Author: ericfrey

Household employees play a crucial role in many homes, providing essential services such as childcare, eldercare, housekeeping, and gardening. However, employing household help comes with a set of responsibilities, particularly in terms of payroll, withholding, and tax reporting. This article delves into the intricacies of household employment, including the classification of workers, payroll requirements, tax implications, and the penalties for non-compliance.

Who is a Household Employee? – A household employee is someone who performs domestic services in a private home. This includes nannies, caregivers, housekeepers, gardeners, and other similar roles. The key factor that distinguishes a household employee from an independent contractor is the degree of control the employer has over the work performed. If the employer dictates what work is to be done and how it is to be done, the worker is typically considered an employee.   

A worker who performs childcare services in their home generally is not an employee of the parents whose children are cared for. If an agency provides the worker and controls what work is done and how it is done, then the worker is not considered a household employee.

Examples of Household Employees:

• Nannies and babysitters
• Caregivers for elderly or disabled individuals
• Housekeepers and maids
• Gardeners and landscapers (if they work under the homeowner’s direction)

Independent Contractors: Independent contractors, on the other hand, operate their own businesses and provide services to the public. They typically supply their own tools, set their own hours, and determine how the work will be completed. They are not treated as household employees and there are no reporting requirements when they work for you in your private home.  Examples include:

• Plumbers
• Gardeners and landscapers (if they don’t work under the homeowner’s direction)
• Electricians
• Pool maintenance workers
• Freelance landscapers

Payroll and Withholding Requirements – When you hire a household employee, you become an employer and must adhere to specific payroll and withholding requirements. Here are the key steps involved:

• Obtain Employer Identification Numbers (EINs): You need to obtain a federal EIN from the IRS and, in some cases, a state EIN.
• Form I-9: Both the employer and the employee must complete Form I-9 to verify the employee’s eligibility to work in the U.S.
• Schedule H: Household Employment Taxes – Employers report household employment taxes on Schedule H, which is filed with their federal income tax return (Form 1040). Schedule H covers Social Security and Medicare taxes, FUTA, and any withheld federal income tax.  
• Social Security and Medicare Taxes: You must withhold Social Security and Medicare taxes from your employee’s wages and pay the employer’s share of these taxes. For 2024, the Social Security tax rate is 6.2% for both the employer and the employee, and the Medicare tax rate is 1.45% each.
• Federal Unemployment Tax (FUTA): You may also need to pay FUTA tax if you pay your household employee $1,000 or more in any calendar quarter. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee.
• Income Tax Withholding: Federal income tax withholding is not required for household employees unless both the employer and the employee agree to it. However, it is advisable to withhold federal income tax to help the employee avoid a large tax bill at the end of the year.

• State Employment Taxes: State requirements vary, but you may need to pay state unemployment insurance and disability insurance taxes. Contact this office for state reporting requirements.  
• W-2 and W-3 Forms: At the end of the year, you must provide your household employee with a Form W-2, Wage and Tax Statement, and file a copy with the Social Security Administration along with Form W-3, Transmittal of Wage and Tax Statements. These forms are generally due by January 31 following the year you paid the employee.

“Nanny” SEPs – A recent tax law change allows employers of domestic employees to establish a Simplified Employee Pension (SEP) plan to provide retirement benefits for their domestic employees, such as nannies. These plans have come to be termed “Nanny” SEPs, but can be made available to other types of domestic employees.

• Tax Treatment: Contributions made to a SEP are generally tax-deferred for the employee, meaning the employee does not pay taxes on the contributions until they withdraw the funds, typically during retirement.
• Distribution Rules: Distributions from SEPs are taxed similarly to IRA distributions. Early withdrawal penalties may apply if funds are withdrawn before the employee reaches age 59½.
• Required Minimum Distributions (RMDs): Employees must start taking required minimum distributions from the SEP once they reach the age of 73 (or 70½ if they reached that age before 2020, or if they attained age 72 during 2020 through 2022).
• No Loans: Loans are not permitted from SEP plans, as they are considered IRA-based plans.

This provision allows domestic employees to benefit from retirement savings plans like those available to employees in other sectors, promoting financial security for these workers. This is not a requirement but can be a valuable benefit to attract and retain quality household employees.

Deductibility of Household Employee Payments – Payments to household employees, and the employer’s associated payroll tax payments, are generally considered personal expenses and are not deductible. However, there are exceptions:

• Medical Expenses: Wages and other amounts paid for nursing services can be included as medical expenses if the services are necessary for medical care. This includes services such as administering medication, bathing, and grooming the patient.
• Child and Dependent Care Credit: Expenses for household services or care of a qualifying individual that allow the taxpayer to work may qualify for the child and dependent care credit. However, the same expense cannot be used both as a medical expense and for the child and dependent care credit.

