Author: Wolfe

Over the last decade, in particular, the definition of the term “career” has changed.

Rather than being employed by a single entity for which you receive a W2 at the end of the year, many are now participating in the “gig economy” in a variety of ways. They’re not just working a day job. They’re also driving for a ride-sharing service like Uber. They’re delivering food for companies like DoorDash. They’re leaning into the versatility that the fast-paced digital world has brought with it, enjoying the type of freedom that people didn’t previously have.

Of course, this newfound sense of freedom brings with it a number of potential disadvantages, especially when it comes to tax season. But thankfully, there are still ways to enjoy all the benefits of the “gig economy” with as few of the potential tax-related downsides as possible. You just need to be savvy about planning ahead, and you need to keep a few key things in mind along the way.

Taxes and Gig Work: An Overview

By far, the most important thing to understand about this process is that any time you increase your income – be it by picking up “gig work” in addition to your primary job, or by getting additional employment where you receive a second W2 form at the end of the year – it will always potentially increase your taxes.

For the sake of example, let’s say that yours is a situation where you A) work for a small business, and B) also run a business like Etsy on the side. The first source of employment would almost certainly give you a W2 at the end of the year. In the second, you’d be left with self-employment income – which itself increases your tax liability almost immediately.

In that situation, you would want to pay quarterly estimated tax payments using form 1040-ES to increase your income tax withholding at your W2 job as much as you could to offset the liability that your self-employment income would bring with it. Yes, this means a little less money in your pocket right now – but that’s almost certainly better than getting hit with a major tax bill at the end of the year.

Along the same lines, you would want to make sure that you’re always keeping receipts for your self-employment job so that you can write off whatever you can at the end of the year. In the Uber example, that would include any maintenance and other work that you’ve had done to your car. In other “gig economy” examples, that might include money that you’ve spent on supplies that are expressly needed to complete this second job.

If you use your car for your “gig work” at all, you would want to keep a journal of all the miles that you’ve traveled. This, too, will help give you more to write off so that you can reduce your income tax liability moving forward.

Why Gig Workers Might Need Professional Tax Advice

Overall, your taxes are almost certainly going to be more complicated if you have “gig work” that you are accounting for. Not only do you need to think about how much is being withheld from every paycheck from your primary job, but you also have an increased liability when it comes to things like Social Security tax, Medicare tax, and more. In a normal situation, half of that would be paid by your traditional employer. In a self-employed situation, you’re responsible for both sides of the equation.

That’s why, if you have any questions or if you just aren’t sure how to proceed, you shouldn’t be afraid to enlist the help of a trained professional. Not only can they help you reduce your tax liability as much as possible, but they can also maximize your overall income, so you’re taking home every dollar that you’ve earned without being concerned about getting hit with a tax bill that you can’t handle down the road.

In the end, “gig work” is certainly something to be celebrated – after all, it gives people a freedom when it comes to how their careers play out that would have been unthinkable even as recently as a decade ago. Having said that, it certainly isn’t without its potential consequences – but with the right approach, you can still take them into consideration and enjoy all the advantages of “gig work” at the same time.

If you’d like to find out more information about the tax consequences of “gig work,” or if you’d just like to speak to someone about your own needs in a bit more detail, please don’t hesitate to contact us today to speak to one of our professionals.

Required Minimum Distributions (RMD) are required taxable distributions from qualified retirement plans and are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to indefinitely keep funds in their qualified retirement plans. Eventually, these assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, then he or she may have to pay a 50% penalty on the required distribution amount that is not distributed.

The penalty can be waived where the failure to take the required distribution was due to reasonable cause and steps are being taken to remedy the shortfall. The penalty waiver must be applied for, creating additional hassle, not to mention the potential additional tax created by multiple-year distributions in one year.

Note: RMDs do not apply to Roth IRAs while the account owner is alive.

Individuals must begin taking RMDs in the year they reach age 72. The first year’s distribution for those turning age 72 in 2022 can be delayed to no later than April 3 of 2023. However, delaying the first distribution means taking two distributions in 2023, which could have adverse tax consequences.

