Archives for May 2025

2026 HSA Contribution Limits Announced by IRS: What Employers and Employees Need to Know

Ken Botwinick, CPA | 05/29/2025

The IRS has officially announced the 2026 inflation-adjusted contribution limits for Health Savings Accounts (HSAs), giving individuals with high-deductible health plans (HDHPs) a slightly higher opportunity to save for medical expenses tax-free.

What Is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged savings tool designed to help individuals covered by an HDHP pay for qualified medical expenses. To be eligible, the account holder must:

Be enrolled in an HDHP,
Not be covered by other non-permitted health insurance,
Not be enrolled in Medicare, and
Not be claimed as a dependent on someone else’s tax return.

HSAs offer triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

2026 HSA Contribution Limits

According to IRS Revenue Procedure 2025-19, the 2026 HSA contribution limits have increased slightly due to inflation:

Self-only HDHP coverage: $4,400 (up from $4,300 in 2025)
Family HDHP coverage: $8,750 (up from $8,550 in 2025)
Catch-up contribution for those age 55 or older: $1,000 (unchanged)

2026 HDHP Minimum Deductibles and Maximum Out-of-Pocket Expenses

To qualify for an HSA, the associated health plan must meet specific high-deductible requirements:

Minimum annual deductible:
- $1,700 for self-only coverage (up from $1,650 in 2025)
- $3,400 for family coverage (up from $3,300 in 2025)
Maximum out-of-pocket limits (excluding premiums):
- $8,500 for self-only coverage (up from $8,300 in 2025)
- $17,000 for family coverage (up from $16,600 in 2025)

Why HSAs Are a Smart Savings Strategy

Health Savings Accounts are not just a way to save on medical expenses — they also function as long-term savings vehicles. Here’s why many individuals and employers value them:

Tax Advantages: Contributions reduce taxable income, and qualified withdrawals are not taxed.
Long-Term Growth: Unused funds roll over year after year and can be invested for growth.
Flexibility: HSA funds can be used for a wide range of qualified medical expenses including copays, prescriptions, dental care, vision, and even long-term care insurance premiums.
Portability: HSAs are owned by the individual — not the employer — so the funds stay with the account holder regardless of job changes or retirement.

Plan Ahead for 2026

With contribution limits rising slightly, both employers and employees should consider updating their benefit strategies and payroll withholding options for 2026. Employers may want to educate staff on maximizing their HSA contributions to take full advantage of these tax-saving opportunities.

If you have questions about how these changes affect your business or your personal financial planning, contact our office today. We’re here to help you navigate the rules and optimize your benefits strategy.

Independent Contractor or Employee? Avoid IRS Trouble with Proper Worker Classification

Ken Botwinick, CPA | 05/27/2025

As staffing shortages and rising labor costs push businesses to seek flexible solutions, many are turning to independent contractors. While this approach can reduce overhead and increase agility, it also carries legal and tax risks — especially if workers are misclassified. The IRS takes worker classification seriously, and getting it wrong can lead to audits, penalties, and back taxes.

Why Proper Worker Classification Matters

The IRS draws a clear line between employees and independent contractors for federal tax purposes. Employers who misclassify workers — even unintentionally — can face steep consequences, including:

Federal and state tax audits
Liability for back payroll taxes
Penalties and interest
Potential employee lawsuits for unpaid benefits

That’s why it’s essential to understand and apply the right classification criteria from the beginning.

Employee vs. Independent Contractor: What’s the Difference?

The distinction often hinges on the level of control a business has over how work is performed.

If your business:

Controls work schedules and procedures
Provides tools or equipment
Reimburses business expenses
Requires exclusivity

…then the worker may legally be considered an employee — even if they signed a contractor agreement.

As an employer, that means you’re responsible for:

Withholding income and payroll taxes
Paying the employer share of Social Security and Medicare (FICA)
Paying federal unemployment tax (FUTA)
Complying with state employment tax laws
Possibly offering employee benefits

In contrast, independent contractors typically:

Work under a written contract
Use their own tools and resources
Set their own hours and terms
Incur their own business expenses
Work for multiple clients
Receive Form 1099-NEC at year-end if paid $600 or more

IRS Form SS-8: Helpful or Hazardous?

