligible employee with up to $5,250 annually in federal income tax-free and federal payroll tax-free benefits.

Let’s dive into how these plans work and why they’re worth considering for your business strategy.

Understanding Section 127 Educational Assistance Plans

A Section 127 plan allows businesses to cover a wide range of educational expenses for employees, including graduate-level courses. The best part? The education doesn’t even have to be job-related unless you specifically design the plan that way.

All payments made through the plan are tax-deductible for your company as employee compensation expenses.

However, a few rules apply:

Assistance is for employees only (not their spouses or dependents).
Courses related to sports, hobbies, or games typically don’t qualify unless they are directly tied to job skills.

Special restrictions may apply if the participating employee is related to the business owner — more on that below.

Key Requirements for Setting Up a Section 127 Plan

To maintain tax-favored status, your Educational Assistance Program must:

Be a Written Plan: It must exist formally in writing for the benefit of employees.
Avoid Discrimination: The plan must not favor highly compensated employees or their dependents.
Exclude Compensation Options: Employees cannot choose between tax-free education benefits and taxable wages (i.e., it can’t be part of a cafeteria plan).
Be Funded Flexibly: You don’t need to prefund the plan; you can pay or reimburse expenses as needed.
Notify Employees: Clear communication about plan availability and details is required.
Limit Ownership Benefits: No more than 5% of total annual benefits can go to business owners holding more than 5% ownership or their families.

Can Owner’s Children Benefit from a Section 127 Plan?

Yes — under specific conditions. If your employee-child is:

21 years or older,
A legitimate employee of the company, and
Not a dependent of the owner,

they may qualify for benefits, provided they do not hold more than a 5% ownership stake, directly or indirectly, in the business.

Important Ownership Rules to Know:
For C or S corporations, ownership attribution includes:

Stock options that exceed 5% ownership.
Partnerships or corporations where the child holds more than 5% ownership and that own shares in your company.

If your business operates as a sole proprietorship, LLC, or partnership, similar ownership attribution rules apply.

Expanded Benefits: Covering Student Loan Payments

Through December 31, 2025, businesses can also use Section 127 plans to make tax-free payments toward employees’ qualified student loan principal and interest. These payments count toward the $5,250 annual limit, making it an even more valuable recruitment and retention tool.

Why an Educational Assistance Plan Makes Sense

Setting up a Section 127 plan offers dual benefits:

Attract and Retain Talent: Show employees you’re invested in their growth, leading to higher loyalty and satisfaction.
Save on Taxes: Enjoy federal tax savings while improving your workforce’s skills.

Even better, your eligible family members who work for the business may also participate under the right conditions.

Need Help Setting Up a Section 127 Plan?
If you’re considering an educational assistance program for your business, or if you have questions about including employee-family members, contact us today for expert guidance and support.

Title: SEP vs. SIMPLE IRAs: Best Retirement Plan Options for Small Business Owners in 2025

Ken Botwinick, CPA | 04/25/2025

Are you a small business owner exploring retirement plans for yourself and your team—but hesitant about high costs and complex administrative requirements? Fortunately, there are two affordable, low-maintenance retirement options designed specifically for small businesses: the Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA.

Let’s break down the benefits of each to help you choose the best fit for your business.

What is a SEP IRA?

A SEP IRA is a tax-deferred retirement plan that’s easy to set up and manage. It’s ideal for small businesses or self-employed individuals who want flexibility in annual contributions. One major benefit? You’re not locked into contributing every year. You decide whether or not to make contributions based on your financial situation.

To get started, you can adopt the IRS’s Form 5305-SEP, a model plan that doesn’t require IRS approval or filing. Once set up, you can make tax-deductible contributions to your employees’ SEP-IRAs, which are owned and controlled by the employees themselves. These contributions grow tax-free until retirement.

