You may have heard of the “nanny tax.” But if you don’t employ a nanny, you may think it doesn’t apply to you. Check again. Hiring a housekeeper, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations.

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. However, you may choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

Threshold increasing in 2024

In 2023, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,600 or more (excluding the value of food and lodging). If you reach the threshold, all the wages (not just the excess) are subject to FICA. In 2024, the threshold will increase to $2,700.

However, if a nanny is under age 18 and child care isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time babysitter who is a student, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Reporting and paying 

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As a household worker employer, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, you include your employer identification number (EIN), which is not the same as your Social Security number. You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for your business. And you use your sole proprietorship EIN to report the taxes.

Keep meticulous records 

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.

If you need assistance or have questions about how to comply with these employment tax requirements, contact us.

© 2023

If you’re concerned about your 2023 tax bill, there may still be time to reduce it. Here are four quick strategies that may help you trim your taxes before year end.

1. Accelerate deductions and/or defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2024 payment in December, you can deduct the interest portion on your 2023 tax return (assuming you itemize).

Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay sending invoices until late in December to postpone the revenue to 2024.

You shouldn’t follow this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.

2. Take full advantage of retirement contributions. Federal tax law encourages individual taxpayers to make the allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.

For 2023, you generally can contribute as much as $22,500 to 401(k)s and $6,500 to traditional IRAs. Self-employed individuals can contribute up to 25% of net income (but no more than $66,000) to a SEP IRA.

3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.

If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.

4. Donate to charity using investments. If you itemize deductions and want to donate to IRS-approved public charities, you can simply write a check or use a credit card. Or you can use your taxable investment portfolio of stock and/or mutual funds. Consider making charitable contributions according to these tax-smart principles:

• Underperforming stocks. Sell taxable investments that are worth less than they cost and book the resulting tax-saving capital loss. Then, give the sales proceeds to a charity and claim the resulting tax-saving charitable write-off. This strategy delivers a double tax benefit: You receive tax-saving capital losses plus a tax-saving itemized deduction for your charitable donations.
• Appreciated stocks. For taxable investments that are currently worth more than they cost, you can donate the stock directly to a charity. Contributions of publicly traded shares that you’ve owned for over a year result in a charitable deduction equal to the current market value of the shares at the time of the gift. Plus, when you donate appreciated investments, you escape any capital gains taxes on those shares. This strategy also provides a double tax benefit: You avoid capital gains tax and you get a tax-saving itemized deduction for charitable contributions.

Time is running out

The ideas described above are only a few of the strategies that still may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2023.

© 2023

If you have a tax-saving flexible spending account (FSA) with your employer to help pay for health or dependent care expenses, there’s an important date coming up. You may have to use the money in the account by year-end or you’ll lose it (unless your employer has a grace period).

As the end of 2023 gets closer, here are some rules and reminders to keep in mind.

Health FSA 

A pre-tax contribution of $3,050 to a health FSA is permitted in 2023. This amount will be increasing to $3,200 in 2024. You save taxes in these accounts because you use pre-tax dollars to pay for medical expenses that might not be deductible. For example, expenses won’t be deductible if you don’t itemize deductions on your tax return. Even if you do itemize, medical expenses must exceed a certain percentage of your adjusted gross income in order to be deductible. Additionally, the amounts that you contribute to a health FSA aren’t subject to FICA taxes.

Your employer’s plan should have a list of qualifying items and any documentation from a medical provider that may be needed to get reimbursed for these expenses.

FSAs generally have a “use-it-or-lose-it” rule, which means you must incur qualifying medical expenditures by the last day of the plan year (December 31 for a calendar year plan) — unless the plan allows an optional grace period. A grace period can’t extend beyond the 15th day of the third month following the close of the plan year (March 15 for a calendar year plan).

What if you don’t spend the money before the last day allowed? You forfeit it.

Take a look at your year-to-date expenditures now. It will show you what you still need to spend. What are some ways to use up the money? Before year end (or the extended date, if permitted), schedule certain elective medical procedures, visit the dentist or buy new eyeglasses.

Dependent care FSA 

Some employers also allow employees to set aside funds on a pre-tax basis in dependent care FSAs. A $5,000 maximum annual contribution is permitted ($2,500 for a married couple filing separately).

