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Contributing to your employer’s 401(k) plan: How it works

If you’re fortunate to have an employer that offers a 401(k) plan, and you don’t contribute to it, you may wonder if you should participate. In general, it’s a great tax and retirement saving deal! These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about contributing to a plan at work, here are some of the advantages.

With a 401(k) plan, you can opt to set aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income and defer tax on the amount until the cash (adjusted by earnings) is distributed to you in the future. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.

Tax benefits

Your wages or other compensation will be reduced by the pre-tax contributions that you make, which will save you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis. These are Roth 401(k) contributions. With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.

Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. In 2023, the maximum amount permitted is $22,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. In 2023, that additional amount is up to $7,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2023 is $30,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2023, $66,000, whichever is less.

In a typical plan, you’re permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.

Taking withdrawals

Another important characteristic of these plans is the limitation on withdrawals while you’re working. Amounts in the plan attributable to elective contributions aren’t available to you before one of the following events:

  • Retirement (or other separation from service),
  • Reaching age 59½,
  • Disability,
  • Plan termination, or
  • Hardship.

Eligibility rules for a hardship withdrawal are strict. A hardship distribution must be necessary to help deal with an immediate and heavy financial need.

As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s plan may allow you to receive a loan, which you pay back to your account with interest.

Matching contributions

Employers may opt to match 401(k) contributions up to a certain amount. Although matching is not required, surveys show that most employers offer some type of match. If your employer matches contributions, you should make sure to contribute enough to receive the full amount. Otherwise, you’ll lose out on free money!

These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have so connect with your local Padgett advisor today!

How Padgett helped Holly Crumley become a top-dog entrepreneur

Holly Crumley had always loved animals, and eventually, she channeled that love into starting a business focused on animals. After running a dairy farm for years, Holly began Cavaliers by Crumley which breeds, trains and sells Cavalier King Charles Spaniel puppies. “I traveled all over the world,” Holly says. “About 20 years ago, I finally found the right place to purchase the dogs and begin the breeding business.” Her business later expanded with the opening of a pet resort in 2007, and she then added a guardianship program to her breeding business.

With such a unique business model, it was crucial for Holly to have an accountant who truly understood her business. That’s where Janet Kaup of Padgett Gainesville came in. “Janet found us about 30 years ago,” Holly says. “She was building her Padgett business and came to the farm one day and asked if she could be of assistance to us. We didn’t have a good accountant then, so it took off from there.”

Since then, Janet has been by Holly’s side as she has built her business. “Janet has become like a sister to me,” Holly continues. “I’ve always depended on her to lead me in the right direction. It’s just imperative to have an accountant who understands the type of business you’re involved in.”

“It’s also important to hire good people,” Holly continues. “We offer incentives for our employees, helping them put their kids through college, helping people learn how the business works and other things. My employee retention is great; Janet has helped me manage my employees and offer a simple retirement plan. We have a tax card to help people with medical expenses and things like that. I have very committed, loyal employees.”

Having a strong support system is key to Holly’s hectic day. “It’s a constant business; it doesn’t end,” she says. “It’s seven days a week. It’s a 24-hour job, and not a clean job either… I get up and let the dogs out, feed and clean up for them. Then we have social media to deal with, returning phone calls and emails. The business I’m in, communication doesn’t stop with the sale of the dog.”

Despite her busy schedule, Holly also prioritizes education, both for herself and her employees. “School’s never out for the pros,” she says. “It’s important to stay on the cutting edge, always be on top of new developments.” She encourages them to attend leadership events, learn the business, and stay informed on industry updates. Luckily, staying up to date on every in and out of the tax system isn’t something that Holly has to add to her plate. She relies on Janet and her Padgett team for that.

“I did everything the wrong way first,” Holly adds, “so I’ve learned how to do a lot of things right. I learned all my lessons the hard way. I’ve been lucky to have a great accountant. Janet took it upon herself to make it important that we were taken care of. I feel confident about my taxes.”

If you need an accountant or tax professional on your business’s team, Padgett can help! Contact us today.

