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What the ERC Pause Means for Small Business Owners

Posted on September 26, 2023 - 2:52 pm by

When properly claimed, the Employee Retention Credit (ERC) is a refundable tax credit designed for businesses and tax-exempt organizations that continued to pay their employees while experiencing workforce disruptions due to the COVID-19 pandemic. Unfortunately, the intricate filing process associated with this credit inadvertently created an opportunity for corrupt specialty firms to prey on small business owners, making deceptive claims about eligibility. 

With the rise in fraudulent ERC claims, the IRS announced an immediate halt to processing new claims through at least the end of the year. IRS Commissioner Danny Werfel states, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.”

Depending on your filing situation, we’re going to cover what to expect and what you should do next as a small business owner. 

What if I have already filed an ERC claim?

If you have already filed an ERC claim, the IRS will continue to process your claim, but at a greatly reduced speed. The IRS will be reviewing more than 600,000 claims, so expect processing times to be 180 days (about 6 months) or longer. The IRS may even ask for more information, so be prepared to receive this request. 

If you believe that your claim is fraudulent, the IRS is working on offering a withdrawal option for those who have filed an ERC claim but have not yet had it processed. As cited by the IRS, “This option, which can be used by taxpayers whose claim hasn’t yet been paid, will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees.” However, if you have willfully filed a fraudulent claim, withdrawing it does not exempt you from potential criminal investigation. 

In the event that your ERC claim has already been processed and you have received an improper ERC payment, you are required to pay it back with possible penalties and interest. Per the IRS, they are “developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment.” Remember, this program is not finalized, but the IRS plans to release more information in the fall. 

What if I am in the process of filing for the ERC?

The IRS encourages anyone being pressured by promoters to apply for the ERC “to immediately pause and review their situation while we (the IRS) look to add new protections and safeguards to stop bad claims from ever coming in.” Commissioner Werfel also states, “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

This would also be a good time to review the IRS list of red flags when it comes to aggressive ERC promoters as well as the IRS ERC eligibility checklist. 

What are my next steps?

Considering the complexity of the ERC, it’s never been more important to partner with a trusted tax professional. As small business owners ourselves, we know how scary this situation can be, but you don’t have to face it alone. At Padgett, we prioritize our relationships with our clients and are here to help you every step of the way. With over 50 years of collective experience and expertise in filing ERC claims, we’re prepared to answer any questions you may have regarding your ERC filing status. Connect with us today for reliable guidance and advice. 

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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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The Burden of ERCs on Tax Professionals

Posted on September 11, 2023 - 7:32 pm by

The COVID-19 Employee Retention Credit (ERC) program has provided a lifeline for many businesses. However, questionable claims and muddy guidance have made ERCs a major burden for tax preparers and advisors trying to serve clients. On a recent Federal Tax Updates podcast, Padgett hosts Roger Harris, EA, and Annie Schwab, CPA discussed the key challenges ERCs create for their profession. Indeed, since the podcast was published, the IRS has put out a significant announcement placing a moratorium on ERC claims through at least the end of the year. While a positive step, it is just another layer of complexity to this credit.

Dealing with Fraudulent ERC Claims

A major difficulty is clients coming in with potentially fraudulent ERC claims obtained through “mills” aggressively promoting the credits. As Schwab notes, these preparers must tread carefully: “The IRS has been very clear to tax practitioners that they should not perpetuate the fraud and that we should not amend a return for credit that we believe or know to be illegitimate.” (00:22:07) Verifying murky eligibility criteria and documentation from mills becomes a messy, risky process.

Fixing Incorrect ERC Claims

Even with legitimate credits, untangling convoluted calculations done by mills creates headaches. As Harris explains, “You got to amend the partnership return for 2020. The partnership return for 2021. Sixty-five partners have to amend their return for 2000. Sixty-five partners have to amend their return for 2021. That’s 130 returns for one credit.” (00:43:22) Recreating records and amending multiple returns devours huge time.

Advising Clients on ERC Issues

Guiding clients through ERC pitfalls also frustrates advisors. Schwab notes the bind of telling clients credits are invalid: “I’m going to have to send this client away. And now I’ve lost a good client because they were misled by a mill.” (00:22:07) With evolving IRS rules, providing accurate guidance becomes precarious.