2025 SEP IRA Contribution Limits:

The lesser of 25% of compensation or $70,000 per employee

Unlike traditional IRAs, the SEP IRA has a much higher contribution limit, and your contributions aren’t capped by the traditional IRA deduction limits. Just keep in mind: all eligible employees must be included, and contributions must be nondiscriminatory.

SEP IRAs are significantly easier to manage than traditional qualified pension plans. No annual IRS filings are required, and recordkeeping can be handled by a financial institution such as a bank or mutual fund company.

What is a SIMPLE IRA?

A SIMPLE IRA is another great choice for businesses with 100 or fewer employees. It’s especially useful if you want to encourage employees to contribute to their own retirement through a salary deferral program.

Each eligible employee sets up their own SIMPLE IRA, and the employer makes matching contributions based on employee salary deferrals—up to 3% of their compensation—or a 2% non-elective contribution for every eligible employee.

2025 SIMPLE IRA Contribution Limits:

Employee deferral limit: $16,500
Catch-up contribution (age 50+): $3,500

You can also opt for a SIMPLE 401(k), which provides similar features with the added benefit of avoiding complicated nondiscrimination testing typical of traditional 401(k) plans.

SEP vs. SIMPLE IRA: Which Is Right for Your Business?

Both SEP and SIMPLE IRAs are excellent retirement planning tools for small business owners:

SEP IRA Benefits:

High contribution limits
Flexible funding decisions
Minimal paperwork
No IRS annual filing

SIMPLE IRA Benefits:

Employee participation through salary deferrals
Employer matching encourages employee engagement
Lower administrative costs than a 401(k)
No annual IRS filings

Choosing between a SEP IRA and a SIMPLE IRA depends on your business size, income structure, and how involved your employees are in their retirement planning. Both plans offer valuable tax advantages, simple setup, and reduced administrative burdens—making them attractive alternatives to traditional retirement plans.

Have questions about which plan is right for your small business in 2025? Contact us today to schedule a consultation and create a custom retirement plan strategy that fits your goals.

Turn a Summer Job into Tax Savings: Hire Your Child and Reap the Rewards

Ken Botwinick, CPA | 04/18/2025

With summer fast approaching, many small business owners are thinking about hiring seasonal help. If your child is looking to earn some extra money, why not keep it in the family? Hiring your child can benefit your business—and your household finances—thanks to several tax-saving opportunities.

Here are three valuable tax benefits of putting your child on your payroll this summer:

1. Shift Business Income and Save on Taxes

One of the most significant benefits of hiring your child is the ability to transfer some of your high-taxed income into tax-free or lower-taxed income. When you pay your child a reasonable wage for legitimate work, your business can deduct that amount as a business expense.

Example:
Let’s say you’re a sole proprietor in the 37% tax bracket. You hire your 17-year-old daughter to help with office work. She earns $10,000 during the year and has no other income. Thanks to the $15,000 standard deduction for single filers in 2025, she pays no federal income tax—while you save $3,700 in taxes (37% of $10,000).

Even if your child earns more than the standard deduction, the extra income will be taxed at their lower rate (starting at 10%), rather than your higher one.

✅ Pro Tip: Keep accurate records of hours worked and tasks completed to ensure the wages are considered legitimate and reasonable by the IRS.

2. Reduce or Eliminate Payroll Taxes

If your business is not incorporated, hiring your under-18 child can help you save even more through FICA and FUTA tax exemptions:

FICA exemption: Wages paid to a child under 18 employed by a parent are not subject to Social Security or Medicare taxes.
FUTA exemption: Wages paid to a child under 21 by a parent are exempt from federal unemployment (FUTA) tax.

This applies to sole proprietorships or partnerships only between the child’s parents. If your business is a corporation or has other partners, these exemptions do not apply—but hiring your child can still be financially beneficial.

3. Set Up a Retirement Plan for Your Child

Giving your child the opportunity to save for retirement early is a great long-term financial move. Once your child has earned income, they are eligible to contribute to a retirement account such as a Traditional IRA or Roth IRA.