Penalties for Non-Compliance – Failing to comply with household employment tax requirements can result in significant penalties:

• Failure to Withhold and Pay Taxes: If you do not withhold and pay Social Security, Medicare, and FUTA taxes, you may be liable for the unpaid taxes, plus interest and penalties.
• Failure to File Forms: Not filing required forms, such as Form W-2, can result in penalties. For example, the penalty for failing to file a correct Form W-2 by the due date can range from $60 to $330 per form, depending on how late the form is filed.
• Misclassification of Employees: Misclassifying an employee as an independent contractor to avoid payroll taxes can lead to back taxes, interest, and penalties. The IRS has strict guidelines for determining worker classification, and misclassification can result in significant financial consequences. Some states have different guidelines, often more restrictive than the federal rules. 

Other Tax Issues:

• Overtime Pay: Under the Fair Labor Standards Act (FLSA), domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in each week. However, live-in employees are an exception to this rule in most states.
• Hourly Pay vs. Salary: It is illegal to treat nonexempt employees as if they are salaried. Household employees must be paid on an hourly basis, and any overtime must be compensated accordingly.
• Separate Payrolls: Business owners must maintain separate payrolls for household employees. Personal funds, not business funds, must be used to pay household workers. Including household employees on a business payroll is not allowable as a business deduction.

Employing household help comes with a set of responsibilities that go beyond simply paying wages. Understanding the classification of workers, adhering to payroll and withholding requirements, and complying with tax reporting obligations are crucial to avoid penalties and ensure legal compliance. Additionally, offering benefits such as Nanny SEPs can help attract and retain quality household employees.

Please contact our office for questions and help meeting federal and state reporting requirements.

When engaging in activities that generate income, it’s essential to understand how the IRS classifies these activities for tax purposes. The distinction between a hobby and a business can significantly impact your tax obligations. This article will delve into the hobby loss rules, the impact of the Tax Cuts and Jobs Act (TCJA) on deductions, the nine factors the IRS uses to determine if an activity is engaged in for profit and provides examples of court cases involving profit motive.

Hobby Loss Rules Overview – The IRS uses hobby loss rules to determine whether an activity is a hobby or a business. If an activity is classified as a hobby, the income generated is taxable, but for years 2018 through 2025 the expenses incurred are not deductible. This means you cannot use hobby expenses to offset other income.

Impact of the Tax Cuts and Jobs Act (TCJA) on Deductions – The TCJA, enacted in 2017, brought significant changes to the tax code, including the suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor for tax years 2018 through 2025. This suspension means that hobby expenses are not deductible during these years, making the entire income from a hobby taxable.

Nine Factors to Determine Profit Motive – The IRS considers nine factors to determine whether an activity is engaged in for profit. No single factor is decisive; instead, all factors must be considered together:

1. Businesslike Manner: Is the activity carried out in a businesslike manner? This includes maintaining complete and accurate books and records.
2. Expertise: Does the taxpayer have the necessary expertise or consult with experts to carry out the activity successfully?
3. Time and Effort: How much time and effort does the taxpayer put into the activity? Significant time and effort may indicate a profit motive.
4. Expectation of Asset Appreciation: Does the taxpayer expect the assets used in the activity to appreciate in value?
5. Success in Similar Activities: Has the taxpayer succeeded in similar activities in the past?
6. History of Income or Losses: What is the history of income or losses from the activity? Consistent losses may indicate a lack of profit motive.
7. Amount of Occasional Profits: Are there occasional profits, and if so, how substantial are they?
8. Financial Status: Does the taxpayer have substantial income from other sources? If so, the activity may be more likely to be considered a hobby.
9. Elements of Personal Pleasure: Does the activity involve elements of personal pleasure or recreation?

Presumptions of Profit Motive – The IRS provides a presumption of profit motive if an activity generates a profit in at least three of the last five consecutive years, including the current year. For activities involving breeding, training, showing, or racing horses, the presumption applies if there is a profit in at least two of the last seven consecutive years.

Election to Delay Determination of Profit Intent – Taxpayers can elect to delay the determination of whether an activity is engaged in for profit by filing Form 5213, “Election to Postpone Determination as to Whether the Presumption Applies That an Activity Is Engaged in for Profit.” This election allows taxpayers to defer the determination until the end of the fourth tax year (or sixth tax year for horse-related activities) after the activity begins. This election (1) should not be made unless the taxpayer is being audited by the IRS and the IRS is disallowing their deductions under the hobby loss rules, and (2) cannot be made if the taxpayer has been engaged in the activity for more than five years (seven years for horse-related activities).

