Category: News (Page 1 of 4)

Tax Deductions for Educators

School is back in session in most areas, and students and teachers are again returning to the classroom. It’s unfortunate, but many teachers find themselves having to pay for necessary classroom supplies our of their own pocket. The educator expense deduction allows these eligible teachers and administrators to deduct part of the cost of technology, supplies and training from their taxes. They can only claim this deduction for expenses that weren’t reimbursed by their employer, a grant or other source.

Eligible educators

To be eligible for the educator expense deduction, you must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide. You must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

Deduction limits

Starting on tax returns for 2022, educators can deduct up to $300 of trade or business expenses that weren’t reimbursed. If two married educators are filing a joint return, the limit rises to $600.

For 2021 returns, the limit is $250, or $500 for married educators filing jointly. If you are a teacher preparing for the school year, you should remember to keep receipts after making any purchase to support claiming this deduction.

Qualified expenses are amounts the educator paid himself or herself during the tax year.

Examples of expenses an educator can deduct include:

  • Professional development course fees
  • Books and supplies
  • COVID-19 protective items to stop the spread of the disease in the classroom
  • Computer equipment, including related software and services
  • Other equipment and materials used in the classroom

Is Your Worker a Contractor or an Employee?

As a business owner, you might pay an independent contractor and an employee for similar – or even the same – work, but there are key legal differences between the two. If you hire workers, it’s critical that you correctly determine whether these workers are employees or independent contractors. Here’s some information to help you avoid misclassifying workers and all the problems that can come from that.

An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public.

Independent contractor vs. employee

Whether your worker is an independent contractor, or an employee depends on the relationship between the worker and your business. Generally, there are three categories to consider:

  1. Behavioral control − Does your company control or have the right to control what the worker does and how the worker does the job?
  2. Financial control − Does your business direct or control the financial and business aspects of the worker’s job? Are the business aspects of the worker’s job controlled by you? Things like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies all influence this determination.
  3. Relationship of the parties − Does your worker have a written contracts or have employee type benefits such as pension plan, insurance, vacation pay? Is the work relationship ongoing? Is the work performed a key aspect of your business?

Misclassified worker

Misclassifying a worker as an independent contractor hurts the worker because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If your business misclassifies an employee, you or your business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.

Who is self-employed?

Generally, someone is self-employed if any of the following apply to them:

  • They carry on a trade or business as a sole proprietor or an independent contractor.
  • They are a member of a partnership that carries on a trade or business.
  • They are otherwise in business for themselves, including a part-time business.

People who are self-employed, including those who earn money from gig economy work, are generally required to file a tax return and make estimated quarterly tax payments. They also generally must pay self-employment tax which is social security and Medicare tax as well as income tax.

Sometimes it can be tricky to determine if your worker is your employee, or if the worker is a self-employed independent contractor. If you need help with this, please contact our office. We can help you evalate your circumstances, come into compliance (if necessary), and prevent misclassifying workers in the future.

IRAs Are One Tool in the Retirement Toolbox

There are many ways people plan for retirement. Individual Retirement Arrangements, or IRAs, are a common one. IRAs provide tax incentives for you to make investments that can provide financial security for you and your family once you retire. These accounts can be with a bank or other financial institution, a life insurance company, mutual fund, or a stockbroker.

Traditional IRAs

Here are some things you should know about traditional IRAs:

  • A traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.
  • Generally, the money in a traditional IRA isn’t taxed until it’s withdrawn.
  • There are annual limits to contributions depending on your age and the type of IRA.
  • When you’re planning when to withdraw money from an IRA, you should know that:
    • You may face a 10% penalty and a tax bill if you withdraw money before age 59½, unless you qualify for an exception.
    • Usually, you must start taking withdrawals from your IRA when you reach age 72. For tax years 2019 and earlier, that age was 70½.
    • Special distribution rules apply for IRA beneficiaries.

Roth IRAs

A Roth IRA is another tax-advantaged personal savings plan with many of the same rules as a traditional IRA but there are exceptions:

  • A taxpayer can’t deduct contributions to a Roth IRA.
  • Qualified distributions are tax-free.
  • Roth IRAs don’t require withdrawals until after the death of the owner.

Other Types of IRAs

Although Traditional IRAa and Roth IRAs are the most commonly used types of IRAs, there are a few other types of IRAs that you might encounter:

  • Savings Incentive Match Plan for Employees. A SIMPLE IRA allows employees and employers to contribute to traditional IRAs set up for employees. It is suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
  • Simplified Employee Pension. A SEP IRA is set up by an employer. The employer makes contributions directly to an IRA set up for each employee.
  • Rollover IRA. This is when the IRA owner receives a payment from his or her retirement plan and deposits it into a different IRA within 60 days.

So there you have it – some of the most common types of IRAs that you might run into. If you have questions about using an IRA to save for retirement, or about setting one up, please contact our office. We would be happy to help.