If you’re unsure how to classify a worker, you can file IRS Form SS-8 to request a determination. But beware — this can attract unwanted IRS attention. The IRS often favors employee classification, and a request for one worker may open the door to broader inquiries about your workforce.

In many cases, it’s safer to consult a tax professional who can help you assess the relationship and maintain compliance with minimal risk.

Workers Can File Form SS-8 Too

Independent contractors who feel they’ve been wrongly classified can also file Form SS-8. If they do, the IRS will notify your business and request a response. A decision could lead to reclassification and tax consequences retroactively — another reason to be proactive and ensure you’re doing things by the book.

Protect Your Business: Stay Compliant from the Start

If your company works with freelancers, gig workers, or consultants, take steps to protect your business:

Use clearly written contracts that outline the independent nature of the work
Avoid behaviors that imply control, such as dictating how or when tasks must be done
Keep records that support contractor status (e.g., invoices, payment methods, project scopes)
Apply consistent classification across similar workers
Stay up to date on IRS guidance and local labor laws

Don’t Let Classification Mistakes Derail Your Business

Worker classification is a complex but critical aspect of business compliance. If you’re unsure how to proceed, our team can help you properly assess your situation, avoid IRS penalties, and structure contracts that protect your business.

Need guidance with worker classification?
Reach out to us today to schedule a consultation and avoid costly mistakes before they happen.

Is It Possible to Turn Business Losses into Tax Savings?

Ken Botwinick, CPA | 05/13/2025

Is It Possible to Turn Business Losses into Tax Savings?

Even the most financially sound businesses can experience challenging years. Whether due to market shifts, rising expenses, or unexpected events, downturns happen. But here’s the silver lining: under the federal tax code, certain business losses may be used strategically to reduce taxable income in future years. This approach, known as the Net Operating Loss (NOL) deduction, can offer significant tax relief when properly applied.

What Is a Net Operating Loss (NOL)?

A Net Operating Loss occurs when a business’s allowable tax deductions exceed its taxable income in a given year. NOLs are designed to help businesses with fluctuating income—allowing them to “smooth out” the tax burden across years by applying losses from unprofitable periods to offset income in profitable ones.

This deduction is particularly helpful for businesses that experience growth cycles, seasonal trends, or economic downturns.

Who Can Use an NOL to Reduce Taxes?

You may be eligible for an NOL deduction if your total deductions surpass your income for the year. These losses must generally be tied to:

Business operations (e.g., losses reported on Schedule C or F, or pass-through losses from partnerships or S corporations on Schedule K-1)
Federally declared disaster-related losses, such as casualty or theft
Rental property losses (Schedule E)

However, not all losses count when calculating an NOL. The following items are generally excluded:

Capital losses that exceed capital gains
Gains from the sale of qualified small business stock that are excluded from income
Nonbusiness deductions that exceed nonbusiness income
The NOL deduction from a previous year
Section 199A Qualified Business Income deduction

Eligible filers include individuals and C corporations. While partnerships and S corporations themselves can’t claim an NOL, their partners or shareholders can potentially use their share of the loss on their individual tax returns.

Key Changes to NOL Rules Under the TCJA

The Tax Cuts and Jobs Act (TCJA) brought significant reforms to how net operating losses can be used. Here are the major updates:

No more carrybacks (except for specific farming losses): You can no longer apply NOLs to previous tax years.
Unlimited carryforwards: You can carry unused losses forward indefinitely.
80% cap: NOLs can only offset up to 80% of your taxable income in a future year.

If your NOL is larger than your taxable income in a particular year, the remaining amount becomes a carryover and can be used in future years. It’s important to apply NOLs in the order they were incurred.

What Is the Excess Business Loss Limitation?

Beginning in 2021, the TCJA introduced the Excess Business Loss (EBL) limitation for noncorporate taxpayers, including partners and S corporation shareholders. This rule applies after accounting for other loss limitations such as basis, at-risk, and passive activity rules.

Under this provision, only a portion of your business loss can offset income. For the 2025 tax year, the threshold is:

$313,000 for individuals
$626,000 for joint filers

Any losses beyond this threshold become NOL carryforwards—again subject to the 80% limitation in the years they’re used. This reduces the immediate tax benefit of those losses.

