Consider hiring your spouse as your company?s first employee.
For many taxpayers beginning a new business, there are always concerns and questions about decisions to be made.? How to finance the new endeavor, where to locate the office, and who to choose as the right advisors such as a CPA/attorney/IT consultant, etc.?? And being a new business owner, as you begin the process of moving forward with your new business, often your spouse is your initial ?most trusted advisor? and ?silent partner? with regard to the numerous business decisions you will face.
As the business grows, adding your spouse onto the company payroll also proves to be both a financial and tax advantageous move for a number of reasons; especially, if your spouse is not employed elsewhere. ?The following examples provide a list of options for savvy small business owners to consider and to easily implement.
- You can include your spouse in the company retirement plan, allowing additional retirement funding for the family while reducing your company?s taxable net income and resulting income tax.
- Perhaps your spouse has been out for the workforce for a number of years, while being the principal caregiver to your children. Hiring your spouse as an employee may help him/her to reach the required 40 quarters of employment in order to qualify for social security benefits later in life.
- The cost of your dining out together may become a tax-deductible expense. If business issues are discussed while dining out, keep a record of the business topics being discussed and you could include the dining expense with your spouse at a restaurant as a deductible meal expense.
- Business travel may also become a deductible expense for your spouse. If you travel for a business-related event, typically the cost of your spouse joining you would not be tax deductible.? However, if your spouse travels with you as a true employee of your company and there is a bona fide business purpose to accompany you, then your spouse?s meal and travel costs would now become a deductible expense of your company in addition to your travel and meal costs.
- If you are a Schedule C filer (sole proprietor or single-member LLC), your spouse?s wages are not subject to federal or state unemployment payroll taxes typically paid by the company.
- If you are a Schedule C filer (sole proprietor or single-member LLC), have your spouse be the subscriber for the family health insurance plan offered by the company as an employee benefit. Although a self-employed Schedule C business owner is allowed an income tax deduction for health insurance premium payments, the premium payments do not reduce the self-employment taxes owed by the taxpayer.? However, if the plan subscriber is the spouse and the spouse qualifies as an employee of the business, then the health insurance premium payments made on the spouse?s behalf will reduce the business owner?s self-employment taxes.
A few items to note.? You should plan to pay your spouse ratable throughout the year and should not write one large check for the entire year near the end of the year.? You will need to issue a W-2 to your spouse for the wages paid throughout the year.? And although employing your spouse may increase the amount of overall social security taxes paid as a family and may also necessitate the hiring of a payroll service provider by your company, these additional costs typically will be outweighed by the tax and financial benefits noted above.
by Andrew D. Schwartz CPA
?One of the most interesting wrinkles of the Tax Cuts and Jobs Act was the creation of Opportunity Zones.
According to the IRS, Opportunity Zones are particular distressed communities throughout the country in need of economic revitalization. Under a nomination process completed in June 2018, 8,761 communities?in all 50 states, the District of Columbia, and five U.S. territories were designated as qualified Opportunity Zones. Investing in an Opportunity Zone can provide substantial tax benefits to an investor, namely deferral and maybe even exclusion of the capital gains tax.
Investors may defer tax on almost any capital gain up to Dec. 31, 2026 by making an appropriate investment in a zone and meeting other requirements.
Generally, to qualify for deferral, the amount of a capital gain to be deferred must be invested within 180 days of the gain being realized into a Qualified Opportunity Fund (QOF). The QOF must be an entity treated as a partnership or corporation for Federal tax purposes and organized in any of the 50 states, D.C. or five U.S. territories for the purpose of investing in qualified opportunity zone property.
The QOF must hold at least 90 percent of its assets in qualified Opportunity Zone property. Investors who hold their QOF investment for at least 10 years may qualify to increase their basis to the fair market value of the investment on the date it is sold, which would effectively eliminate any capital gains tax on the appreciation of the QOF. Plus, anyone who holds the QOF investment for 7 years will exclude 15% of the original gain from being taxed. Holding the QOF for 5 years yields a 10% exclusion.
Check out the IRS’ Opportunity Zone FAQs at:? https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
by?Andrew D. Schwartz CPA
Last month, my firm hosted a live webinar in our Financial Boot Camp series titled?”How to FIRE: Strategies for Becoming Financially Independent and Retiring Early””?which was recorded and is now available online.