Sequence of Deductions to the Extent of Income for years before 2018 and after 2025 (providing Congress allows the TCJA rules to expire) – If an activity is classified as a hobby, deductions are allowed only to the extent of the income generated by the activity. The sequence in which deductions are allowed is as follows:

• Home Mortgage Interest, Taxes, and Casualty Losses: These deductions are allowed first.
• Deductions That Do Not Reduce Basis: These include expenses such as advertising, insurance, and wages.
• Deductions That Reduce Basis: These include depreciation and amortization.

Hobby Income and Self-Employment Tax – If income is determined to be hobby income rather than trade or business income after applying the nine factors to determine whether an activity is engaged in for profit, the income is subject to income tax but not self-employment tax. This distinction is crucial because self-employment tax can significantly increase the tax liability for individuals engaged in a trade or business activities.

Court Cases Involving Profit Motive – Several court cases have addressed the issue of profit motive, providing valuable insights into how the IRS and courts determine whether an activity is a hobby or a business. 

• Groetzinger v. Commissioner (1987): The Supreme Court held that a full-time gambler who bet solely on his own account was engaged in a trade or business of gambling. This prevented his gambling losses from being tax preference items for the purpose of computing minimum tax.
• Gajewski v. Commissioner (1983): The court held that a taxpayer who did not hold himself out to others as offering goods or services was not in a trade or business. The taxpayer was a professional gambler who bet solely for his own account, and the denial of his business deductions turned the expenses into Schedule A deductions.
• Ditunno v. Commissioner (1983): The court ruled that the proper test of whether an individual was carrying on a trade or business required examination of all facts involved. In this case, a full-time gambler was determined to be in a trade or business of gambling, and his gambling losses were business expenses, even though they were not related to offering goods and services.

Examples of Hobby vs. Business – To illustrate the distinction between a hobby and a business, consider the following examples:

• Example 1: The Amateur Photographer – Jane enjoys photography and occasionally sells her photos online. She does not maintain detailed records, consult with experts, or spend significant time on her photography. Jane’s activity is likely to be classified as a hobby, and her expenses will not be deductible.
• Example 2: The Professional Photographer – John is a professional photographer who maintains detailed records, consults with experts, and spends significant time on his photography business. He has a history of generating profits and expects his photography equipment to appreciate in value. John’s activity is likely to be classified as a business, and his expenses will be deductible.
• Example 3: The Horse Breeder – Sarah breeds and trains horses. She has generated profits in two of the last seven years and maintains detailed records. Sarah’s activity is likely to be classified as a business, and her expenses will be deductible.

Understanding the hobby loss rules and the impact of the TCJA on deductions is crucial for taxpayers engaged in income-generating activities. By considering the nine factors used by the IRS to determine profit motive, taxpayers can better assess whether their activities are likely to be classified as hobbies or businesses. Additionally, being aware of the sequence in which deductions are allowed, or whether deductions are allowed at all, and the implications for self-employment tax can help taxpayers make informed decisions about their activities. Finally, reviewing court cases involving profit motive provides valuable insights into how the IRS and courts approach these determinations.

If you have any questions, please contact our office. 

Tax season can be stressful, especially if you’re worried about penalties. Whether you’re an individual or a small business owner, IRS penalties can add up quickly, turning a simple oversight into a costly mistake. Understanding what triggers these penalties—and how to avoid or reduce them—can save you time, money, and frustration.

In this article, we’ll break down the most common IRS penalties, explain what triggers them, and provide tips on how to contest or mitigate them if necessary.

Common IRS Penalties

The IRS imposes a variety of penalties for different types of tax-related mistakes or missed obligations. Some of the most common include:

1. Late Filing Penalty

The late filing penalty is one of the most frequent issues taxpayers encounter. If you fail to file your tax return by the due date (or extended due date), the IRS typically imposes a penalty of 5% of the unpaid taxes for each month your return is late, up to a maximum of 25%. If more than 60 days pass without filing, the minimum penalty is either $435 or 100% of the unpaid tax—whichever is less.

2. Late Payment Penalty

If you file your taxes on time but fail to pay the taxes you owe, the IRS charges a late payment penalty. This penalty is 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid, up to a maximum of 25%.

Even if you can’t pay the full amount, filing your return on time can help reduce additional penalties. You may also qualify for a payment plan, which can prevent the situation from escalating further.

3. Estimated Tax Penalty

Small business owners and self-employed individuals are required to make quarterly estimated tax payments. If you fail to pay enough taxes throughout the year, the IRS may assess an underpayment penalty. This applies to those who don’t have sufficient withholding or don’t pay enough in quarterly estimated taxes.