For 2025, your child can contribute the lesser of:
- Their earned income – This includes wages or salary your child earns from working, such as helping out in your business. If they earn less than $7,000 during the year, their maximum IRA contribution is limited to that amount.
- $7,000 – This is the annual IRA contribution limit set by the IRS for individuals under age 50 in 2025. If your child earns $7,000 or more, they can contribute the full amount to their IRA for the year.

If your business offers a SEP IRA, you can contribute up to 25% of your child’s compensation (up to $70,000 for 2025), depending on your plan’s rules.

⚠️ Heads up: Early withdrawals from a traditional IRA before age 59½ may incur a 10% penalty, unless they qualify for an exception (such as higher education costs or a first-time home purchase).

More Than Just Tax Benefits

Beyond the financial advantages, hiring your child helps them:

Learn about the value of work
Gain business skills and responsibility
Build a work ethic early in life
Start saving for the future

Hiring your child can be a smart tax strategy—and a great opportunity to teach them real-world skills. Just be sure to follow IRS guidelines, pay a fair wage for actual work performed, and document everything.

If you’re considering hiring your child this summer, or want help designing a tax-smart strategy, contact our team today. Tax laws change frequently, and we can help ensure you remain compliant while maximizing your family’s savings.

🚨 Avoid IRS Trouble: What Small Business Owners Need to Know About the 100% Trust Fund Recovery Penalty

Ken Botwinick, CPA | 04/08/2025

If you own or help run a small business, there’s a serious tax issue you need to be aware of: the IRS’s Trust Fund Recovery Penalty, also known as the 100% penalty. This isn’t your average tax mistake. It’s a financial hit that can personally cost you 100% of the unpaid employment taxes—even if your business is a separate legal entity like a corporation or LLC.

What Is the 100% Penalty?

When a business withholds federal income and payroll taxes from its employees’ wages, those funds are held “in trust” for the IRS. If those taxes aren’t turned over, the IRS can hold certain individuals personally liable for the full amount—hence the name “100% penalty.”

This penalty can be assessed against anyone deemed a “responsible person.” And it’s not just business owners—employees, officers, and even volunteers in some cases can be targeted.

Who Is a “Responsible Person” in the Eyes of the IRS?

The IRS defines a responsible person as someone who:

Is responsible for collecting, accounting for, and paying withheld taxes
Willfully fails to ensure those taxes are paid

⚠️ “Willful” doesn’t mean malicious—it simply means the person knew about the unpaid taxes and made a conscious decision not to pay.

Responsible parties can include:

Corporate officers, directors, or employees
LLC members or employees
Partners in a partnership
Bookkeepers with financial control or check-signing authority

Even if your role is limited, if you had authority over financial decisions and knew taxes weren’t being paid, you could be held liable.

What Courts Look At When Determining Responsibility

It’s not just about job titles. Courts and the IRS consider many factors when determining who qualifies as a responsible person:

Did the individual have the authority to sign checks?
Were they actively involved in managing day-to-day operations?
Could they hire or fire employees?
Did they control how bills and payroll were paid?
Did they own part of the business or benefit financially?

Real IRS Cases That Might Surprise You

Here are a few real-life examples where individuals were held personally responsible for unpaid employment taxes:

✅ Case 1: Estate Executor An inn failed to remit payroll taxes. The executor of the estate that owned the inn was deemed a responsible person and held liable for the penalty.

✅ Case 2: Nonprofit Board Member A volunteer trustee at a nonprofit who knew about the unpaid taxes—and had the authority to pay them—was assessed the penalty.

✅ Case 3: CFO and CEO A newly hired CFO found that the company was years behind in payroll tax payments. Despite notifying leadership, the taxes weren’t paid. The CFO and CEO were both found liable because they knowingly paid other expenses instead of the IRS.

