Benefits of small business owners of hiring family members Part II:

Consider adding your teenage children onto your company payroll.

If you are self-employed and have children that are old enough to work, consider adding them onto your company payroll.? There are several tax benefits and opportunities for income shifting within the family when children become employees of your small business.

  • Under the recently passed Tax Cuts and Job Act (TCJA) of 2017 the new standard deduction has been increased to $12,200 for individual filers in 2019. This increase allows employers to pay their children $12,200 in wages free of income taxes. ?And the payment of wages to your children from your business is an allowed tax deduction reducing the business owner?s taxable income and resulting taxes.
  • The wages paid to your child can be contributed to a Roth IRA. Wages are considered earned income for IRA contribution qualification purposes.? A taxpayer can contribute annually to a Roth IRA subject to earned income limits.? For 2019, the maximum IRA contribution is the lesser of the child?s earned income or $6,000.? Starting retirement planning at such a young age will help introduce your child to good financial habits.? ?Additionally, the invested retirement funds have the potential to grow immensely over your child?s lifetime.
  • The wages paid by the company to their children can be used to pay education expenses. Thus, the small business owner would indirectly be getting a tax deduction for payments to their children?s colleges and private schools.
  • You can include your children in the company retirement plan, allowing additional retirement funding for the family while reducing your company?s taxable net income and resulting income tax.
  • If your business is set up as a Schedule C (sole proprietor or single-member LLC), the wages paid to your children that are under age 18 are not subject to social security or Medicare taxes. This payroll tax savings for the family can be as high as 15.3% of the wages paid to your children, in addition to the income taxes saved.? Additionally, if your child is under age 21, your child is exempt from federal and state unemployment taxes typically paid by the company.

A few considerations when paying your children.? Document the work being performed by your children and maintain a log of the hours worked by your children each pay period.? Be sure the hourly rate paid to your children is fair and not overly excessive for the work they are hired to do.? And pay you children at the same time that you pay other employees and on the same pay cycle. ?Plus, you will need to issue a W-2 to each employed child as well. If your business is ever audited by the IRS, the IRS will want to validate that the work performed and hours worked by your children for the period under audit are accurate and that the payments to your children truly qualify as a valid business expense.


Gifting Rules

Does part of your family’s financial planning include gifting? If so, here are a dozen tips to follow:

  1. Annual gift exclusion is $15,000 per year by an individual to another individual, or
  2. Annual gift exclusion is $30,000 per year gifted jointly from a married couple to another individual (assuming the gift is joint property). However, a Form 709 is required if the gift is in excess of $15,000 and only from assets belonging to one spouse (typically gift-splitting would be elected on the Form 709 to take advantage of the $15,000 annual exclusion for both spouses).
  3. Gifts in excess of the annual exclusion amounts noted above are reported by filing a Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return. The giver is responsible for filing the tax return.
  4. The receipt of a gift from another is not taxable income to be reported by the receiver of the gift.
  5. Gifting is tracked and reported on a calendar year (and not through April 15 of the following year as IRA contributions are tracked).
  6. A gift in the form of a check payment is not considered a gift until the check is cashed and clears the bank. Be careful with gifts made near the end of the year ? i.e., if a check is given to your grandchild on December 31, 2019 but not deposited into the child?s bank account until January 2, 2020, then the gift would be considered a calendar year 2020 gift.
  7. Gifts are not a charitable deduction.
  8. For gift tax purposes, payments made directly to an educational institution or medical facility for another person?s respective tuition or medical expenses are not reportable gifts even if the amounts exceed the annual gift exclusion amount.
  9. Gifts to a political organization in excess of the exclusion amount are not reportable gifts (nor are they deductible charitable gifts).
  10. Individuals are allowed to gift into a 529 plan $75,000 ($150,000 jointly) in a calendar year ? being a frontloaded gift of 5 years ? and spread the gift over the following 4 years. The filing of a gift tax return is required to report this gift, but will fall under the annual exclusion threshold.? Additional gifts to such individuals over the next 4 years would be considered a reportable gift.
  11. Non-cash gifts are gifted at the fair market value as of the date of the gift, not the giver?s basis. (Be aware of the gifting rules when the property is eventually sold by the receiver of such gifts.)
  12. If an individual receives a gift (or multiple gifts in a calendar year) from a nonresident alien or foreign estate and the total of the gifts received from that foreign individual or entity exceeds $100,000 in a calendar year, the individual/receiver is required to file Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.



