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Category Archives: Financial Tips

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Tax Tips for Self-Employed Individuals

Posted on September 18, 2023 - 5:49 pm by

Being a solo entrepreneur or independent contractor has its perks – flexible schedules, creative freedom, and the ability to be your own boss. However, it also comes with its fair share of responsibilities, particularly when it comes to managing your finances and taxes. Self-employed individuals are generally treated as independent contractors, which include freelancers, gig workers, sole proprietors and the like when it comes to paying taxes. These workers often face unique tax considerations that can be quite different from traditional employees. In this blog post, we’ll dive into some essential tax tips that can help these individuals navigate the world of taxes with confidence and help ensure they are making the most of their income. 

Understanding Your Tax Obligations

One of the key differences for self-employed individuals is the absence of employer withholding. Unlike traditional employees who have their taxes deducted from their paychecks, self-employed workers are responsible for calculating and paying their own taxes. This means that understanding your tax obligations is crucial to avoiding any unpleasant surprises come tax season. 

1. Self-Employment Tax and Income Tax

If you are considered self-employed by the IRS, you are generally responsible for paying both the self-employment (SE) tax, which consists of Social Security and Medicare taxes, and income tax. Unlike individuals employed by someone else, self-employed individuals are responsible for the full 15.3% tax rate. But don’t worry, there is an SE tax deduction we’ll talk about that could be a big tax saver. 

2. Estimated Taxes

Since self-employed people don’t have taxes withheld from their income throughout the year, it’s important to make estimated tax payments on a quarterly basis. This prevents a significant tax liability from accruing at the end of the year. There are several ways to approach calculating estimated taxes, depending on the other activity expected on your return and what your tax goals are. Remember, underestimating your payments might lead to penalties, so it’s wise to consult a tax professional for accurate estimations.

3. Record-Keeping

Be sure to keep track of all your income, expenses, invoices, and receipts. This will make it easier to calculate your taxable income and claim deductions when the time comes. Numerous digital tools and apps are available to simplify record-keeping and expense tracking.

Maximizing Deductions

Self-employed individuals can take advantage of various deductions to reduce their taxable income, ultimately lowering their tax liability. Here are some common deductions self-employed folks should explore:

1. Home Office

If you use a portion of your home exclusively for business purposes, you might be eligible for the home office deduction. This deduction allows you to write off a percentage of your home office repairs, utilities, and other related expenses.  

2. Business Expenses

For a business expense to be deductible, it must be both ordinary and necessary to the business. Per the IRS, “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” It’s important to keep in mind that even though some expenses may be both ordinary and necessary, they may not be eligible for a deduction. That’s why it’s essential to maintain receipts and document the business purpose of each expense. It can be tempting to overestimate your eligible expenses, but there may be consequences for doing so. Not only do you risk underpaying your taxes, but it could also distort your overall financial picture. This could have an impact on things like getting a mortgage.

3. Self-Employment Tax

As mentioned earlier, self-employed individuals are generally responsible for the SE tax, which includes both the employee and employer portions of Social Security and Medicare taxes. The good news is that you can deduct one-half of the SE tax when calculating your adjusted gross income.

4. Self-Employed Health Insurance

With the Small Business Jobs Act self-employed individuals may deduct up to 100% of their insurance premium. This includes premiums that cover the self-employed individual and their families. Be careful, not all premiums will be considered tax deductible so reach out to your advisor for guidance. 

Consulting a Tax Professional

Given the complexity of being self-employed when it comes to taxes, it’s wise to work with a tax professional. A tax expert can help you navigate the intricacies of tax law, help you take advantage of all available deductions, and provide guidance on estimated tax payments. 

As a recap, being self-employed offers a world of opportunities, but it also requires diligent financial management, especially when it comes to taxes. By understanding your tax obligations, making timely estimated tax payments, keeping meticulous records, and maximizing deductions, you can set yourself up for financial success. Remember, consulting a tax professional can provide personalized guidance tailored to your unique situation, making tax season a less daunting experience. If you’re on the other end of the spectrum as a small business owner and are looking to hire a freelancer or independent contractor, we also have a guide to help you make the right choice! Remember to prepare for tax season today with your local Padgett advisor. Find your local office here!