4. Accuracy-Related Penalty

The IRS imposes an accuracy-related penalty when taxpayers understate their income by a significant amount or claim deductions or credits they’re not entitled to. This penalty is typically 20% of the underpaid tax. In some cases, the IRS may charge this penalty if they determine that the taxpayer was negligent or didn’t have a reasonable basis for their tax position.

5. Failure to Deposit Employment Taxes

For businesses that withhold payroll taxes from employees, failure to deposit those taxes with the IRS can result in significant penalties. The IRS charges a penalty based on how late the deposit is, ranging from 2% to 15% of the unpaid amount.

What Triggers These Penalties?

IRS penalties are typically triggered by mistakes, missed deadlines, or lack of compliance. Some common reasons penalties are imposed include:

• Missing filing deadlines for individual, corporate, or payroll tax returns.
• Failure to pay the taxes owed by the due date, even if the tax return is filed.
• Inaccurate reporting of income or expenses on tax returns.
• Underpaying taxes throughout the year (especially for self-employed individuals).
• Neglecting payroll tax obligations is a serious concern for small businesses.

How to Avoid IRS Penalties

Avoiding IRS penalties is all about staying organized, filing on time, and ensuring accuracy in your tax reporting. Here are a few tips to help you avoid penalties:

1. File and Pay on Time: Make it a priority to file your tax return by the due date and pay as much of the tax you owe as possible. Even if you can’t pay in full, filing on time will help minimize penalties.
2. Set Up a Payment Plan: If you can’t pay your full tax bill, contact the IRS to arrange a payment plan. This can prevent additional penalties from accumulating.
3. Accurate Record Keeping: Keep detailed and organized records throughout the year. Accurate records will help ensure you don’t miss deductions or make reporting errors that could trigger an accuracy-related penalty.
4. Pay Estimated Taxes: If you’re self-employed or have income not subject to withholding, make sure you pay quarterly estimated taxes. This helps avoid the underpayment penalty.
5. Stay Compliant with Payroll Taxes: If you run a business, make sure you’re depositing payroll taxes on time and following the IRS’s requirements for employee withholding.

How to Contest or Mitigate IRS Penalties

If you’ve already been hit with a penalty, all is not lost. The IRS does provide options for contesting or reducing penalties under certain circumstances. Here’s how:

• Request a Penalty Abatement: In some cases, you may be eligible for a first-time penalty abatement. This is available if you have a clean filing history and haven’t had a penalty in the past three years.
• Show Reasonable Cause: If you can demonstrate that your failure to file or pay was due to reasonable cause (such as illness, a natural disaster, or an unavoidable absence), the IRS may waive the penalty.
• Submit an Offer in Compromise: If you’re facing significant financial hardship and can’t pay your tax bill in full, you may be eligible to settle your tax debt for less than the full amount owed through an Offer in Compromise.
• Seek Professional Help: Sometimes penalties are the result of more complex tax issues. Working with a tax professional can help you understand your options and develop a strategy for contesting or reducing penalties.

Don’t Let Penalties Add Up

IRS penalties can quickly turn a small tax issue into a large financial burden. The best way to avoid penalties is to stay organized, file on time, and ensure you’re paying what you owe. However, if you’re already facing penalties, there are ways to contest or reduce them—and we can help.

Need Help with IRS Penalties?
Contact our office today to discuss your situation. As tax experts, we can help you avoid penalties, resolve issues with the IRS, and get your tax obligations back on track. Let us guide you through the process and save you from unnecessary stress and expense.

We are pleased to announce that Shafiq Ahmadzai joined the Bowman team effective Tuesday September 3rd, 2024, as a Sr. Accountant in the Audit Department. 

Shafiq brings over 4-years of experience in audit accounting leading audit procedures to ensure compliance with AICPA, PCAOB and GAGAS standards, conducting financial statement audits and producing detailed audit reports with actionable recommendations for compliance. 

Prior to joining Bowman, Shafiq was working with Next Plus LLC as Accounting Compliance Officer.  In addition to being a CFE (certified fraud examiner), Shafiq holds a Bachelor of Science in Accounting and a Master of Accounting from the University of the Pacific.

Please give Shafiq a warm Bowman welcome!

Shafiq, welcome to the team. We wish you great success in your new role.

We are pleased to announce that Aja Secheslingloff joined the Bowman team effective Tuesday September 3rd, 2024, as a Senior Accountant in the Audit Department. 