According to the presenter Alex Oliver from First National Corporation:
?With the stock market on a record long run, the FIRE movement to become Financially Independent and Retire Early has really picked up steam. Forums all over Facebook, Reddit, and other corners of the internet outline the dream: save enough so that you can live off of 4% withdrawal rates for the rest of your life. Many high income, high saving couples are able to retire as early as their 40’s with these principles! However, these financial plans need to be radically different than the traditional models. In this webinar, we will discuss what it means to FIRE, strategies to become financially independent, and areas for consideration that the online forums don’t always spend enough time talking about.?
Target Audience: Professionals in their working years who hope to able to retire comfortably when they are ready to retire
Please view this informative 51-minute presentation at: https://www.youtube.com/watch?v=7t-jwl3oLzQ&feature=youtu.be
by?Andrew D. Schwartz CPA
Most years, the government bumps up the maximum Social Security taxes that you can pay. ?For 2020, the maximum wage base jumps to $137,700, an increase of $4,800, or 3.6%, over the max of $132,900 that was in place for 2019.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $8,537.? This is $297 higher than the 2019 max of $8,240.
How is this increase calculated?? According to the Social Security Administration, the annual change is based on the National Wage Index.
Higher Medicare Taxes Due To The Affordable Care Act:
On June 28, 2012, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act, including the increase to the Medicare taxes high-income taxpayers will pay starting in 2013.
Starting in 2013, the employee portion of the Medicare tax jumps from the current rate of 1.45% to 2.35% on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer will continue to match their employees’ Medicare taxes at a rate of 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers. This tax is reported on the Form 8959.
For example, if you’re single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013 and beyond.
To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income (except for when you rent office space you own to your practice) beginning in 2013. You will pay this tax in addition to any federal and state income taxes due on this income. This tax is reported on the Form 8960.
Calculating the Self-employment Tax:
If you’re self-employed and earn more than $400 in net profit from your business, you’re subject to social security and Medicare taxes as well. Known as the “self-employment tax”, you’ll need to complete a Schedule SE to calculate this tax, and then report the amount due on your Form 1040.
The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee’s portion and the employer’s portion of both taxes.? Remember, when you work as an employee, your employer matches the Social Security and Medicare taxes withheld from your pay.
Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes.? If you earn income as an employee and as an independent contractor, and your combined income exceeds $132,900 in 2019, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you’ll end up overpaying your self-employment taxes.
Do You Work For More Than One Employer in 2019 and Earn More Than $132,900?
For 2019, each of your employers withholds social security taxes from the first $132,900 that you earn from them.? If you work for more than one employer and your total salary from all sources exceeds that threshold, you’ll have excess social security taxes withheld. Make sure to claim a credit for these excess taxes on your 1040 as additional federal taxes paid in.
Let’s say you work for two employers and earn $100,000 from each employer. Employer #1 withholds $6,200 in social security taxes ($100,000 * 6.2%). Employer #2 also withholds $6,200 in social security taxes – for a total of $12,400 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2019 is limited to $8,240, the excess of $4,160 counts as additional federal income taxes paid in by you.
|A) Social security taxes withheld by Employer #1
|B) Social security taxes withheld by Employer #2
|C) Total social security taxes withheld during the year (A+B)
|D) Social security max for 2019
|E) Excess social security taxes withheld (C-D)
A great place to find out more about your social security taxes and projected benefits is at the Social Security Administration’s website located at www.ssa.gov, or learn about what’s new for the 2020 Social Security Changes.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2020 wage base max: $137,700
2019 wage base max: $132,900
2018 wage base max: $128,400
2017 wage base max: $127,200
2015 & 2016 wage base max: $118,500
2014 wage base max: $117,000
2013 wage base max: $113,700
2012 wage base max: $110,100
2009, 2010 & 2011 wage base max: $106,800
2008 wage base max: $102,000
2007 wage base max: $97,500
2006 wage base max: $94,200
2005 wage base max: $90,000
2004 wage base max: $87,900
2003 wage base max: $87,000
2002 wage base max: $84,900
2001 wage base max: $80,400
2000 wage base max: $76,200
1999 wage base max: $72,600