Hiring teens for the summer? Here’s how

Each May and June, millions of teenagers begin their search for a summer job. Before hiring teens for any summertime help, it’s a good idea to be aware of the Federal and State laws governing youth in the workplace. The Fair Labor Standards Act (FLSA) youth employment provisions are designed to protect young workers by limiting the types of jobs and the number of hours they may work, based on the age of the minor. The following provisions apply to nonagricultural occupations:

18 Years of Age: Once a youth reaches 18, the Federal child labor provisions no longer apply to them — they can work any job for any number of hours. Remember that states have their own labor laws, so be sure to check your state’s work laws in non-agricultural work

16 & 17 Years of Age: Under the FLSA 16- and 17-year olds may work on any day for any number of hours. However, individual states may limit the hours or the times of day that anyone under the age of 18 may work. Also, all youth under the age of 18 are prohibited from working any non-farm jobs deemed hazardous.

14 & 15 Years of Age: 14- and 15-year-olds may work:

  • Non-school hours
  • 3 hours on a school day
  • 18 hours in a school week
  • 8 hours on a non-school day
  • 40 hours in a non-school week
  • Between 7 a.m. to 7 p.m. (except June 1-Labor Day when hours are extended to 9 p.m.)

Alert to parents who hire their children

There’s a lot to be said for hiring family members to work in your business. Hiring your children won’t only provide them with spending money…your business may obtain a deduction for their wages as well.

Since there’s no specific exception from income tax withholding for wages you pay to family members, you’ll generally have to withhold income taxes from the wages you pay them. However, you’ll be relieved from some FICA taxes and federal (and perhaps even state) unemployment taxes, depending on the type of entity and ownership makeup.

Keep in mind, the Social Security Administration (SSA) may question the validity of wages if the recipient is on record as a young child. Unless you can provide acceptable detail such as date of birth and job responsibilities, your child may not be given credit for the correct amount of wages.

In fact, the information obtained may be given to the IRS or the Department of Justice for investigating and prosecuting violations of the Social Security Act. Matching programs compare the SSA’s records with those of other Federal, State, and local agencies, which are often used to find or prove that a person qualifies for benefits paid by the Federal government.

Rule of thumb: Put your child on the payroll only if there is a legitimate job offering with responsibilities that are within the child’s capability…and then, make sure that your child does the work!

If you are looking into hiring teens or your own children, a Padgett business advisor can help you make sure you’re following the regulations for their schedule and making the most of available tax deductions. Find a location near you today.

Teamwork made Jenna Speight’s dream work

Jenna Speight has always been fashion-forward, but she struggled to find a way to turn her passion into a profit. After changing her college major several times in search of the right path forward, her hairstylist suggested cosmetology school. “It was a lightbulb moment for me,” Jenna says. “I called a school the next day, and within four weeks, I was enrolled.”

Though she was now on the right path, it wasn’t always easy. But the difficulties opened other doors for Jenna: “I worked at a few salons, and there ended up being a lot of drama that made me consider leaving the industry. It was either leave or start my own salon. So, I decided to open my own salon.”

Jenna opened Rue 62 Salon in April 2011, but the challenges wouldn’t stop there. Less than a year later, she discovered she was expecting twins. “It was a bit overwhelming as I was trying to build my new business,” she says. “One baby I could manage, but when I found out it was two, I really had to adjust my expectations.”

Thankfully, she was surrounded by a strong team of supportive employees who helped the business grow. “Choosing who I can work with has been essential,” Jenna adds. “[My twins] are absolutely a blessing, and my team has been key in our success.”

Years later, when COVID-19 forced her business to shut down for several months and implement expensive safety protocols upon reopening, Padgett Barrington joined Jenna’s team. She had received a PPP loan, and her previous accountant was not equipped to handle the challenging tax situations that came with it. “I needed someone more informed,” she says, so she reached out to Dave Gribben. “He had amazing reviews and his office was only half a mile from my house.”

“He’s always been super responsive, very thorough, and great at explaining things,” she continues. “He made my tax process more understandable, and introduced me to more options for government assistance, like the ERC, which was absolutely essential to help us get out of a tight spot.”

Jenna credits her strong support system with helping the salon succeed despite the challenges life continued to throw her way—including being diagnosed with breast cancer in December 2021. “That changed everything,” she says. “I didn’t work in the salon for 7 months, and I would go weeks without talking to anyone. The cancer journey has really re-prioritized my life and really drives home the point that the girls on my staff can weather any storm.”