Aja brings over 4-years of experience in audit and tax accounting where she gained experience inspecting 401k’s, 403b’s, completing financial statements, preparing taxes and reviewing financial statements.  Prior to joining Bowman, Aja was working with MUN CPA’s focusing on audit accounting.

Aja has a Bachelor of science degree from Southern New Hampshire University and has also been recognized with the Commissioners Honor Roll for student athletes during her time studying at Eastern New Mexico University. 

Please give Aja a warm Bowman welcome!

Aja, welcome to the team. We wish you great success in your new role.

The Form 706, also known as the United States Estate (and Generation-Skipping Transfer) Tax Return, is a critical document in estate planning and tax management. One of its significant features is the portability election, which allows a surviving spouse to utilize their deceased spouse’s unused estate tax exclusion amount. This article delves into the intricacies of the 706 portability election, including its purpose, qualifications, special filing rules, complications, and the importance of making an informed decision.

Form 706 is used to report the value of a decedent’s estate and calculate the federal estate tax due. It is also used to compute the generation-skipping transfer (GST) tax. The form must be filed if the gross estate, plus adjusted taxable gifts and specific exemptions, exceeds the lifetime estate tax exclusion amount. For deaths in 2024, this exclusion amount is $13.610 million. The top tax rate is 40%. Form 706 is generally due no later than nine months from the decedent’s date of death, with a 6-month extension of time available, if applied for.

Purpose of the Portability Election: The portability election allows a surviving spouse to apply the deceased spouse’s unused exclusion (DSUE) amount to their own transfers during life (i.e., gifts in excess of the annual gift tax exclusion amount to other individuals) or at death. This provision, introduced by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, aims to simplify estate planning for married couples and ensure that the estate tax exclusion is fully utilized.

Qualifications for Filing a Portability Election: To qualify for the portability election, the following conditions must be met:

• Decedent’s Date of Death: The decedent must have died after December 31, 2010.
• Surviving Spouse: The decedent must have a surviving spouse.
• Citizenship or Residency: The decedent must have been a U.S. citizen or resident at the time of death.
• Estate Tax Return Requirement: The estate must not be required to file an estate tax return based on the value of the gross estate and adjusted taxable gifts, without regard to the need to file for portability purposes.

Special Portability Filing Rules: Special filing rules, referred to as the “simplified method” provide a means for obtaining an extension of time to file Form 706 beyond the normal filing deadline only to make a portability election. Under the current version of this simplified procedure, a complete and properly prepared Form 706 must be filed on or before the fifth anniversary of the decedent’s death. Before this special rule became effective, when no 706 had been filed and the filing deadline had passed, a request had to be submitted to the IRS for a private letter ruling granting additional time to file the 706 so that the portability election could be made. The IRS charged a significant fee to process the request. Under the simplified method, no user fee is required.

Complications Associated with Preparing Form 706 – Preparing Form 706 can be complex and time-consuming. Some of the complications include:

• Valuation of Assets: Accurately valuing the decedent’s assets, including real estate, investments, and personal property, can be challenging.
• Deductions and Credits: Identifying and calculating allowable deductions and credits, such as charitable contributions and marital deductions, require meticulous attention to detail.
• Documentation: Gathering and organizing the necessary documentation to support the reported values and deductions can be arduous.

Because of its complexity the cost of preparing a Form 706 can be substantial and often becomes a factor in whether to make the portability election.

Who Should Make a Portability Election? The portability election is particularly beneficial for surviving spouses who anticipate that their own estate may exceed the lifetime exclusion amount. By electing portability, the surviving spouse can substantially increase their exclusion amount, potentially saving thousands, if not millions, of dollars in estate taxes.

Even if the surviving spouse’s estate is currently below the exclusion threshold, it is prudent to consider the portability election. Future changes in wealth, such as winning the lottery, receiving a sizable inheritance, or accumulating additional assets, could push the estate above the exclusion limit. Additionally, under current law the exclusion amount is set to be approximately halved after 2025. Whether the more generous amount will be extended is up to Congress.

Example: When Portability Election is Not Made – Consider a scenario where John dies in 2024, leaving an estate valued at $10 million. His wife, Jane, who is the executor of his estate, decides not to file Form 706 to elect portability, reasoning that her estate is well below the $13.610 million exclusion amount. However, a few years later, Jane inherits $5 million from a relative and her investments appreciate significantly, pushing her estate value to $15 million.

Without the portability election, and if the exclusion amount in her year of death was also $13.610 million, Jane’s estate would only have the $13.610 million exclusion, resulting in a taxable estate of $1.39 million. At a 40% tax rate, her estate would owe $556,000 in estate taxes. Had she elected portability, she could have utilized John’s unused exclusion, potentially saving her estate from any tax liability. Her heirs will wish that she’d made the election.

