Archives for July 2026

When a Form W-4 Doesn’t Look Right: Employer Steps to Stay Compliant

Ken Botwinick, CPA | 07/27/2026

Employees use Form W-4, “Employee’s Withholding Certificate,” to tell employers how much

federal income tax to withhold from their paychecks. Most W-4s are straightforward. But when a form appears
modified, incomplete, or accompanied by unusual statements—or when an IRS “lock-in” letter is involved—
employers need a clear, consistent process.

The goal is simple: meet your withholding obligations while avoiding unnecessary involvement in an employee’s
personal tax dispute.

How to spot an invalid Form W-4

Employees are responsible for the information they provide on Form W-4 and sign the form under penalties of
perjury. In general, employers aren’t expected to verify whether an employee’s tax filing choices and
calculations are correct.

That said, a Form W-4 should be treated as invalid when the employee:

Alters the official form
Removes or crosses out the penalties-of-perjury declaration
Indicates that information on the form is false

You should also reject any substitute form created by the employee. (In some cases, an electronic or
employer-provided substitute may be acceptable if it meets IRS requirements.)

What to do if you receive an invalid W-4

If an employee submits a W-4 that appears invalid, let them know you can’t accept it and request a valid
replacement. In most cases, you may continue using a valid W-4 you already have on file until the employee
provides the corrected form.

If you don’t have a valid W-4 on file, you generally withhold using the default approach: treat the employee
as “single or married filing separately” with no entries in Steps 2, 3, or 4.

Exemption from withholding: not automatically invalid

An employee’s claim of exemption from withholding is not automatically wrong, but it must meet the applicable
eligibility rules. For the 2026 Form W-4, employees claiming exemption use the exemption
checkbox on the form.

For 2026, an employee generally may claim exemption only if they had no federal income tax liability in
2025 and expect to have none in 2026. The responsibility for determining eligibility
rests with the employee—not the employer.

Understanding IRS “lock-in” instructions

Employers generally aren’t required to routinely submit Forms W-4 to the IRS. Typically, you submit forms only
when the IRS directs you through written notice or specific published guidance.

When the IRS believes an employee’s withholding may be too low, it may issue a lock-in letter.
This letter specifies the filing status and withholding adjustments the employee must use going forward.

Before the lock-in rules take effect, the employee receives a separate notice and an opportunity to dispute the
determination directly with the IRS.

Once the lock-in takes effect

After the lock-in instructions become effective, you generally must ignore any Form W-4 that would reduce
withholding below the IRS-mandated amount.

However, you should still honor any new Form W-4 that results in more withholding.
If your payroll system accepts Forms W-4 electronically, it should also prevent a locked-in employee from
lowering withholding below the required level.

If the employee disagrees with the lock-in, they must work with the IRS. They may submit a new Form W-4 and
supporting information as directed in the IRS notice. Until the IRS authorizes changes, you should not reduce
withholding.

Failing to follow lock-in requirements can expose your business to liability for additional tax that should have
been withheld.

Build consistent internal procedures

Strong payroll controls reduce the risk of costly errors. Consider documenting how W-4s are:

Submitted
Reviewed
Stored and retained

Train payroll personnel to recognize altered or unauthorized documents. At the same time, avoid asking staff to
determine whether an employee’s tax calculations are “correct.” That decision generally belongs to the
employee and—when applicable—the IRS.

Where to direct employees with W-4 questions

If employees ask for help completing Form W-4, direct them to the IRS Tax Withholding Estimator or encourage
them to consult their personal tax advisors. Unless your organization is authorized to provide individualized
tax guidance, avoid offering individualized tax advice.

Need help handling a questionable W-4 or lock-in letter?

Unusual W-4 submissions and IRS lock-in letters can create compliance risk when they aren’t handled correctly.
If you want to strengthen your processes—or need support responding to an invalid form or complying with an IRS
lock-in—reach out to Botwinick.