RMDs for 2022 are determined based upon the values of the accounts as of December 31, 2021, divided by the distribution period. The distribution period is based on the taxpayer’s life expectancy determined from the Uniform Lifetime Table for the taxpayer’s current age.

If you have been calculating your RMD in the past, be aware that a new uniform lifetime table applies effective in 2022, as illustrated below.

Example: Don’s oldest age during 2022 is 75 and he has a single IRA account with a value of $150,000 at the close of the business day on December 31, 2021. Using the Uniform Lifetime Table effective for 2022, we find that the distribution period for age 75 is 24.6 years. Thus, Don’s RMD for 2022 is $6,098 ($150,000/24.6).

When an owner of a retirement plan or an IRA dies before receiving his or her entire RMD in the year of death, the unpaid amount must be distributed to the named beneficiaries or, if none, the decedent’s estate.

Where an individual has multiple retirement plans and/or IRAs some additional complications may be encountered as to which accounts the distributions must be withdrawn from. Note that distributions from a 401(k) or other qualified retirement plans can’t be used to satisfy the RMD of an IRA or vice versa.

If you need to make your 2022 RMD by December 31 and haven’t yet done so, keep in mind that the 31st, is not a business day, and may be observed as the New Year’s holiday by many financial institutions. So, a word to the wise: don’t wait until New Year’s Eve to arrange for the distribution.

If you need assistance related to your RMD, please contact this office.

Have you seen those ads on television or received email solicitations promoting a large tax credit? The large tax credit they are referring to is the employee retention tax credit (ERTC). The ERTC is a government-sponsored program to keep workers employed during 2020 and 2021 because of the COVID pandemic by providing refundable tax credits to employers that kept their workers on payroll during the COVID crisis. Unlike most tax credits, this is a credit against the employer’s payroll taxes.

Even though this credit only applies for 2020 and part of 2021 for most businesses, if your business qualifies, and you haven’t already claimed the credit, it can still be claimed by amending the payroll tax returns for those years. So that you can determine if you might qualify for the credit and avoid being misguided by the credit promoters, the following is a summary of the qualifications to claim the ERTC.

The credit is available to all employers regardless of size, including tax-exempt organizations, tribal businesses, and businesses in U.S. Territories. There are only two exceptions: State and local governments and their instrumentalities. For eligible employers, the credit is available for wages paid:

• March 13, 2020, through Sept. 30, 2021, and
• July 1, 2021, through December 31, 2021, for certain start-up companies

Eligible Employers fall into one of two categories:

• Business Operations Curtailed: Eligible employers are employers who were carrying on a trade or business during any quarter in 2020 or during the calendar quarter for which the credit is determined, for calendar quarters beginning after December 31, 2020, and for which the operation of that business is fully or partially suspended.
  
  The operation may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can continue to operate but not at its normal capacity.
• Significant Decline in Gross Receipts: For 2020, employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in 2019 are also eligible. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019. This cutoff of eligibility upon return to 80% of a comparable 2019 quarter’s gross receipts is removed for 2021.
  
  For 2021, a significant decline is defined as gross receipts being 80% or less than the gross receipts for the same calendar quarter in 2019 (i.e., there’s a 20% decline in gross receipts). The employer has the option to elect to satisfy the gross receipts test by using the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019. If an employer was not in existence as of the beginning of the same calendar quarter in calendar year 2019, substitute ‘2020’ for ‘2019’. 

The credit is a refundable payroll tax credit and for 2020 is 50% of qualified wages, up to a maximum wage of $10,000 per employee. Thus, $5,000 is the maximum credit for qualified wages paid for any employee for 2020.

For 2021, the credit is 70% of qualified wages, up to a maximum wage of $10,000 per employee per quarter. Thus, the per-employee maximum credit is $7,000 for each quarter of quarters 1, 2 and 3 in 2021.

But the limitation is $50,000 each in quarters 3 and 4 of 2021 for a “recovery start-up business” – generally an employer that began a business after February 15, 2020, and had average annual gross receipts of less than $1 million for the 3-taxable year period ending with the taxable year which precedes the calendar quarter for which the credit is determined. The activity suspension and decline in gross receipts requirements don’t apply to these businesses.