A Primer on Business Related Travel Deductions

Business travel can be costly. Hotel bills, airfare or train tickets, cab fare, public transportation – it can all add up fast. The good news is that if you travel for business, you may be able off-set some of those costs by claiming business travel deductions when you file your taxes. Here’s what you need to know.

Business travel deductions are available when employees must travel away from their tax home or main place of work for business reasons. The travel period must be substantially longer than an ordinary day’s work and a need for sleep or rest to meet the demands the work while away.

Travel expenses must be "ordinary and necessary." That means that expenses that are lavish, extravagant, or for personal purposes can’t be deducted.

Employers can deduct travel expenses paid or incurred during a temporary work assignment if the assignment length does not exceed one year.

Travel expenses for conventions are deductible if attendance benefits the business and there are special rules for conventions held outside North America.

Deductible travel expenses while away from home include the costs of:

  • Travel by airplane, train, bus or car between your home and your business destination.
  • Fares for taxis or other types of transportation between an airport or train station to a hotel, from a hotel to a work location.
  • Shipping of baggage and sample or display material between regular and temporary work locations.
  • Using a personally owned car for business which can include an increase in mileage rates.
  • Lodging and non-entertainment-related meals.
  • Dry cleaning and laundry.
  • Business calls and communication.
  • Tips paid for services related to any of these expenses.
  • Other similar ordinary and necessary expenses related to the business travel.

Finally, don’t forget to keep records to substatiate your deductions. Records such as receipts, canceled checks, credit card statements, and other similar documents will allow your tax preparer to get you the maximum deduction that you are entitled to.

Increased Mileage Rate for Remainder of 2022

The Internal Revenue Service announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes.

For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022, taxpayers should use the rates announced earlier.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The 14 cents per mile rate for charitable organizations remains unchanged as it is set by law.

Kids, Summer Jobs, and Taxes

A lot of young people find themselves going into business each summer. Jobs like babysitting, lawn mowing, and dog walking teach responsibility and the value of hard work. But they also might come with an unexpected tax bill, because – whether they realize it or not – many of these young entrepreneurs are self-employed, and their income may be taxable.

What you need to know

Things to keep in mind:

  • Everyone, including minors, must file a tax return if they had net earnings from self-employment of at least $400.
  • If they owe taxes, teens and young adults should file their own tax return, even if their parent or guardian claims them as a dependent.
  • Teens and young adults can prepare and sign their own tax return. There is no minimum age to sign a tax return.
  • Parents can’t claim a dependent’s earned income on their own tax return.
  • In addition to income tax, people who are self-employed are generally responsible for self-employment tax as well. It’s like the Social Security and Medicare taxes withheld from the pay of most wage earners.
  • Teens and young adults can lower the amount of tax they owe by deducting certain expenses.

What to do

Here’s what young entrepreneurs can do to keep on top of their tax responsibilities:

Keep records. It’s good to make and keep financial records and receipts during the year. Recordkeeping can help track income and deductible expenses and provide the information needed for a tax return.

Pay estimated tax, if required. If a teen being claimed as a dependent expects to owe at least $1,000 in tax for 2022, they must make estimated payments on a quarterly basis. They should be sure to pay enough tax on time to avoid a penalty.

File a tax return. When tax season rolls around, young taxpayers can review the information and forms, gather their records and e-file their tax return. When preparing to file a tax return, they should make sure to review all their records, including estimated tax they’ve already paid.

It’s Time to Review Your Federal Withholding

It’s that time of year again. Summertime! The time of year when we all enjoy warm weather, vacation, and reviewing our federal tax withholding. Well, maybe we don’t all enjoy reviewing our federal tax withholding, but it’s definitely something that we all should do each year. And summertime is a good time to do it.

You should definitely check your withholding if you fall into any of these group, as adjustments are more likely to be needed:

  • People who are working two or more jobs at the same time or who only work for part of the year
  • People who claim credits such as the child tax credit
  • People with dependents age 17 or older
  • People who itemized deductions on prior year returns
  • People with large tax refunds or large tax bills for the previous tax year

When you’re reviewing your withholding, a good place to start is the IRS Tax Withholding Estimator, a free tool provided by the IRS. This tool guides you step-by-step through the process of checking your withholding, and provides recommendations on adjustments that might be needed.

Adjusting your withholding

So what types of adjustments might be needed to your federal withholding?

You should generally increase withholding if you hold more than one job at a time or have income from sources not subject to withholding. If you don’t make any changes, you will likely owe additional tax and possibly penalties when filing your tax return.

You should generally decrease your withholding if you qualify for income tax credits or deductions other than the basic standard deduction.

Either way, if you need to adjust your withholding, you will need to submit a new form W-4 to your employer as soon as possible since withholding occurs throughout the year.

If you would like help reviewing your withholding, or if you need advice on what adjustments might be necessary, please contact our office.

Summertime Tax Planning Tips

Now that Memorial Day has passed, many people are thinking more about summer vacations than taxes. But summer is a great time to review withholding and see if your summer plans will affect next year’s tax return. Here are some common summertime tax situations and tips to help you figure out if they apply to your tax situation.