IRS Gets Serious About Cryptocurrency

Have you been dabbling in cryptocurrency trading? The IRS is stepping up its efforts to provide guidance to taxpayers around cryptocurrency transactions and has enacted some new compliance measures.

On 2019 tax returns, the IRS will require taxpayers to check off a box if they engaged in any virtual currency transactions during the year. The question will appear on the Schedule 1, as follows: ?At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency??

The IRS has confirmed that virtual currency is to be treated as a capital asset if it can be converted to cash.?This means that capital gains rules apply to any gains or losses on the sale or transfer of virtual currency, and should be reported on a Schedule D.

Digital currency exchanges like Coinbase are now required to issue a 1099-K if there are at least 200 transactions with a total value equal to or exceeding $20,000 or gross proceeds that exceed the state?s threshold, which for most states is $20,000.? These are high thresholds, so the IRS is heavily relying on taxpayers? complying on their own.? The gross proceeds threshold for MA residents, however, is much lower?at only $600.

The IRS has published a complete list of frequently asked questions regarding cryptocurrency at:


New SSN Scam

Scammers are at it again, this time calling up taxpayers, impersonating the IRS, and threatening to suspend or cancel social security numbers. According to the IRS, these calls can come in as ?robocall? voicemails, requesting people to call back.

The scammers may mention overdue taxes. If you receive a call threatening to suspend your SSN for an unpaid tax bill, hang up and do not give out any sensitive information over the phone.

There are several telltale signs of this scam. The IRS and its?authorized private collection agencies will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, iTunes gift card or wire transfer. The IRS does not use these methods for tax payments.
  • Ask a taxpayer to make a payment to a person or organization other than the U.S. Treasury.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.


Review of the 2019 Rules for Itemizing Your Deductions

Medical Expenses

For 2019, medical expenses are deductible to the extent they exceed 10% of your Adjusted Gross income (AGI).

The IRS also allows a deduction of 20 cents/medical miles driven so don?t forget to track your medical mileage.

Planning Opportunity:? Check out IRS Publication 502, Medical and Dental Expenses.? If your allowable medical expenses will exceed 7.5% of your AGI this year, then paying your outstanding medical and dental bills prior to 12/31/18 will increase the allowable deduction.? Same goes for pre-paying for medical expenses even if the services won?t be provided until next year.

Home Mortgage Interest

Big changes with the deductibility of home mortgage interest:

  • Interest on a total of up to $1 million of pre-12/14/17 outstanding debt on your primary residence and a second home is fully deductible.
  • New mortgages debt (excluding refinancing of pre-12/14/17 mortgages) taken after 12/14/17 limited to $750k for this deduction.
  • Interest on home equity debt used to improve the residence securing the debt is still deductible subject to the $1 million and $750k limits above.
  • All other home equity loans no longer qualify for the mortgage interest deduction.

Planning Opportunity:? Read the IRS? explanation of the new rules for deducting mortgage interest and home equity loan interest and consider refinancing outstanding debt accordingly, but only if the current interest rates permit. You might also consider claiming the home office deduction to write off a portion of your mortgage interest and real estate taxes that are now non-deductible under the new rules.

Charitable Donations

The amount of charitable donations you can make and deduct each year are 60% of your AGI.

Planning Opportunity:??Consider donating appreciated securities to a charity since you don?t pay taxes on the appreciation but can still write off the full value of the securities donated.? You will claim the deduction based on the asset?s FMV.

You might also consider setting up and funding a Donor Advised Fund to frontload the tax deduction on your donations while still allowing you to disburse the contributions to the charities over a number of years.

Miscellaneous Itemized Deductions

Investment management fees, tax prep fees, and unreimbursed employee business expenses are no longer deductible.

Planning Opportunity:? Consider claiming these expenses if possible against your business income reported on your Schedule C, rental income on the Schedule E, page 1, or partnership income on Schedule E, page 2.