If you think your business may be eligible for this credit and it hasn’t already been claimed, keep the following cautions in mind:

Caution #1: An employer who secured an SBA Paycheck Protection Program (PPP) loan is prevented from using the same wages for forgivable PPP loans and the employee retention credit. No double dipping.

Caution #2: No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the same employee.

Caution #3: Although many companies legitimately qualify for the ERTC, there is substantial concern related to abuse and fraud, especially with companies that are relying on government shutdowns, and particularly supplier shutdowns, to justify their claims based on the business operations curtailed qualification.

Please call this office to determine if your business can legitimately qualify for the ERTC.

As the country emerges from the COVID pandemic and supply chain issues, along with the fallout from the war in Ukraine, the country has been experiencing high inflation rates that negatively impact the cost of everyday living, including food, gas for your vehicle, utilities and more.

But there is one shining light: tax-related inflation adjustments that will benefit most taxpayers. However, many media outlets have been touting the IRS’ recently released inflation adjustments for 2023 as if taxpayers will see the benefits this coming spring when they file their tax returns. What much of the hype fails to mention is that the 2023 increases will show up on your 2023 tax return which will be filed in 2024. So most people will have to wait until 2024 to see the approximately 7% inflation adjustment to tax benefits.

But there was an approximately 3% inflation adjustment for 2022 from which you will benefit when you file your 2022 tax return in early 2023.

If you are an employee, you may notice some reduction in the amount of income tax withheld from your wages starting in January, as the 2023 tax withholding calculation will take into account some of the items affected by the inflation adjustments, such as the increased standard deduction and widened tax rates.

Standard Deduction: The table illustrates the increases in the standard deduction for 2022 and 2023. As shown in the table, for taxpayers filing married joint returns the increase was $800 from 2021 to 2022 and $1,800 between 2022 and 2023. For a married couple filing jointly these amounts are not subject to income tax. Taking this a step further, if that married couple were in the 22% tax bracket their tax savings would be $176 (0.22 x $800) in 2022 and $396 (0.22 x $1,800) in 2023.

Tax Brackets: Tax brackets are also affected by the inflation adjustments as illustrated in the tables below. For example, you will note that for an unmarried taxpayer using the single filing status for 2022 the table shows that when the individual’s taxable income reaches $89,076 the marginal tax rate increases from 22% to 24%. However, that transition between 22% and 24% occurs at $95,376 for 2023, or a difference of $6,300 that is taxed at 2% less than in 2022. Inflation adjustments are made annually for all the marginal rate brackets.  

Besides the standard deduction and tax brackets there are a large number of other tax attributes that are subject to inflation adjustment as well. Here are some examples. 

As of this writing, the IRS has not yet released the 2023 maximum contributions to IRAs, 401(k)s and other retirement plans. It is anticipated that these amounts will also increase substantially due to the adjustment for inflation. 

Please contact this office if you have any questions.

If your traditional IRA is invested in stocks and/or mutual funds, the recent substantial downward slide by the stock markets may provide a unique opportunity to convert your traditional IRA to a Roth IRA at a low cost, and then benefit when the markets recover.

Why would you want to do that? Because Roth IRA distributions provide tax free retirement benefits while payouts from Traditional IRAs are taxable.

Of course there is no assurance that the markets will not continue to decline, and this may not be the most opportune time to make a conversion in your specific circumstances but is something you may want to consider. Conversions provide the most benefit to younger individuals who can look forward to many years of the tax-free growth provided by a Roth IRA.

You don’t have to convert all of your traditional IRA in one year. You can convert what you can afford to pay the tax on each year.

Here Is How It Works – The tax code allows individuals to convert any portion of their traditional IRA to a Roth IRA by paying tax on the conversion as though taking a distribution from the traditional account. Thus, if you make a conversion you are taxed on the conversion based upon the tax rates that apply to your normal income plus the traditional IRA amount being converted.

Of course, if in 2022 you have an abnormally lower income, that could make the conversion tax even less. The following table includes the marginal tax rates for 2022.