Getting married

If you’re a newlywed and your name has changed, you should report the change to the Social Security Administration. You should also report any address change to the United States Postal Service, your employer, and the IRS. To report a change of address for federal tax purposes, complete Form 8822, Change of Address, and submit it to the IRS. This will help make sure you receive the documents you will need to file your taxes.

Sending kids to summer day camp

Unlike overnight camps, the cost of summer day camp may count towards the child and dependent care credit.

Working part-time

Summertime and part-time workers may not earn enough to owe federal income tax, but they should still remember to file a return. They’ll need to file early next year to get a refund for taxes withheld from their checks this year.

Gig economy work

You may find it convenient to earn summer income by providing on-demand work, often through an online platform like an app or website. Examples include ride sharing, delivery services and other activities. If this sounds like you, be aware that you may be categorized as either an employee or an independent contractor, depending on the nature of your work.

Normally, employees receive a Form W-2 from their employer to account for the summer’s work. They then use this to prepare their tax return. If you are categorized as an employee, you should receive your W-2 by January 31 next year. Employees will get a W-2 even if they no longer work for the summertime employer.

Independent contractors, on the other hand, won’t receive a W-2 for their work, and aren’t subject to withholding. This makes them responsible for paying their own income taxes plus Social Security and Medicare taxes.

Adjust your withholding now to avoid tax surprises next year

You can avoid a tax surprise next filing season by reviewing your withholding now. Life events like marriage, divorce, having a child, or a change in income can all affect taxes. If you contact our office, we can help you assess your situation and determine whether you need to change your withholding by submitting a new Form W-4 to your employer.

Work Opportunity Tax Credit Extended

Everyone knows that it’s tough to find employees right now. It seems like every business has a “Help Wanted” sign in their front window. With the employment market so tight, the federal government has taken steps through the Work Opportunity Tax Credit (WOTC) to encourage businesses to consider employees that have historically been overlooked by employers.

The WOTC, which encourages employers to hire workers certified as members of any of ten targeted groups facing barriers to employment, has been extended through the end of 2025. The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. The WOTC may be claimed by any employer that hires and pays wages to members of one of 10 targeted groups. In general, the WOTC is equal to 40% of up to $6,000 (up to $2,400 maximum) of wages paid to an individual who:

  • is in their first year of employment;
  • is certified as being a member of a targeted group; and
  • performs at least 400 hours of services for that employer.

The ten targeted groups are:

  • Temporary Assistance for Needy Families recipients
  • Qualified unemployed veterans, including disabled veterans
  • Formerly incarcerated individuals
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in Empowerment Zones
  • Supplemental Nutrition Assistance Program recipients
  • Supplemental Security Income recipients
  • Long-term family assistance recipients
  • Long-term unemployment recipients

Claiming the credit

If your business would like to claim the WOTC, the job applicant will need to be certified as being eligible for this credit. On or before the day that an offer of employment is made, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). The employer has 28 calendar days from the new employee’s start date to submit Form 8850 to the designated local agency located in the state where the employee works. Additional forms may be required by the Department of Labor to obtain certification. Following receipt of a certification from the designated local agency that the employee is a member of one of the 10 targeted groups, taxable employers file Form 5884 (Work Opportunity Credit) and tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans) to claim the WOTC.

If you would like more information about the Work Opportunity Tax Credit and whether your business might be able to take advantage of it, please contact our office so that we can discuss your specific circumstances.

Tax Benefits for Small Businesses

It’s tough owning a small business in the current environment. It can be difficult to get needed supplies, prices keep going up, and it can be stressful trying to grow your business. Luckily there are a few tax breaks that can make running a business a little bit easier.

Enhanced business meal deduction

If you find yourself often entertaining customers, there is an enhanced tax deduction that you may be able to take advantage of. For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. Usually, the limit is 50% of the cost of the meal.

As usual, there are a few conditions. To qualify for the higher limit, the business owner or an employee of the business must be present when food or beverages are provided. Also, the expense can’t be lavish or extravagant, so that $800 bottle of wine you’ve had your eye on probably won’t count. But all in all, this is a change that will be welcomed by any business owner that relies on entertaining to close sales or maintain customer relationships.

Home office deduction

With a growing number of business owners now working from home, many may qualify for the home office deduction (known more formally as the deduction for business use of a home).

Usually, a business owner must use a room or other identifiable portion of the home exclusively for business on a regular basis. Exceptions to the exclusive-use standard apply to home-based daycare facilities and to portions of the home used for business storage, where the home is the only fixed location for that business.

There are different ways to calculate this deduction, so if you qualify for it, we encourage you to contact our office so that we can discuss which calculation would be more advantageous given your circumstances.

Other tax benefits

In addition to the two deductions discussed above, there are a variety of other deductions that a business owner might qualify for. There is a deduction for business start-up expenses, qualified business income, and even health-insurance for people who are self-employed. Now is the perfect time to start planning for the 2022 tax year, so please contact our office so that we can help.

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