FSAs are for:

• A child who qualifies as your dependent and who is under age 13, or
• A dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the tax year.

Like health FSAs, dependent care FSAs are subject to a use-it-or-lose-it rule, but the grace period relief may apply. Therefore, it’s a good time to review your expenses to date.

Other rules and exceptions may apply. Your HR department can answer any questions about your specific plan. Contact us with any questions you have about the tax implications.

© 2023

The IRS recently announced various inflation-adjusted federal income tax amounts. Here’s a rundown of the amounts that are most likely to affect small businesses and their owners.

Rates and brackets

If you run your business as a sole proprietorship or pass-through business entity (LLC, partnership or S corporation), the business’s net ordinary income from operations is passed through to you and reported on your personal Form 1040. You then pay the individual federal income tax rates on that income.

Here are the 2024 inflation adjusted bracket thresholds.

• 10% tax bracket: $0 to $11,600 for singles, $0 to $23,200 for married joint filers, $0 to $16,550 for heads of household;
• Beginning of 12% bracket: $11,601 for singles, $23,201 for married joint filers, $16,551 for heads of household;
• Beginning of 22% bracket: $47,151 for singles, $94,301 for married joint filers, $63,101 for heads of household;
• Beginning of 24% bracket: $100,526 for singles, $201,051 for married joint filers, $100,501 for heads of household;
• Beginning of 32% bracket: $191,951 for singles, $383,901 for married joint filers, $191,951 for heads of household;
• Beginning of 35% bracket: $243,726 for singles, $487,451 for married joint filers and $243,701 for heads of household; and
• Beginning of 37% bracket: $609,351 for singles, $731,201 for married joint filers and $609,351 for heads of household.

Key Point: These thresholds are about 5.4% higher than for 2023. That means that, other things being equal, you can have about 5.4% more ordinary business income next year without owing more to Uncle Sam.

Section 1231 gains and qualified dividends

If you run your business as a sole proprietorship or a pass-through entity, and the business sells assets, you may have Section 1231 gains that passed through to you to be included on your personal Form 1040. Sec. 1231 gains are long-term gains from selling business assets that were held for more than one year, and they’re generally taxed at the same lower federal rates that apply to garden-variety long-term capital gains (LTCGs), such as stock sale gains. Here are the 2024 inflation-adjusted bracket thresholds that will generally apply to Sec. 1231 gains recognized by individual taxpayers.

• 0% tax bracket: $0 to $47,025 for singles, $0 to $94,050 for married joint filers and $0 to $63,000 for heads of household;
• Beginning of 15% bracket: $47,026 for singles, $94,051 for joint filers, $63,001 for heads of household; and
• Beginning of 20% bracket: $518,901 for singles, $583,751 for married joint filers and $551,351 for heads of household.

If you run your business as a C corporation, and the company pays you qualified dividends, they’re taxed at the lower LTCG rates. So, the 2024 rate brackets for qualified dividends paid to individual taxpayers will be the same as above.

Self-employment tax

If you operate your business as a sole proprietorship or as a pass-through entity, you probably have net self-employment (SE) income that must be reported on your personal Form 1040 to calculate your SE tax liability. For 2024, the maximum 15.3% SE tax rate will apply to the first $166,800 of net SE income (up from $160,200 for 2023).

Section 179 deductions

For tax years beginning in 2024, small businesses can potentially write off up to $1,220,000 of qualified asset additions in year one (up from $1,160,000 for 2023). However, the maximum deduction amount begins to be phased out once qualified asset additions exceed $3,050,000 (up from $2,890,000 for 2023). Various limitations apply to Sec. 179 deductions.

Side Note: Under the first-year bonus depreciation break, you can deduct up to 60% of the cost of qualified asset additions placed in service in calendar year 2024. For 2023, you could deduct up to 80%.

Just the beginning

These are only the 2024 inflation-adjusted amounts that are most likely to affect small businesses and their owners. There are others that may potentially apply, including: limits on qualified business income deductions and business loss deductions, income limits on various favorable exceptions such as the right to use cash-method accounting, limits on how much you can contribute to your self-employed or company-sponsored tax-favored retirement account, limits on tax-free transportation allowances for employees, and limits on tax-free adoption assistance for employees. Contact us with questions about your situation.

© 2023