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Financial KPIs, EBITDA, Gross Profit, and 12 other financial terms you should know

Posted on June 7, 2023 - 4:42 pm by

Financial literacy: “the knowledge and skills that give you the ability to manage your finances, including budgeting and investing” 

Financial literacy is the key to successful money management and the reduction of financial stress. Yet many people struggle with financial literacy, to the point that the National Financial Educators Council (NFEC) estimates that financial illiteracy cost the U.S. population more than $352 billion in 2021 alone. 

Below, we have a defined a few key financial terms to improve your financial literacy and support your money management abilities: 

  1. Financial KPIs: Financial key performance indicators are quantifiable metrics that help measure a business’s performance in terms of things like revenue, expenses, profits or other financial targets.
  2. EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization. It is a metric used to evaluate a business’s profitability and a common starting point in determining a company’s value. It is calculated using this formula: EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization.
  3. Gross Profit Margin: A metric often used to analyze a business’s financial wellbeing by calculating the amount of money made from product sales after cost of goods is subtracted,
  4. Net Income: The amount of profit left after subtracting other costs (selling, administrative and other general expenses) from the gross profit margin.
  5. Accounts Receivable (AR): The amount of money owed to a business for good or services delivered that hasn’t been paid yet by the customer.
  6. Accounts Payable (AP): The amount of money that a business owes to its creditors or suppliers.
  7. Return on Capital: A payment (also known as a return) received from an investment that is not considered taxable income or capital gain.
  8. Capital Gains: Income that results when an asset is sold for more than you originally paid for it.
  9. Capital Loss: The opposite of capital gain; A possible tax deduction resulting from an asset being sold for less than its cost or book value.
  10. IRA: Individual Retirement Account, which may be one of the several types. Traditional IRAs are typically funded with pre-tax dollars while Roth IRAs are often funded with after-tax money.
  11. Defined Contribution (DC) Plans: A type of retirement plan (such as a 401k) in which employees contribute a set amount of their wages to the account, usually pre-tax.
  12. APR: Annual Percentage Rate; refers to the amount of interest on a loan or investment, not including compounding interest.
  13. APY: Annual Percentage Yield; refers to the amount of interest on a loan or investment, including compounding interest.
  14. Articles of Incorporation: A set of documents filed with the government to legally create a corporation, such as a C-corp or S-corp.
  15. Articles of Organization: Similar to Articles of Incorporation, these are a set of government documents files to create a limited liability company (LLC).

If you want to continue improving your financial literacy or are worried about your finances, Padgett’s nationwide network of CPAs and EAs can help. Our advisors can work with you to understand your personal or business finances and can help you make financial decisions with confidence. Find an office near you today!

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Graduating? Here’s what it could mean for your taxes!

Posted on June 1, 2023 - 8:57 pm by

If you or your child is graduating this year, you’re likely caught up in a swirl of pomp and circumstance. You may be thinking about ordering regalia, planning grad parties, taking senior photos or what the next step in continuing education may be. But graduating comes with some implications for your taxes and finances as well.

Student Loans

One of the biggest ways graduations — either from high school or college — affect your finances is through student loans.

Following high school graduation, you may be looking at taking on student loans to pay for college and other educational expenses. It’s important to consider whether these loans will be in the parent’s name or the student’s name, as this influences who will be responsible for the loan later, as well as who can deduct the interest on their tax return. Some taxpayers may be able to deduct up to $2,500 of interest paid on qualified education loans, but this can depend on factors like your filing status or modified adjusted gross income. It’s a good idea to talk with a tax professional about setting up your student loans correctly for your situation to make the most of tax benefits.