Importance of a Signing a Refusal Letter – If the decision is made not to file for the portability election, the tax preparer may request a signed refusal letter from the executor and surviving spouse. This letter serves as documentation that the tax preparer informed the client of the potential benefits and risks associated with the portability election. It also protects the tax preparer from potential liability if the surviving spouse’s estate later incurs estate taxes that could have been avoided with the portability election.

This firm’s goal is to help you navigate the complexities of the tax code and maximize your tax benefits. If you have any questions or need assistance with your tax return, please do not hesitate to contact this office.  

Taxpayers are limited in the annual amount they can contribute to a Roth IRA. The maximum contribution for 2024 is $7,000 ($8,000 if age 50 or older), but the allowable 2024 contribution for joint-filing taxpayers phases out at an adjusted gross income (AGI) between $230,000 and $240,000 (or an AGI between $0 and $9,999 for married taxpayers filing separately). For unmarried taxpayers, the phase-out is between $146,000 and $161,000. The contribution limits and phase-out limitations are inflation adjusted annually.

However, higher-income taxpayers can circumvent the phase-out income limitations by first making a traditional IRA contribution and then converting it to a Roth IRA, which is commonly referred to as a “back-door Roth IRA.” But, without advance planning, serious pitfalls associated with this maneuver can result in unexpected taxable income.

Converting a traditional Individual Retirement Account (IRA) to a Roth IRA is a financial strategy that many Americans – even those not in the higher tax brackets – consider for its potential long-term tax benefits. However, this decision is not without its complexities and should be approached with a thorough understanding of its implications, benefits, and drawbacks. This article will delve into the process of converting a traditional IRA to a Roth IRA, examining taxability, benefits, pros and cons, age considerations, and other tax-related issues.

Understanding Traditional and Roth IRAs -Before diving into the conversion process, it’s essential to understand the fundamental differences between traditional and Roth IRAs. A traditional IRA allows individuals to make pre-tax contributions, reducing their taxable income for the year the contribution is made. The funds in the account grow tax-deferred, but withdrawals are taxed as ordinary income.

Conversely, Roth IRA contributions are made with after-tax dollars, meaning there’s no tax deduction for contributions. However, the significant advantage of a Roth IRA is that the earnings grow tax-free, and qualified withdrawals are also tax-free. This feature makes Roth IRAs an attractive option for those who anticipate being in a higher tax bracket during retirement and those creating Roth accounts when they are younger.

The Conversion Process – Converting a traditional IRA to a Roth IRA involves transferring some or all the funds from a traditional IRA into a Roth IRA. When you convert, you must pay income taxes on the amount converted as if it were income for the year. This taxability is a critical consideration, as it can result in a substantial tax bill, depending on the amount converted and your current tax bracket.

Benefits of Converting

Tax-Free Withdrawals: The most significant benefit of a Roth IRA is the ability to withdraw your money tax-free in retirement, or earlier in some cases, providing a hedge against future tax rate increases.

No Required Minimum Distributions (RMDs): Roth IRAs do not require the owner to take minimum distributions starting at age 73, unlike traditional IRAs, allowing for more flexible retirement planning.

Estate Planning Advantages: Roth IRAs can be passed on to heirs, who can also benefit from tax-free withdrawals, making it an effective tool for estate planning. Inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts, but generally the distributions will be tax free.

Pros and Cons of Converting

Pros:

• Potential for tax-free growth and withdrawals.
• No RMDs while the owner is alive, offering more control over your retirement funds.
• Can provide tax diversification in retirement.

Cons:

• Upfront tax bill on the converted amount.
• Conversion could push you into a higher tax bracket for the year.
• If you are a Medicare beneficiary, the conversion could cause an increase in your Medicare premiums two years later, as the premiums are based on income from the tax return two years prior. 
• Increased adjusted gross income for the year can trigger limitations on other tax benefits that are reduced or eliminated for higher income taxpayers.  
• No reversal – once converted to a Roth IRA, you cannot recharacterize back to a traditional IRA.

Age Considerations – Age plays a significant role in deciding whether to convert a traditional IRA to a Roth IRA. Younger individuals who expect their income (and consequently their tax bracket) to increase over time may benefit more from conversion, as the tax-free withdrawals from a Roth IRA could outweigh the initial tax hit. For older individuals closer to retirement, the decision becomes more nuanced. They must consider whether they have enough time for the benefits of tax-free growth to offset the conversion tax bill.