Note: The Inflation Reduction Act extended the EBL limitation through 2028. Originally, it was set to expire after 2026.

Why Strategic Tax Planning Matters

Understanding and utilizing the NOL deduction properly requires careful attention to detail. Coordinating it with other credits, deductions, and loss limitations is critical to ensure you’re maximizing your tax benefits.

Smart tax planning can make a significant difference. Applying your business losses the right way could save you thousands—or more—over time.

Let’s Build a Tax Strategy Around Your Losses

If your business has experienced a loss year, you don’t have to let it go to waste. We can help you determine if you’re eligible for an NOL deduction and develop a strategy that aligns with your short- and long-term goals.

Contact us today to explore how you can turn business losses into a powerful tax-saving tool.

Is Your Business Owner Salary IRS-Compliant? How to Determine Reasonable Compensation for C and S Corporations

Ken Botwinick, CPA | 05/12/2025

If you’re a business owner of a C corporation or S corporation, setting your salary involves more than just choosing a number that sounds right. The IRS pays close attention to how much you’re paying yourself, and if your compensation is deemed too high or too low, it could trigger audits, reclassifications, back taxes, and penalties. Ensuring your salary qualifies as “reasonable compensation” is essential for staying compliant and protecting your tax deductions.

Why Reasonable Compensation Matters for Business Owners

The IRS expects compensation for shareholder-employees to reflect the market value of the work performed. Paying yourself more or less than what someone else would earn for the same role in a similar business can raise red flags.

C Corporation Owners
Many C corporation owners choose to pay themselves higher salaries because wages are considered deductible business expenses. This reduces the corporation’s taxable income. However, if the IRS finds your salary to be excessive, they may reclassify the excess amount as nondeductible dividends—leading to additional taxes and reduced deductions.

S Corporation Owners
S corporation owners often do the opposite—minimizing wages and maximizing distributions to avoid payroll taxes. But if the IRS determines your salary is unreasonably low, they could reclassify a portion of your distributions as wages, triggering payroll taxes and possible penalties.

Both strategies are under constant IRS scrutiny, making it crucial to align your compensation with industry norms and documented responsibilities.

How the IRS Evaluates Reasonable Compensation

The IRS defines reasonable compensation as “the amount that would ordinarily be paid for like services by like enterprises under like circumstances.” In other words, would your company pay someone else the same amount for doing the work you do?

Here are the key factors the IRS reviews:

Job duties and responsibilities
Education, training, and experience
Time commitment and effort
Comparable wages in your industry and location
Overall revenue and profitability of the business

Business owners should periodically assess these factors to make sure their salary aligns with market expectations.

Steps to Help Establish Reasonable Compensation

To protect your business from IRS challenges, take these proactive steps:

1. Benchmark Against Industry Standards

Research what others in similar roles and industries are earning. Use sources like the U.S. Bureau of Labor Statistics, industry salary surveys, and reputable compensation databases. Save your research to demonstrate your salary is grounded in objective data.

2. Create Clear Job Descriptions

Document your roles and responsibilities thoroughly. If you wear multiple hats—such as CEO, marketing strategist, and financial planner—your job description should reflect this. A comprehensive list strengthens your justification for higher compensation.

3. Maintain Proper Corporate Records

Hold official meetings to review and approve compensation. Record all decisions in board minutes to show your salary was determined through a formal, documented process.

4. Review Compensation Annually

As your business evolves, so should your salary. Conduct a yearly compensation review that factors in company growth, profitability, your workload, and market changes. Document the rationale for any adjustments to support your case during an audit.

Ongoing Compliance is Key

Setting reasonable compensation isn’t a one-and-done activity—it requires ongoing evaluation and documentation. Staying proactive will not only help avoid IRS penalties but also align your compensation strategy with the long-term goals of your business.

Need Help with Compensation Planning?

We can assist you in benchmarking your salary against industry standards, creating detailed job descriptions, compiling supporting documentation, and implementing a formal process to establish and review compensation decisions. Our goal is to help you ensure IRS compliance while aligning your compensation strategy with your company’s financial health and long-term objectives. Don’t leave your salary decisions open to IRS scrutiny—proactively manage them with expert support. Reach out to us today for personalized guidance and protect your business from unnecessary tax exposure, penalties, and reclassification risks.