Evolving Guidance Complicates Matters

Indeed, shifting ERC guidance itself also burdens preparers. As Harris says, “What you told the client on Monday might be different than what you tell them on Tuesday because you have more information.” (00:49:34) Absorbing complex new IRS rules strains resources. Meanwhile, clients seek simple, concrete answers.

In summary, questionable claims, workload headaches, client conflicts and swirling guidance have made ERCs a bear for tax professionals. As Harris emphasizes, “This is probably worse than how do I get it and why did it take so long? Because there’s more potential problems.” The impact of ERCs continues as a painful thorn in the side of preparers.

Get ERC Help from the Experts

If you’re a tax pro struggling under the burden of Employee Retention Credits, Padgett’s dedicated ERC team can help. Members of our franchise network have received ERC support since day one. From validating claims to managing audits and advising clients, we have the expertise to guide you through the maze. Contact us to learn more about our tax support and more for tax and accounting firms.

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Tax Audits Demystified: How to Prepare and Respond as a Small Business

Posted on August 16, 2023 - 7:17 pm by

As a small business owner, the term “tax audit” might strike fear into your heart, conjuring images of auditors poring over your financial records with a fine-tooth comb. While tax audits can be intimidating, understanding the process, being proactive in your tax compliance, and knowing how to respond can help ease the stress. In this article, we’ll demystify tax audits, provide tips to reduce audit risk, and guide you through steps to take if your small business is audited.

What is a Tax Audit?

A tax audit is an examination of your financial records and tax returns by the Internal Revenue Service (IRS) or state tax authorities to ensure the accuracy of your reported income, deductions, and credits. Per the IRS, audits can be conducted randomly, but more often they are triggered by certain red flags, discrepancies, or patterns that catch the attention of tax authorities. 

Reducing Audit Risk

While audits can happen to anyone, there are steps you can take to minimize your audit risk: 

  1. Accurate Recordkeeping: Maintain thorough and organized records of your financial transactions, including receipts, invoices, bank statements, and expense reports. This transparency can provide a clear trail of your business activities. 
  2. Consistency: Ensure consistency in your reported income and deductions from year to year. Drastic changes can raise eyebrows and trigger audits. 
  3. Classify Expenses Correctly: Properly categorize your business expenses. Misclassifying personal expenses as business expenses can lead to an audit.
  4. Reasonable Deductions: Claim only legitimate business deductions. Exaggerated or questionable deductions can invite scrutiny. 
  5. Hire a Professional Accountant: A certified tax professional can help ensure accurate tax filing and adherence to tax laws, reducing the chances of errors that might trigger an audit. 
  6. Report All Income: Ensure you report all income, including cash payments. Omissions can lead to serious consequences if discovered. 

Steps to Take If Audited

Even with precautions, audits can still occur. If your small business receives an audit notice, follow these steps: 

  1. Stay Calm: Don’t panic. An audit notice doesn’t necessarily mean you’ve done something wrong. It’s a routine procedure to verify your records. 
  2. Read the Notice Carefully: The notice will outline the scope of the audit, the years under review, and the specific documents requested. Understanding the requirements is crucial. 
  3. Gather Documentation: Collect all requested records, including financial statements, receipts, invoices, and relevant tax returns. Having organized records will make the process much smoother. 
  4. Consult a Professional: If you don’t already have a tax professional, hire one now. They can guide you through the process, help you understand your rights, and represent you before the tax authorities. 
  5. Cooperate and Respond Promptly: Respond to the audit notice within the specified timeframe. Cooperation with the auditor is key. Provide only the requested information but be thorough and honest. 
  6. Be Prepared to Explain: Be ready to explain any discrepancies or unusual entries in your records. A logical and honest explanation can go a long way in resolving issues. 
  7. Understand Your Rights: Familiarize yourself with your rights as a taxpayer during an audit. These rights include the right to representation, the right to appeal decisions, and protection against unfair treatment. 
  8. Appeal if Necessary: If you disagree with the audit findings, you have the right to appeal within the IRS or through the courts if necessary. Your tax professional can guide you through this process.