How to Protect Yourself from the 100% Penalty

If you’re involved in the financial operations of a business—especially one struggling to meet payroll obligations—take this penalty seriously.

Here’s how to safeguard yourself:

Keep detailed records of tax filings and payments
Document any efforts to correct tax issues
Avoid accepting roles where you have check-signing authority unless you also have visibility and control over tax payments
Speak to your tax advisor immediately if you suspect the business has missed payroll tax deadlines

Being involved in a business that fails to pay over employment taxes can expose you to personal liability, even if you’re not the owner. The 100% penalty is one of the IRS’s most aggressive enforcement tools, and defending yourself against it can be time-consuming and expensive.

When in doubt, consult with a qualified tax professional to review your responsibilities and help you reduce your risk of being caught in the crosshairs of a trust fund recovery penalty.

Real Estate Professionals: How to Qualify for Special Tax Deductions on Rental Losses

Ryan Malone | 04/05/2025

Unlocking Tax Benefits: Are You a Qualified Real Estate Professional Under IRS Rules?

When it comes to rental property losses, most taxpayers hit a wall: the IRS classifies these as passive activity losses (PALs), which can typically only be deducted against passive income. So, unless you have other passive gains—like from additional rental properties—your losses may be stuck in limbo, carried forward to future years.

But here’s the good news: there’s a valuable tax exception for those who meet the IRS criteria as real estate professionals. Let’s explore what it means to qualify and how this designation could help you deduct rental losses now instead of later.

Understanding Passive Activity Losses (PALs)

Under standard federal tax rules, rental real estate losses are considered passive. If your other income (like from a W-2 job or business profits) isn’t passive, you can’t use these rental losses to reduce your tax liability. Instead, they’re carried forward into future years until you either:

Generate enough passive income, or
Sell the property that caused the loss.

The Real Estate Professional Exception

The IRS makes an exception for taxpayers who are materially involved in real estate activities. If you qualify as a real estate professional, your rental losses may be reclassified as non-passive, meaning you can deduct them against your regular income.

To qualify, you must:

Spend more than 750 hours per year in real estate activities in which you materially participate, and
Work more hours in real estate than in all your other trades or businesses combined.

Once you meet this threshold, you must also prove material participation in each rental activity to make those losses non-passive. The three easiest ways to do this include:

Spending over 500 hours annually on the activity,
Spending over 100 hours, and more time than any other individual, or
Performing substantially all the work related to the property.

What If You Don’t Qualify as a Real Estate Pro?

Not everyone can meet the 750-hour requirement, especially if you have a full-time job elsewhere. But there are still some alternative exceptions that could let you deduct rental losses now:

1. The $25,000 Small Landlord Exception

If you:

Own at least 10% of the rental property, and
Actively participate in its management (approving tenants, leases, or repairs),
You may be able to deduct up to $25,000 in rental losses annually. This deduction begins to phase out when your adjusted gross income (AGI) exceeds $100,000 and disappears entirely at $150,000.

Note: Properties owned through limited partnerships don’t qualify.

2. 7-Day Average Rental Rule

If your rental property’s average lease duration is seven days or less, it’s treated as a business rather than a passive activity. If you meet one of the material participation tests, losses from this property are non-passive and deductible.

3. 30-Day Rule with Services Provided

When your property is rented out for an average of 30 days or less and you provide substantial personal services (like cleaning, concierge, or meal service), the IRS may also treat it as a business activity. Again, if you materially participate, you can deduct those losses immediately.

Maximize Every Available Tax Break

Navigating the world of rental property tax rules can be complicated—but it’s also filled with opportunity. Whether you qualify as a real estate professional or fall under one of the exceptions, it’s worth evaluating your eligibility every year.

Our team can guide you through the requirements and help you maximize every available deduction. Don’t let your rental losses go to waste—let us help you make the most of your investments at tax time. Contact us today for a personalized consultation and let our experts help you make the most of your rental property deductions.