“They’re like family,” she adds. “One of my stylists had twins as soon as I came back, and another had her first child when the first returned. Through it all, we’re stronger than ever. I think that’s due in large part to who I’ve hired. I have the most incredible group of women.”

Jenna knew opening a small salon wouldn’t make her a millionaire, but believes the experience of working with a team of incredible people has been priceless.

“My best advice, the best thing I have done as an owner, is hire the right people,” she says. “I have a staff that will really step up and have my back, who will keep the salon surviving and thriving. Having a tax preparer who is professional and responsive and has my best financial goals in mind, somebody who treats me with respect… has been extremely helpful, not just to my business, but to my self-esteem.”

“I absolutely, even 12 years in, still look at the tax return and don’t understand it,” Jenna continues. “It’s not something I could do on my own. Having a great bookkeeper who keeps track of things for me has been a huge burden lifted off of my shoulders. If another small business owner is anything like me and doesn’t have an MBA or a business degree, having a good accountant is essential.”


If you need an accountant or tax professional on your business’s team, Padgett can help! Contact us today.

Employee gifts: the must-know tax rules

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.” 


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!

When Should I Hire Contractors Or Employees?

If you’re thinking about hiring new staff ahead of the holiday rush, or you’re reworking existing staff, you’ve likely run into the issue of deciding whether you should treat them as a contractor or an employee. How do you choose what’s best for your business? 

The difference between a contractor and an employee 

First, it’s important to understand exactly what the differences are between contractors and employees. 

A contractor—who may also be known as a freelancer or a contract worker—is an independent worker hired to do a specific job or task. They may work for multiple companies simultaneously. They generally have more control over when and how they work. Unlike employees, contractors aren’t officially on the payroll and don’t receive a W-2 or benefits like a 401k or insurance. Instead, they are considered self-employed and may have their own business, such as an LLC or sole proprietorship.  Depending on their contract, they may be paid for their time or by project completion—such as a freelance writer being paid per article. 

An employee, on the other hand, is someone who performs services an employer controls and is paid an hourly wage or a salary. Employees also have certain rights, such as protection from discrimination and entitlement to leave under the Family Medical Leave Act. 

How to determine if someone is a contractor or an employee 

If you’re looking at hiring someone and aren’t sure whether to classify them as a contractor or an employee, there are some things to consider. Keep in mind, there are consequences for misclassification, including penalties, fines and possible legal trouble, so you need to get this right. 

The IRS looks at factors such as: 

  • How is the worker paid? Is it on a regular schedule such as weekly, or is it when a project is complete? 
  • How does the worker complete their tasks? Are they in an office or working from home? Do they use their own tools and technology? Do they have set hours? 
  • Is the work temporary or ongoing? Is the worker contributing to projects that have set end points, or is there an indefinite length to their work with you? 

They may also consider things such as travel, as employers generally pay for work-related travel for employees, and company training, not commonly provided to a contractor.  

The pros and cons 

Contractors offer business owners more flexibility than they can typically get with employees. A business can hire contractors to do a specific task or project. Contractors are also often more affordable than employees, especially as the employer is not required to offer benefits or pay payroll taxes. Businesses may also be able to save time and money on training, office space, and providing tools or technology by hiring a contractor. 

However, you’ll have less control over how and when the work is done. They won’t be on your payroll, so you’ll have to account for their pay differently and you may lose out on some tax benefits. And once their contract ends, they may not be available the next time you need help. 

Hiring an employee may be more challenging and expensive with training, payroll taxes, and benefits, but ideally, there is a greater sense of loyalty. Unlike a contractor who may be working for other companies and is thinking about getting their next gig, a well-treated employee can become a valuable, trusted member of your team long term. 

What’s best for my business? 

Whether contractors or employees are the right approach for your business will depend on factors like the type of work you need and your budget. If you’re still not sure what’s right for you or want to avoid costly misclassification mistakes, Padgett’s nationwide network of CPAs and EAs are here to help! With our decades of tax, payroll and accounting experience, we can help you find the solution your business needs. Find a location near you today! 

We encourage you to contact us with any questions.

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