How Padgett Can Help

While tax audits may seem daunting, they are a part of maintaining a fair and accurate tax system. At Padgett, we can help you maintain accurate records and prepare you for the process, enabling you to navigate audits with confidence. Contact us today to find your local Padgett advisor.

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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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What is an IRS audit, really?

Posted on May 10, 2023 - 9:28 pm by

Especially since the passing of the Inflation Reduction Act that provided $80 billion in funding to the IRS, many small business owners have been concerned about the possibility of having their finances audited. While most of the funds are dedicated to improving taxpayer services, it is true that some of the funding will be used for enforcement and audits.  

So, what does that mean for your business, and how can you avoid being audited in the future? 

What is an IRS audit? 

An IRS audit is an examination of your tax returns, financial records, and other documents to ensure that you have reported your income and deductions accurately and in compliance with the tax laws. Receiving an IRS notice doesn’t mean you’re being audited, and an IRS audit is not the same as other types of business reviews. An IRS audit is conducted by the government, and it can result in penalties, interest and even criminal charges if it uncovers fraud or other serious issues. 

But don’t panic—audits are not a common occurrence. Last year, only 0.38% of returns were audited by the IRS, according to USA Today. It’s also unlikely that taxpayers making less than $400,000 in annual income will be targeted for audits. 

What are the different types of audits? 

While the prospect of an IRS audit may seem daunting, it’s important to remember that not all audits are created equal. There are several types of IRS audits that you may encounter as a small business owner. Here are the most common ones: 

  1. Correspondence Audit: This is the most common type of audit, and it can be conducted entirely by mail. The IRS will request specific documents or information from you, and you will have a deadline to provide the requested materials. This type of audit is usually focused on a single issue, such as a missing tax form or a discrepancy in reported income, and most commonly occurs with charities and nonprofit organizations. 
  2. Office Audit: An office audit is conducted in person at an IRS office. During an office audit, an IRS agent will review your financial records and ask you questions about your tax returns. This type of audit is typically focused on one or two specific issues, such as a deduction that the IRS believes may not be valid. 
  3. Field Audit: A field audit is the most comprehensive type of audit, and it involves an in-person visit from an IRS agent to your place of business. During a field audit, the agent will review all of your financial records and ask you questions about your business operations. This type of audit is usually reserved for larger businesses or more complex tax issues. 
  4. Taxpayer Compliance Measurement Program (TCMP) Audit: This type of audit is relatively rare, and it is typically used to measure compliance rates across a larger population of taxpayers. The IRS will select a random sample of your returns and conduct a comprehensive audit of those returns to measure your compliance with the tax laws. 
  5. Specialized Audit: A specialized audit is conducted by an IRS agent with expertise in a particular area, such as international tax issues or employee benefit plans. These audits are typically reserved for businesses with complex tax issues that require specialized knowledge. 

Note: Beware of scam calls impersonating the IRS! If you are selected for an audit, the IRS will only notify you by mail, not by telephone.  

What should you do if you’re audited? 

No matter the type of audit, you have the right to be represented by a tax professional, so make sure you choose one who is qualified to represent you. If you are notified of an IRS audit, it’s important to respond promptly and professionally. Ignoring or delaying an audit can only make the situation worse. Instead, gather the requested documents and information and work with your tax professional to respond to the IRS’s requests. 

It’s also important to remember that an audit does not necessarily mean that you have done something wrong. The IRS uses algorithms to screen returns for potential red flags and sometimes selects random returns for closer review. However, the IRS has stated it will be auditing more employment tax returns in the future because of the possibility of false or incorrect Employee Retention Credit (ERC) claims. If your business has received this credit, make sure to have all the necessary documentation, like employee, wage, and eligibility information, to support the claim under audit.  

If you have been selected for an audit, it’s not necessarily a reflection of you or your business. That being said, there are steps you can take to reduce your chances of being audited. First and foremost, make sure that you are reporting your income and deductions accurately and in compliance with the tax laws. By maintaining accurate records, reporting your income and deductions correctly, and working with a tax professional throughout the year, you can reduce your chances of being audited in the future. 

If you need a tax professional, Padgett can help! Contact your local office 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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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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