We can help you navigate withholding rules to reduce the risk of avoidable payroll mistakes.

New 2026 Tax Incentives for Businesses Offering Employee Child Care

Ken Botwinick, CPA | 07/21/2026

Offering competitive employee benefits can help your business recruit talented professionals and keep valued employees. Employer-provided child care is especially appealing to working parents, but the cost has often made it difficult for small businesses to offer. Recent tax law changes may now make this benefit more affordable through expanded tax incentives. Your business may want to consider opening or improving an on-site child care facility, partnering with a qualified provider, or joining a shared child care arrangement. Here’s what employers should know about the enhanced credit beginning in 2026.

Recent changes

Under Section 45F of the tax code, employers may claim a tax credit for eligible expenses paid or incurred to provide child care to employees. For 2026, the credit has increased from 25% to 40% of an employer’s qualified child care facility expenditures, plus 10% of its qualified child care resource and referral expenditures paid or incurred during the tax year. It’s limited to a total of $500,000 per tax year (up from $150,000 for 2025). Beginning in 2027, the $500,000 limit will be adjusted annually for inflation.

The credit has been further enhanced for certain small businesses. If you meet the eligibility requirements, you can claim a credit equal to 50% of qualified child care facility expenses, plus 10% of qualified resource and referral expenditures, up to a maximum of $600,000 for 2026 (annually inflation-adjusted going forward).

Eligible small businesses are generally those that had average annual gross receipts for the previous five tax years below an inflation-adjusted threshold. For 2026, the threshold is $32 million.

Also, eligible small businesses can now pool their resources to provide child care for their employees and to use third-party intermediaries to facilitate child care services. These options may make the credit more accessible to businesses that can’t justify operating their own facilities.

Qualified expenditures

Qualified child care facility expenditures are amounts paid or incurred to:

Acquire, construct, rehabilitate or expand property that’s 1) to be used as part of your qualified child care facility, 2) depreciable or amortizable, and 3) not part of your principal residence or an employee’s home,
Operate your qualified child care facility, including the costs to train and compensate its employees and provide scholarship programs, or
Contract with a qualified child care facility to provide eligible services to your employees.

It’s important to note that qualified child care expenses exclude amounts that exceed the fair market value of providing such care.

A qualified child care facility is one that meets all state and local regulatory requirements. In addition, the facility 1) must be used principally to provide child care (unless it’s also the personal residence of the person who operates it), 2) must be open to all employees during the tax year, and 3) can’t discriminate in favor of highly compensated employees. And, if the facility is your principal trade or business, at least 30% of enrollees must be your employees’ dependents.

Additional rules

To avoid doubling your tax benefits from the same expenditures, your tax basis in any qualified child care facility is reduced by the amount of the credit attributable to facility-related expenditures. You also can’t claim other deductions or credits based on the same expenses.

In addition, if your child care facility ceases to operate as such or undergoes a change in ownership before the tenth tax year after the tax year in which it’s placed in service, you may have to recapture (pay back) some or all of the credit. The percentage of the credit that must be recaptured decreases gradually over the 10-year period.

The Sec. 45F credit is part of the general business credit, which is composed of more than 30 separate tax credits that are subject to combined limits based on your tax liability. So the amount you can use in the current year may be limited. However, any unused credit can generally be carried back one year and carried forward for 20 years. The credit is calculated and claimed on Form 8882, “Credit for Employer-Provided Childcare Facilities and Services.”

Look before you leap

Providing child care for your employees can be a major long-term investment. Although the recent enhancements to the employer-provided child care credit help make this benefit option more feasible, it isn’t right for every employer. You should also consider workforce demographics, operational costs, available providers, and the associated risks and responsibilities. Even when outsourcing, you’ll have to exercise due diligence to select a reputable provider, monitor service quality and make changes as necessary.

If you’re interested in pursuing this family-friendly benefit, we can help you evaluate the pros and cons and model the credit’s potential value. Contact us for more information and assistance.