If you or your child is graduating college, you may be faced with the realization that soon you’ll have to pay those loans back. In the past, most federal loans began repayment after a six-month grace period from leaving school. However, with COVID relief measures and loan forgiveness plans, these expectations have become murkier. Check the FSA website for the status of loan forgiveness programs and for details about eligibility. Please be aware that in some states, there may be a tax obligation for forgiven loans. If you’re worried about making those payments, a financial consultant can help you restructure your budget and select the best repayment plan to fit your needs.

Tax Credits

If you’re wondering if there are any other tax credits available to help with education costs, the answer is yes, if you’re eligible. The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) are two of these available education credits. You may be eligible for these credits if you or your dependent pays qualified education expenses and is enrolled at an eligible educational institution.

Students must have a properly completed Form 1098-T to claim these credits. According to the IRS, schools must provide Form 1098-T to any student who paid “qualified educational expenses” in the preceding tax year. Qualified expenses include tuition, any fees that are required for enrollment, and course materials the student was required to buy from the school. Schools must send the form to the student by January 31 and file a copy with the IRS by February 28. Be on the lookout for this form in the mail and bring it to your tax preparer, so you don’t miss out on this tax-saving opportunity!

Remember that when dependency is involved, it’s important to know who is eligible to claim the credit on their return. Working with a tax professional can help you avoid errors in claiming these credits and help you make the most of available benefits.

Scholarships and Fellowships

School can be expensive, and if you can get them, scholarships are a great way to help pay for education expenses without additional debt!

If the recipient of the scholarship or fellowship funds is considered a degree candidate and uses the funds for approved expenses, such as tuition, books, and equipment, that income is generally not taxable. But be aware that this comes with some additional rules and regulations, and it’s not always easy to know what income is and isn’t taxable. You may want to talk to a tax professional during the year, so you don’t accidentally misrepresent your income when it’s time to file.

Higher education can be a noble pursuit, and a valuable one. But don’t let it become an expensive mistake on your tax return. If you need a professional to help you make the most of your loans, credits and scholarships, Padgett’s nationwide network of CPAs and EAs are ready to lend a hand. Find a location near you today!

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When a hobby becomes a business: 9 key factors

Posted on April 17, 2023 - 2:32 pm by

There’s a saying that everyone should have three hobbies: one to keep you in shape, one to keep you creative, and one to make money.

Many people have found hobbies that make money. In fact, a 2019 survey found that 27% of full-time workers have monetized their hobbies. Another 55% said they would like to turn their hobby into a business, and interest in building a “side hustle” has only grown since then.

With millions of Americans now monetizing their hobbies, it’s important to understand how a side hustle could affect your taxes.

Hobby or business?

Hobby and business tax rules are different and it’s important to understand the distinctions to avoid any potential issues with the IRS. So, at what point does your money-making hobby become a business in the eyes of the IRS? There’s no checkbox for you to claim one way or the other. The main differentiator comes down to motive. Businesses have a goal of earning a profit, while hobbies are activities that are pursued for personal enjoyment.

Here are nine more factors the IRS may consider when determining if your side hustle is a business or a hobby:

  1. Does the activity make a profit in some years? How much profit does it make?
  2. Were you, as the taxpayer, successful in making a profit in similar activities in the past?
  3. Do you and your advisors have the knowledge needed to carry out the activity as a successful business?
  4. Do you change methods of operation to improve profitability?
  5. Does the time and effort you put into the activity show that you intend to make it profitable?
  6. Was the activity carried out in a businesslike manner, and did you maintain complete and accurate books and records?
  7. Do you depend on income from the activity for your livelihood?
  8. Can you expect to make a future profit from the appreciation of the assets used in the activity?
  9. Are any losses due to circumstances beyond your control, or are they normal for the startup phase of your type of business?

What are the tax differences?

Businesses are required to file an annual business tax return and report all income earned. They can also deduct expenses related to their business activities, such as rent, supplies, and salaries paid to employees. Hobbyists are still required to report any income they made through their hobby on their individual tax returns, but hobby expenses are no longer deductible.