Other Tax-Related Issues

Non-Deductible Traditional IRAs: Contributions to traditional IRAs can be either pre-tax (tax deductible) or post-tax (not tax deductible). Deductible contributions and earnings are taxable when converted whereas nondeductible contributions are not taxable when converted. When IRA funds are converted, they are considered withdrawn ratably from the taxable and nontaxable portions of the IRA. In addition, all traditional IRAs of a taxpayer are considered one, meaning an IRA with the most nondeductible contributions can’t be singled out for conversion. Thus, a careful analysis is required in advance to establish the taxable percentage when determining how much to convert.  

Conversion Income: The amount converted is added to your taxable income for the year, potentially increasing your tax liability or even pushing you into a higher tax bracket. When considering whether to convert to a Roth IRA, the impact on various tax benefits due to increasing AGI by the taxable conversion amount must be carefully considered.  For instance, a conversion may cause the taxpayer to lose part of or all certain tax benefits for the conversion year, like: 

• American Opportunity Tax Credit
• Lifetime Learning Tax Credits
• Earned Income Tax Credit (EIC)
• Child Tax Credit
• Saver’s Credit
• Adoption Credit
• Higher Education Interest Deduction
• Medicare B & D Premiums – 2 Years Later
• Medical Itemized Deductions
• Miscellaneous Itemized Deductions (in years after 2025)
• Nontaxable Social Security
• Favorable Tax Brackets
• Capital Gains Rates
• Loss Allowance for Rental Real Estate
  
  

Net Investment Income Surtax: Higher-income taxpayers face a potential additional tax related to the Affordable Care Act (health care) provisions: the 3.8% net investment income surtax applies when modified AGI exceeds certain thresholds. A higher AGI due to a Roth conversion could push the taxpayer over the threshold. Also, the additional income from a conversion could negatively impact taxpayers who might otherwise be eligible for credits for health care insurance premiums.

Paying the Tax on a Conversion – Where does the money come from to pay this tax liability on a conversion to a Roth?  The taxpayer can pay the liability from other funds or from IRA funds.  However, if the tax is paid from IRA funds, those funds are not part of the rollover (conversion) and therefore are not only taxable, but also subject to 10% early withdrawal penalties if the taxpayer is under 59½ at the time of the withdrawal.  

Tax Strategy: Strategic tax planning, such as spreading the conversion over several years or timing it during years of lower income, can mitigate the tax impact.

Converting a traditional IRA to a Roth IRA can offer significant benefits, particularly for those who anticipate higher tax rates in retirement or who value the flexibility. However, the decision to convert should not be taken lightly. It requires a careful analysis of your current financial situation, tax implications, and long-term retirement goals. Consulting with this office is highly recommended to navigate the complexities of this decision and to tailor a strategy that best suits your individual needs.

Effective July 1, 2024, California Senate Bill 553 (SB 553) mandates that nearly all California employers implement a Workplace Violence Prevention Plan (WVPP). This requirement is a critical update for businesses, especially from an HR perspective, as it aims to enhance employee safety and reduce incidents of workplace violence.

Who is Affected?

Most employers in California must comply with this new law, with only a few exceptions, including:

• Correctional facilities
• Law enforcement agencies
• Teleworkers
• Small businesses with fewer than 10 employees that are not accessible to the public

What Employers Need to Do

Employers subject to SB 553 must develop, establish, and maintain a comprehensive WVPP. The plan needs to be more than just a formality; it requires active implementation and continuous oversight. Key elements include:

1. Develop and Maintain the WVPP: Employers must create a written plan that outlines procedures for preventing workplace violence. This plan must be reviewed and updated regularly to remain effective.
2. Employee Training: Employers are required to train their employees on the WVPP when it’s first established and then conduct annual refresher trainings. This ensures that all employees are aware of how to recognize, avoid, and respond to potential violence.
3. Violent Incident Log: Employers must maintain a log that records every instance of workplace violence. This log is critical for tracking trends and identifying areas of concern that need to be addressed.
4. Incident Investigations: Employers must thoroughly investigate any incidents of workplace violence, as well as reports of potential violence. The results of these investigations must be communicated to the employee who raised the concern.
5. Record Maintenance: Employers are required to keep training records for at least one year and maintain incident logs and other hazard identification records for at least five years. These records must be made available to both employees and Cal/OSHA upon request.

Addressing Different Types of Violence

The WVPP must cover four distinct types of violence in the workplace, ensuring comprehensive protection for employees. This proactive approach helps businesses mitigate risks and foster a safer work environment.

Why This Matters

The enactment of SB 553 highlights California’s commitment to workplace safety. Employers who fail to comply may face penalties, but more importantly, the law underscores the moral responsibility to safeguard employees from harm. By implementing a robust WVPP, businesses can not only comply with the law but also create a culture of safety that protects both employees and the organization as a whole.