Small Business Tax Problems? Your Most Common Questions Answered

Ken Botwinick, CPA | 07/13/2026

Tax issues can affect even the most organized and financially responsible small business owners. Whether it’s an unexpected IRS or state tax notice, a temporary cash flow challenge, a missed filing deadline, or a payroll tax mistake, these situations can quickly become overwhelming. When left unaddressed, penalties and interest can continue to accumulate, making the problem more costly and complicated over time. The good news is that tax problems are often manageable when addressed promptly. By understanding your options and taking a proactive approach, you can resolve outstanding tax issues, minimize potential consequences, and put your business back on the path to long-term financial stability and success.

What should I do if I receive a tax notice?

If you or your business receives a tax notice from the IRS or a state agency, don’t ignore it. Start by reviewing the notice carefully. It may relate to:

A balance due,
A missing tax return,
A proposed tax adjustment,
A payroll tax deposit issue, or
A request for documentation.

Be aware that tax notices typically include response deadlines — and missing them can limit your options and lead to additional penalties and interest. Tax authorities may eventually pursue collection measures (such as liens or levies) on unpaid amounts. A lien is a legal claim against property, which can affect your ability to secure credit or complete financial transactions. A levy allows the tax agency to seize assets to satisfy the debt.

Before making a payment or sending a response, confirm that the notice is accurate. We can help you compare the notice with your business records, gather supporting documentation and prepare an appropriate response.

How far back can I file unfiled tax returns?

If you have unfiled tax returns, it’s important to address them as soon as possible. In many cases, you’ll need to file past-due returns before you can qualify for certain resolution options, such as a payment plan or settlement program.

How far back you need to file depends on your circumstances, the type of return involved and the tax agency’s requirements. There generally isn’t a simple time limit that makes an unfiled return “go away.”

For federal income taxes, the statute of limitations for the IRS to assess additional tax for a particular tax year generally starts only after a valid return is filed. It’s typically three years, but it’s six years if you understate your gross income by more than 25%. If you fail to file a return (or you file a false or fraudulent return), the IRS has an unlimited amount of time to assess tax for the tax year.

So filing past-due returns can help reduce the risk of penalties, interest and collection activity — as well as the risk that the taxing authority could create a “substitute for return” for you. (This is generally undesirable because the return likely will include your income but not all the deductions, credits and other tax breaks you may be eligible for.)

If you’re owed a refund, filing promptly is especially important because you may lose the ability to receive an otherwise valid refund if you wait too long. Federal income tax refunds and credits generally must be claimed by the later of three years from the date you filed the return or two years from the date you paid the tax.

What are my options if I owe back taxes?

Some business owners who owe tax can’t immediately pay the full balance due. If you owe back taxes, you may have several options depending on the amount owed, the type of tax involved and your financial situation. Ways to manage tax debt may include:

Making a payment,
Asking for a temporary delay in collection due to financial hardship,
Participating in a settlement program (see below), and
Setting up an installment agreement or payment plan.

An installment agreement or payment plan may give qualifying taxpayers extra breathing room to pay the balance over time. However, you must generally stay current with future tax filings and payments. Falling behind again can cause you to default on your payment plan and potentially lead to additional collection actions.

Can I settle my tax debt for less than the full amount owed?

Some tax agencies offer settlement programs that allow eligible taxpayers to settle tax debt for less than the full amount owed. For federal tax debt, the offer in compromise (OIC) program may be available in limited circumstances.

However, an OIC isn’t available to all taxpayers and may not be the best option in every situation. The IRS reviews income, expenses, asset equity and ability to pay when determining whether to approve an OIC request. Before applying, you’ll generally need to have all required tax returns filed. You also must be current with ongoing tax obligations, including estimated tax payments and federal tax deposits.

Can tax penalties be reduced or removed?

Penalty relief may be available in certain circumstances. Depending on the penalty and the facts involved, you may qualify for administrative relief, such as an automatic exemption from penalty, first-time penalty abatement or relief based on reasonable cause.