Another key difference is that businesses can carry forward losses incurred in previous years to offset future profits, while hobbyists can’t. Additionally, businesses may be subject to additional taxes, such as self-employment tax, but income from hobbies is not.

Be aware: if your business isn’t profitable and you’ve claimed a loss for too many years, the IRS could consider it a hobby and prevent you from claiming a loss or deducting expenses. In that case, you’d need to prove that profit was the intent in order to claim business deductions.

That’s also where the safe harbor rule comes in. Typically, if your business has been profitable in at least three out of five consecutive years, that’s a signal to the IRS that it’s a valid business, not a hobby.

Making a hobby into a business

If you want to be seen as a business rather than a hobby, it can help to follow best practices like:

  • Setting up a business checking account
  • Separating personal and business expenses
  • Keeping good business records
  • Choosing the appropriate entity structure for your business
  • Staying in compliance with other state and federal tax laws, such collecting sales taxes
  • Having regular business hours
  • Maintaining a business website and/or social media accounts

If you need help determining how you qualify or are looking to grow your business, Padgett’s network of EAs, CPAs and business advisors can help! Find a location near you today.

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Why you need to care about financial literacy

Posted on April 13, 2023 - 7:52 pm by

April is Financial Literacy Month, and improving financial literacy may be more important than ever. With recent legislative changes to retirement plans, proposed student debt relief in question, and expiring COVID relief measures, it’s crucial for Americans to understand what’s going on with their finances.

What is financial literacy?

Financial literacy is the ability to understand and manage one’s personal finances. It may include topics such as income, debt, interest rates, credit scores, budgeting, saving and investing. To state it more simply, Padgett president Roger Harris puts it this way: “Financial literacy means that you understand your life by the numbers.”

Why does financial literacy matter?

It’s important because it allows individuals to make informed decisions about their money and be more prepared for the future. “Even though our lives may seem simple, sometimes they’re more complicated than we think, and we need to understand it,” Roger says.

CNBC reported that U.S. adults only scored an average 50% out of 28 basic financial questions in 2022. Financial illiteracy can be expensive: a National Financial Educators Council report showed that the lack of financial literacy cost respondents an average of $1,819 last year.

“The consequences for financial illiteracy are often financial as well,” Roger adds. “It’s all money. Financial illiteracy can lead to people making a bad decision because they don’t know what they’re doing, missing opportunities to save. It’s about learning how to understand and manage your finances, so if you don’t have it, you’re probably going to mismanage your funds.”

“There’s a good example of financial illiteracy in the tax world,” Roger continues. “If I ask someone how much tax they paid, someone who got a refund may tell me they paid none. But that’s not accurate—you would have just paid more tax than you owed. People often hand off tax documents without really looking at them. You still paid taxes, and people who get large refunds have, in essence, loaned the government money at zero interest.”

Data also shows that those who are financially literate are more likely to reach financial stability, and are often less vulnerable to scams, fraud and predatory loans. “If you don’t know these things, you’re susceptible to someone telling you what’s wrong or getting bad advice and not knowing how to question it,” Roger says.

How can I be more financially literate?

To become more financially literate, it is important to educate yourself on personal finance topics. “The first step is to try,” Roger says.

Financial education is on the rise, especially among younger generations. Although Gen Z has the lowest rates of financial literacy, they have the highest rates when it comes to taking financial education classes, and have shown motivation to learn. If you are offered a financial education class, that is a great option to get started.

Additionally, it’s important to regularly review your financial statements and track your spending. “Pay attention to the financial documents that are sent to you,” Roger adds. “They’re sent to you for a reason.” Paying bills promptly, setting aside savings, and checking your credit score can also help you have a better understanding of your individual financial situation.

Other ways to improve your financial literacy include reading books, listening to podcasts, researching financial topics online, and consulting a financial professional.

“Ask questions,” Roger encourages. “Ask questions and ask the right people. You can start with the person who sent you the information—why’d they send you that bank statement, that brokerage statement, that tax document? Ask someone who’s really qualified to answer.”