Casualty Losses

Non-business casualty losses are now only deductible if the loss occurs in a Presidentially declared disaster area. Personal casualty losses and theft losses are no longer deducible as of 1/1/18.

Tougher To Itemize in 2019

With a $24.4k standard deduction and state and local taxes (SALT), including real estate taxes, limited to just $10k annually, married couples without a large mortgage might find themselves struggling to itemize their deductions under the new tax rules. Unmarried individuals can also deduct $10k in SALT taxes but have a standard deduction of just $12.2k, so will have a much easier time to itemize just by owning a home, having significant medical expenses, or donating a few thousand dollars to charity each year.

Planning Opportunity:??Married couples might save some taxes by bunching their deductions every other year.

IRS Announces Higher Retirement Plan Limits for 2020

Contributing to a retirement plan is one of the best tax shelters available to you during your working years.? Recently, the IRS announced that many of the retirement savings limits will increase for 2020.

Employer Sponsored Plans

Most working professionals have access to a 401(k) plan or a 403(b) plan at work.? Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred.? For 2020, you can contribute up to $19,500 into a 401(k) or 403(b) plan through salary deferrals, up from $19,000 in 2019.

Looking to set your 2020 monthly budget?? To max out your 401(k) or 403(b) salary deferrals next year, instruct your employer to withhold $1,625 per month from your pay.

Catch-up contributions increase by $500 to $6,500 for 2020.? Anyone 50 or older by December 31, 2020 can contribute an extra $6,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $26,000, or $2,166.67 per month.

Many smaller employers offer their staff access to SIMPLE/IRAs instead.? SIMPLE’s work just like 401(k) plans, which means it’s up to you to fund the bulk of this retirement savings account through salary deferrals.? For 2020, the maximum contribution into your SIMPLE as salary deferrals increases by $500 to $13,500.? Anyone 50 or older by December 31st can sock away an additional $3,000 in 2020, for a total annual salary deferral of $16,500, up $500 from 2019.? Your employer will generally make matching contributions into your account of up to 3% of your salary.

Are you self-employed?? Each year, you can contribute up to 20% of your net self-employment income into a SEP IRA.? The maximum contribution for 2020 is $57,000, or $4,750 per month, up from $56,000 in 2019.

Solo 401(k)’s are an attractive alternative to many sole proprietors and business owners with no full time employees who work more than 1,000 hours per year besides a spouse.? If you don’t have access to a 401(k) or 403(b) plan through another employer, the Solo 401(k) plan makes it easier for you to hit next year’s max of $57,000.? If you’re 50 or older, your maximum contribution into a Solo 401(k) jumps to $63,500, or $5,291.67 per month.? You have until December 31st to set up a Solo 401k for 2019.

The IRS also announced that the maximum amount of wages and net self-employment income that you can use to determine certain retirement plan contributions has increased to $285,000 for 2020, up from $280,000? in 2019.


Don’t forget about IRAs.? Even if you’re covered under a retirement plan at work, you and your spouse can each contribute up to $6,000, or $500 per month, into a traditional IRA or Roth IRA (subject to income limitations) next year, as long as your combined wages and net self-employment income exceeds the total amount contributed.? Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $7,000, or $583.33 per month.

Even though the IRA contribution limits did not increase for 2020, there is a little good news for people looking to contribute to a Roth IRA .? The amount you can earn and still contribute to a Roth has increased by $2,000 for single individuals and $3,000 for married couples, as follows:

Single Individuals Married Couples
Phase-out begins $124,000 $196,000
Phase-out ends $139,000 $206,000

If your income is too high for a Roth, don’t forget that the rules changed a few years back, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA.? This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts.

And if you’re married and your spouse isn’t covered under either an employer sponsored or self-employed retirement plan during the year, the 2020 phase-out range for your spouse making a deductible IRA contribution has increased to $196,000 – $206,000, which is identical to the Roth IRA phase-out limits.

Re-Set Your 2020 Budget

Most people won’t be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month.? With 2019 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2020.

2020 Maximum Retirement Account Contributions:

Retirement Savings Option
Under the age
of 50
50 or older by December 31st

401(k) or 403(b) deferrals

SIMPLE IRA deferrals


Solo 401(k)
$63,500 or

IRA or Roth IRA