Reasonable cause may apply when you made a good-faith effort to meet your tax obligations but were unable to do so because of circumstances beyond your control, such as:

A serious illness,
A death in your immediate family,
A natural disaster, or
Loss of records.

Penalty abatement isn’t automatic. You must follow the instructions in the notice. You might need to call the IRS or submit a written request with a clear explanation and supporting documentation. Even if penalties are reduced, interest may still apply, so it’s advisable to respond as soon as possible.

Why are payroll tax-withholding problems so serious?

Payroll tax-withholding problems are among the most urgent tax issues small business owners can face. If you have employees on your payroll, you’re responsible for withholding federal income tax, state income tax (if applicable), Social Security tax and Medicare tax from their wages and remitting those amounts to the government. Tax agencies closely monitor these tax remittances because you’re withholding money on behalf of your employees and holding it in trust until you deposit it with the taxing authority.

In some cases, business owners or other responsible individuals may be held personally liable for unremitted taxes through the Trust Fund Recovery Penalty. The penalty can apply to individuals who are responsible for collecting, accounting for or depositing the taxes and who willfully fail to do so. If your business falls behind on these tax deposits, professional guidance is critical.

How can I avoid future tax problems?

For small business owners, preventing future tax issues starts with strong accounting systems, accurate bookkeeping and timely tax filings. You should also engage in proactive tax planning by reviewing financial reports regularly, setting aside funds for taxes, and making estimated income tax payments and depositing withheld taxes by the required deadlines.

If you’re facing tax resolution issues, contact us. We can help you understand your options, communicate with tax authorities and create a plan to keep your business moving full speed ahead.

Cash vs. Accrual Accounting: Which Tax Method Is Best for Your Small Business?

Ken Botwinick, CPA | 07/07/2026

Choosing the right accounting method can have a significant impact on your small business’s taxes, cash flow, and overall financial strategy. One of the first decisions many business owners face is whether to use the cash or accrual accounting method for federal income tax purposes. While many larger businesses are required to use the accrual method, eligible small businesses may qualify to use the cash method, which can provide valuable tax-planning opportunities. However, the best choice depends on your business’s size, structure, and financial goals.

Does your business qualify for the cash method?

Under Internal Revenue Code Section 448(c), your business may be eligible for the cash accounting method if it had average annual gross receipts that don’t exceed a specific, inflation-adjusted threshold for the prior three-year period. For 2026, businesses with average annual gross receipts up to $32 million are eligible.

Some businesses may be eligible for cash accounting even if their gross receipts are above the threshold. Examples include S corporations, partnerships without C corporation partners, farming businesses and certain personal service corporations.

In addition, the Sec. 448(c) gross receipts test serves as the eligibility standard for several other tax provisions available to qualifying small businesses, such as:

Simplified inventory accounting,
An exemption from the uniform capitalization rules,
An exemption from the business interest deduction limit, and
The option to use the completed contract method (rather than the percentage-of-completion method) for certain long-term contracts.

When determining your business’s gross receipts, you may need to include those earned by certain related entities, such as those under common control. Special rules apply to organizations that have existed for less than three years. Also, tax shelters, including syndicates, don’t qualify for small business status, even if their gross receipts are below the threshold.

How do the methods differ?

The cash method often provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating expense payments.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, regardless of the timing of cash receipts or payments. Therefore, they have little flexibility to time the recognition of income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if your accrued income tends to be lower than your accrued expenses, the accrual method may result in a lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Is it time for a change?

Even if your business would benefit from switching its accounting method, you should consider the administrative costs. Changing accounting methods for tax purposes may require IRS approval. And, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, using the cash method for tax purposes would require you to maintain two sets of books (cash-basis tax records and accrual-basis financial reporting records).

Fortunately, you don’t have to make this decision by yourself. We can help determine the right method for your situation. Contact us to learn more.