If you need an advisor to help you understand and strengthen your financial situation, Padgett is here to help! Our network of CPAs and EAs are ready to work with you, so contact us today.

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Understanding IRAs: your retirement savings guide

Posted on April 6, 2023 - 9:05 pm by

With the recent passing of the SECURE 2.0 Act of 2022, you may have questions about the different types of Individual Retirement Accounts (IRAs) available. How do you choose what retirement plan is right for you? 

IRAs are a powerful tool for retirement savings. They are savings plans that come with tax advantages to help taxpayers build a retirement fund. Each type of IRA has its own set of regulations and deadlines. Here’s a quick overview of the most common kinds: 

Traditional IRA:

Contributions to a traditional IRA may be tax deductible and earnings grow tax-deferred until distribution, which means you won’t pay taxes on your traditional IRA funds until you make a withdrawal. The contribution limit for 2022 is $6,000, or $7,000 for those aged 50 and over ($6,500 and $7,500 for 2023). You have until April 15 or the tax filing deadline of the following year to make contributions for the previous tax year. Since the deadline is April 18 this year, you have a few extra days to make contributions for 2022. 

Roth IRA:

Unlike a traditional IRA, contributions to a Roth IRA are made after tax, so qualified withdrawals are tax-free. The contribution limit for 2022 is also $6,000, or $7,000 for those aged 50 and over ($6,500 and $7,500 for 2023). Roth IRAs have the same deadline as traditional IRAs, so you can contribute up until April 18 this year. 

SEP IRA:

A Simplified Employee Pension (SEP) IRA is a retirement plan for business owners and their employees. Employers can make tax-deductible contributions on behalf of eligible employees to their SEP IRAs. To be eligible, the employee must be 21, worked in the business at least 3 of the last 5 years and made at least $650 in 2022 ($750 in 2023). Like traditional IRAs, the earnings grow tax-deferred until the money is withdrawn. In 2022, employers can contribute up to 25% of compensation or $61,000 (whichever is less) to an employee’s plan ($66,000 in 2023). The same contribution limits apply if you are self-employed. Contributions must be made by your business’s tax-filing deadline, including extensions. 

SIMPLE IRA:

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan for businesses with 100 or fewer employees that do not have any other retirement savings plan, including self-employed individuals. Because SIMPLE IRAs have lower start-up and operating costs, they are ideal for small employers. Employers must contribute a matching contribution for each eligible employee of either 3% of an employee’s compensation, or a nonelective contribution of 2% of the employee’s compensation, up to $305,000 for 2022 ($330,000 for 2023). Eligible employees include all employees who received at least $5,000 in compensation during any two preceding calendar years and in the current calendar year. An employee can contribute up to $14,000 from their salary in 2022 ($15,500 in 2023), and up to $17,000 for those 50 and over ($19,000 for 2023). Contributions must be made by the tax-filing deadline, including extensions. 

The rules and regulations surrounding IRAs can be complex and can change, so it’s always good to consult with a financial advisor and tax professional to ensure that you’re maximizing your retirement savings while complying with the plan rules.  

Whether you’re an individual looking to build your retirement fund or a small business wanting to offer a retirement plan to your employees, Padgett can help! Our nationwide network of EAs, CPAs and small business advisors are ready to work with you to prepare for the future. Find a location near you today! 

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Everything you need to know about filing an extension

Posted on March 21, 2023 - 9:35 pm by

The tax deadline is now less than a month away! But if you aren’t ready, don’t worry. It’s not too late to request more time to file. Here’s what you need to know about filing an extension:

What does filing an extension mean?

If you need more time to file an accurate and complete federal tax return, you can file Form 4868 with the IRS to request an extension. This will give you six more months, or until October 16, to file your return.

Note that an extension only provides additional time to file your return. It does not extend the amount of time you have to pay any estimated tax due, so be sure to make any necessary payments by April 15th (April 18th for 2022 tax returns) orcheck out other repayment options.

How do I know if I need an extension? 