Example When Using the Table – Let’s say you are filing single and your taxable income without an IRA conversion amount is $45,000, which has a marginal rate of 12%, and you are converting $40,000. This brings your taxable income to $85,000, which is still in the 12% bracket (it’s more than $41,775 but less than $89,075, the start of the next rate). This means the tax on the conversion would be $4,800 (12% of $40,000). If you did the conversion in a year when your other income was more and when combined with the conversion amount you are in the 22% bracket, the tax on the conversion would be $8,800, $4,000 more than when you are in the 12% bracket.

Other Issues:

• There is no income limitation on making a conversion, thus anyone can do a conversion. 
• Higher income taxpayers can use the conversion to circumvent the AGI limits for contributing to a Roth IRA. 
• Once a conversion is made it cannot be undone. 
• Some individuals for various reasons have made non-deductible contributions to their traditional IRAs. For distribution or conversion purposes, all an individual’s IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable. 

Give this office a call if you would like to explore the possible benefits of a traditional to Roth IRA conversion.

The Inflation Reduction Act that President Biden signed into law back in August, has a lesser-known provision that could benefit many small business startups, allowing them to potentially double the amount of the research and development tax credit they can claim from $250,000 to $500,000 per year against payroll taxes.

This little-known tax benefit for new, qualified small businesses is the ability to apply a portion of their research credit – up to $500,000 after December 31, 2022, to pay the employer’s share of their employees’ FICA withholding requirement (the 6.2% payroll tax). This is double the amount allowed under prior law. This can be quite a benefit, as in their early years, start-up companies generally do not have any taxable profits for the research credit to offset; quite often, it is in these early years when companies make expenditures that qualify for the research credit. This can substantially help these young companies’ cash flow.

Research Credit – The research credit is equal to 20% of qualified research expenditures in excess of the established base amount. If using the simplified method, the research credit is equal to 14% of qualified research expenditures in excess of 50% of the company’s average research expenditures in the prior three years.

Qualified Research – Research expenditures that qualify for the credit generally include spending on research that is undertaken for the purpose of discovering technological information. This information is intended to be useful in the development of a new or improved business component for the taxpayer relating to new or improved functionality, performance, reliability, or quality.

Qualified Small Business (QSB)– To apply the research credit to payroll taxes, a company must be an aQSB and must not be a tax-exempt organization. A QSB for purposes of this credit is a corporation or partnership with these criteria:

1. The entity does not have gross receipts in any year before the fourth preceding year. Thus, the payroll credit can only be taken in the first 5 years of the entity’s existence. However, this rule does not require a business to have been in existence for at least 5 years.
2. The entity’s gross receipts for the year when the credit is elected must be less than $5 million.

Any person (other than a corporation or partnership) is a QSB if that person meets the two requirements above after taking into account the person’s aggregate gross receipts received for all the person’s trades or businesses.

Example – The taxpayer is a calendar-year individual with one business that operates as a sole proprietorship. The taxpayer had gross receipts of $4 million in 2022. For the years 2018, 2019, 2020, and 2021, the taxpayer had gross receipts of $1 million, $7 million, $4 million, and $3 million, respectively; the taxpayer did not have gross receipts for any taxable year prior to 2018. The taxpayer is a qualified small business for 2022 because he had less than $5 million in gross receipts for 2022 and did not have gross receipts before 2018 (the beginning of the 5-taxable-year period that ends in 2022). The taxpayer’s gross receipts in the years 2018-2021 are not relevant in determining whether he is a qualified small business in the taxable year 2022. Because the taxpayer had gross receipts in 2018, the taxpayer will not be a qualified small business for 2023, regardless of his gross receipts in that year. 

The research credit must first be accrued back to the preceding year, where it must be used to offset any tax liability for that year. Then, the excess, up to $500,000 maximum, (up from a maximum of $250,000 in years before January 2023) can be used to offset the 6.2% employer payroll tax. Any amount not used is carried forward to the next year.

This expanded R&D tax credit won’t show up on tax returns until 2024 since it can first be claimed for the tax year 2023.

If you have questions related to the research credit or if your business could benefit from using the credit to offset payroll taxes, please give this office a call.