If you are an employer in California, now is the time to review your workplace policies and ensure your WVPP is in place and up to date. For more detailed information on SB 553 and how it affects your business, you can refer to the full article here.

As you may recall, beginning with 2024, many companies are required to file Beneficial Ownership Information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN).  FinCEN is a division of the U.S. Department of the Treasury.  This legislation was enacted in 2021 under the Federal Corporate Transparency Act. 

While the intention is to help reduce financial crimes such as money laundering and tax evasion, this new filing is a burdensome requirement imposed on mostly small business.  Essentially, every business that is registered with the Secretary of State will need to make a filing unless it meets an exception (such as having 20 or more employees and $5 million in revenues for the prior year). The limited list of exceptions can be found on the FinCEN website.  We wanted to stress the importance of making sure you take care of any reporting requirements as outlined on the FinCEN website as the penalties are steep if you do not comply. 

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may result in a civil penalty of up to $591 for each day that the violation continues and/or criminal

penalties, including imprisonment, for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI Report may be held accountable for that failure.

Below is a summary of the provisions of the BOI rules.  It is not intended to be relied upon for your filing and does not represent legal advice.  We recommend that you contact your attorney regarding your filing requirements and visit the websites cited below for additional information.  Please be sure to thoroughly research your situation and obtain legal counsel.

• Key filing deadlines:
  • Entities formed before January 1, 2024, will have until January 1, 2025, to file their initial report. 
  • Entities formed during 2024 have 90 days to file their initial report after receiving actual or public notice that the company’s creation or registration is effective, whichever is earlier.
  • Entities formed after December 31, 2024, will only have 30 days to file their initial report.
• The report is a one-time filing, but the filing needs to be updated within 90 days, or 30 days after 2024, for things like an address change, registering a new business name, change in ownership, change or addition of a beneficial owner, when a new driver’s license is obtained with a changed address, etc. 
• A beneficial owner is anyone who exercises substantial control over the entity, such as corporate officers like the CEO or CFO, important decision makers, or individuals who own at least 25% of the entity. There is no penalty for over-reporting of beneficial owners.

Note that a “beneficial owner” does not need to be an owner at all, but just a senior employee in a management capacity.

In addition to the company information, beneficial owners are required to provide their personal home address and personal identification as part of the BOI submission.  Your personal ID for this purpose is a copy of your passport or driver’s license.  These documents are required to be uploaded to FinCEN for all persons who are required to submit for BOI purposes.  In lieu of submitting your personal ID for each company you are associated with, many experts are recommending that people obtain a FinCEN Identifier.  An individual who obtains a FinCEN Identifier can supply that number to the company in lieu of providing his personal identification, but then it becomes the obligation of the individual to update FinCEN if his identification changes.

We know this is burdensome to a business and the beneficial owners to keep up on and it will take vigilance to keep the reporting current.

Bowman & Company, LLP will not be filing these reports on behalf of our clients due to the strict requirements on information reporting.  We are advising you of the importance of the matter and urge your prompt attention to it.

Below is a list of recommended sites for more information on Beneficial Ownership Information filing requirements and how to fill out your application if it is required:

• FinCEN BOI Website:

https://www.fincen.gov/boi

• Frequently Asked Questions:

https://www.fincen.gov/boi-faqs#B_1

• Location to file:

https://boiefiling.fincen.gov

• Create a FinCEN ID (if desired):

https://fincenid.fincen.gov/landing

• Small Entity Compliance Guide

https://www.fincen.gov/boi/small-entity-compliance-guide

If your organization is subject to this reporting, we encourage you to act promptly to avoid potential penalties. Should you have any questions or need further clarification, please reach out to your legal advisor to determine how the CTA impacts your specific situation.

We hope this reminder assists you in taking the necessary steps toward compliance.

Sincerely,

Bowman & Company, LLP

We are proud to announce Michael Anselmo, CPA, joined Bowman and Company, LLP as a Senior Manager in the Tax Department on September 16^th, 2024.

Michael is a Certified Public Accountant with over 17- years of experience in public accounting. 

Prior to joining Bowman, Michael was working as a Senior Tax Manager with a local Stockton, Ca Firm, Iacopi and Lenz Accounting.

Michael brings a great deal of experience in the areas of tax preparation and review, estate planning, developing policies and procedures and leadership of others.  In addition to his CPA, Michael also has a Bachelor of Science in Business from the University of Phoenix and is working on a Masters in Taxation from Golden Gate University.

Let’s give Michael a warm Bowman Welcome!!!

Michael, welcome to the team. We wish you great success in your new role.