Your tax preparer may recommend you file an extension for several reasons. You may need an extension if parts of your return are particularly complex or may be affected by pending legislation. If this is the case, your tax preparer should let you know what to do.

If you are still waiting on any tax forms or additional information (e.g. Schedule K-1s, corrected 1099s, or othertax documents), you’ll likely need to extend to avoid filing an incomplete return or amending your return later. Filing an extension is usually easier and cheaper than rushing your return and needing to amend it later. 

If you don’t have a tax preparer but need assistance with your taxes, this may be another good reason to extend! Since the April deadline is fast approaching, many tax professionals won’t have time to finalize your return. It’s a good idea to work with a professional to make sure your taxes are correct, so even if your chosen tax professional will not be able to file your return by April 18, you can still file an extension and work with them later.

How will an extension affect me? 

Filing an extension is better than filing an incomplete or incorrect return. As long as you have withheld or paid enough money into the IRS by April 18, an extension won’t change much about the tax filing process. If not, then you will need to make a payment when you file an extension to avoid late payment penalties later. You should still provide information to your preparer as it becomes available. Believe it or not, an extension won’t increase your odds of being audited.

If you need help getting your taxes done correctly and on time—whether that’s in April or October—Padgett’s nationwide network of CPAs and EAs can help. Find an office near you today! 

 

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What should you do if you can’t pay your taxes?

Posted on March 17, 2023 - 9:27 pm by

While many of us are hoping to have a payday when our tax refunds arrive, if you owe taxes, you may find that April 15th is the wrong kind of “pay day.” If you’re struggling to pay your taxes this year, here’s what you need to know.  

1. File your return or extension by the due date.

To avoid any penalties for late filing, the first thing you should do is file your personal return by April 15th or request an extension of time to file. Since April 15th falls on a weekend this year and April 17th is a national holiday, April 18th is the filing deadline for 2022 individual returns. Note that an extension only extends your time to file, not to pay your balance due. Talk to your tax advisor to get your return or extension filed on time.  

2. Pay what you can.  

Even if you can’t pay the full amount at once, go ahead and pay what you can to reduce your overall balance. A lower balance may mean you owe less in interest late payment penalties later.   

3. Determine if you qualify for an installment payment plan.  

Talk to your tax preparer about applying for a payment plan. To manage your payment plan online, you’ll need to set up an account on the IRS website—you can follow our guide to get started. There are various kinds of payment plans, including short-term (120-days or less) and long-term, and they each have different fees and interest. Talk with your financial advisor about which option will be best for you.   

4. As a last resort, talk to your tax advisor about an offer-in-compromise.  

If you find that you aren’t able to pay your taxes, even with an installment plan, you may be eligible for an “offer in compromise,” which allows you to settle your debt for less than what you owe. The IRS considers factors that affect your ability to pay, like your income, expenses, and asset equity to determine eligibility. This program is not for everyone, so be sure to talk to a qualified tax professional about your options.  

We understand that owing the IRS money can be stressful, but don’t panic! A qualified tax professional can assist you in finding the best ways to manage your debt. Padgett has a nationwide network of CPAs and EAs who are ready to help, so you don’t have to worry. Find an office near you today!  

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10 reasons your 2022 tax refund may be lower

Posted on March 9, 2023 - 7:23 pm by

Have you already filed your 2022 tax return? If so, you may have noticed that your refund is lower than it was in 2020 or 2021. As we return to the “new normal” after the COVID-19 pandemic, many tax credits and deductions from the last two years are no longer available in tax year 2022. This may be contributing to a smaller tax refund or a larger balance due.    

Here are some of the key differences to keep in mind.

For individuals:

  • Economic Impact Payments (EIP): Also known as stimulus checks, EIPs were not issued to taxpayers in 2022. You likely claimed a tax credit on your 2020 or 2021 tax return if you were eligible for a stimulus payment but didn’t receive it.   
  • Child tax Credits: For 2022, the credit is now worth $2,000 per child, down from $3,000 per child and $3,600 for children under age six in 2020 and 2021. This credit now ends when your child reaches age 16 rather than 17. This could further reduce the amount of credit you receive.  
  • Child and Dependent Care Assistance Credit: In 2021, this credit was refundable and taxpayers whose adjusted gross income (AGI) was less than $125,000 were eligible for the maximum credit of 50% of eligible expenses paid. In 2022, the maximum percentage dropped to 35%. The full credit is only available to taxpayers with AGI $15,000 or less. The credit is now nonrefundable, meaning it’s limited to the amount of tax you owe. 
  • Earned Income Tax Credit: This credit has reverted to pre-pandemic rates of 7.65% instead of the increased amount of 15.3% in the last two years. The eligibility ceiling has also decreased to $7,320.  
  • Charitable contributions for non-itemizers: In 2020 & 2021, a $300 per person deduction was available to taxpayers who made a qualified charitable donation and did not itemize. For 2022, only taxpayers who itemize can deduct charitable donations. 
  • Employer-Provided Child Care: This year, only $5,000 in employer provided childcare is excluded from your taxable income on the Cafeteria Plan. This is a decrease from the $10,500 that was excluded from income in previous years. This means more of your income is taxable in 2022, which could result in a lower tax refund. 
  • Healthcare Premium Tax Credit: This is another credit that has reverted to pre-pandemic rules. In the past few years, the credit expanded, allowing individuals on unemployment to qualify. However, in 2022, the eligibility is based on household income in comparison to the federal poverty limit. If you were eligible for the credit before, your eligibility may have changed. 

For businesses:

As a business owner, you may also face an increase in taxable income from your business activity. There are a few reasons for this, including: 

  • COVID-19 Employer Payroll Credits and loan forgiveness (including Employee Retention Credits, Paycheck Protection Program and Paid Sick and Family Leave Credits): During the pandemic, several credits, loans and benefit programs were available to businesses. In 2022, many of those pandemic relief efforts have expired.  
  • Business Interest Expense Limits: The calculation for the limitation has changed in 2022 and may result in less of a deduction for interest expense.  
  • Corporate charitable deduction limits: The charitable contribution limit has reverted to pre-pandemic rules. In 2022, corporations are limited to a charitable deduction of no more than 10% of their taxable income. This is down from the 25% limit imposed in 2020 and 2021.  

Are you unsure you’re getting your maximum tax refund or feeling surprised by your tax results? That may be a sign that your tax professional isn’t right for you. Padgett’s nationwide network of CPAs and EAs can help, so find a location near you today! 

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Employee gifts: the must-know tax rules

Posted on March 3, 2023 - 10:03 pm by

How do you show your employees you appreciate their hard work? If you choose to give your staff gifts or throw them a party, remember that only certain types of gifts are tax deductible. Here’s a quick overview of some employee gift options to help you show your appreciation: 

Employee Gifts:

The IRS doesn’t recognize non-cash gifts of nominal value as taxable income, but rather as a de minimis fringe benefit (one in which the value and number of times it’s given is so small, accounting for it isn’t practical). But cash or a cash equivalent — like gift certificates or gift cards, or prepaid cards — are taxable employee gifts. Regardless of the amount, cash gifts must be included in the employee’s wages.

However, depending on circumstances, the IRS states that a gift certificate for a specific item can be considered a de minimis fringe benefit. The item must be one “that is minimal in value, provided infrequently, and is administratively impractical to account for.” 

Parties: 

Thinking of throwing an office party? Remember, the food is fully deductible only if the party is for the benefit of employees and their families. Historically, if clients, independent contractors, or customers attend the soirée, then entertainment rules apply and only 50% of the food and beverage costs associated with these partygoers are deductible (and this applies even if you hold the party virtually). Don’t get too lavish! The IRS always keeps an eye on business deductions and the costs associated with an extravagant event. 

Thinking of showing your thanks with some employee gifts this year? Reach out to our trusted network of accountants, tax experts and business advisors at Padgett so we can help ensure your employees benefit from the present and you make the most of the available tax deductions. Find an office near you today!

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