Don’t Miss Out on Retirement Planning If You’re Self-Employed

Many of our clients are self-employed; most commonly working in their own private practice, providing consulting services or holding positions as locum tenens.   And often, this group of self-employed taxpayers have no employees.  For our small business self-employed taxpayers, the two retirement planning options that typically work best are either a SEP-IRA or a solo 401(k) plan.  The two plans are similar but have key differences.

  • SEP-IRA. The maximum annual contribution to this plan is approximately 20% of net Schedule C income or 25% of W-2 wages for S-Corps owners.  Capped at $69,000 for 2024.
  • Solo 401(k). This plan works similarly to a SEP-IRA but also has a “salary deferral” component (plus “catch-up” provision for taxpayers age 50 or older).  The maximum annual employer contribution portion to this plan is approximately 20% of net Schedule C income or 25% of W-2 wages for S-Corp owners – the same allowed funding amounts as a SEP-IRA.  However, taxpayers can additionally fund a “salary deferral” portion to the plan that is maxed at the lesser of the owners’ net Schedule C income or W-2 wages for S-Corp owners or $23,000 ($30,500 including $7,500 catch-up contribution) for 2024.  Note that this salary deferral limit is also limited by salary deferral amounts additionally funded at other employer retirement plans in a year.  The maximum combined employee deferral and employer contribution limit for 2024 is $69,000 ($76,500 including the $7,500 catch-up contribution) for 2024.

For taxpayers considering a SEP-IRA, Solo 401(k) or other retirement plan to fund relevant to their business income, we recommend discussing these options with your tax advisor to review additional features of these plans to help you decide which choice may be best for your specific business.

 

Key Tax Deductions for the Self-Employed

Two key tax deductions taxpayers shouldn’t overlook when they are self-employed: automobile deductions and home office deductions.

One major tax advantage that self-employed individuals have over W-2 employees is that self-employed taxpayers can deduct their business expenses incurred in the course of operating their business.  W-2 employees cannot.  As of the passing of the Tax Cuts and Jobs Act of 2017 which became effective beginning in 2018, W-2 employees were no longer allowed to deduct their out-of-pocket business expenses that were not reimbursed by their employer.   Thus, while both self-employed workers and W-2 employees may both incur similar business expenses, only self-employed individuals can claim their business expenses as tax deductions on their tax return.  Two such expenses available for self-employed taxpayers to claim as business deductions are the home office deduction and the auto deduction.

Claiming a home office deduction:

When taxpayers are self-employed, they may qualify to claim a portion of their home as a business deduction.  To qualify as business use of the home, the specified business use space in the home must be utilized for business purposes both regularly and exclusively.  Generally, taxpayers will claim a specific room in their house as a dedicated home office space, but a section of a room will qualify as well.  Plus, the business use of the home would qualify whether the house is owned or rented by the taxpayer – home ownership is not a requirement to qualify for this deduction.  Meeting patients or clients (in person and/or virtually) as well as performing administrative functions for your business all qualify as business use of the designated home office space.  Taxpayers can even claim a qualified home office while having a second office for their business that they rent or own elsewhere.

For taxpayers claiming a business deduction for a home office, two different options are available.

  1. The less complicated option is to claim the simplified method. For this home office deduction method, the allowed deduction is calculated by multiplying the home office square footage by $5 per square foot and capped at 300 square feet (or a tax deduction of $1,500).
  2. The second method is the business use percentage method and requires the tracking of actual home expenses over the year and accurate record-keeping by the taxpayer. Taxpayers using this method are allowed to claim a percentage of the actual costs incurred related to the area of the business use portion of the home.  Using this method, the taxpayer will need to keep records of all the costs of maintaining the residence over the year.  Such costs generally include amounts paid for mortgage interest, real estate taxes, homeowners insurance, repair & maintenance costs, and utilities.  Condo fees for condo unit owners and rent expense for renters are also allowed expenses in determining the home office deduction.  One additional allowed deduction for homeowners in determining the home office deduction is depreciation on the home (amortizing the original cost of the home based upon IRS published tables).    These total costs are allowed to be deducted based upon the business use percentage (square footage of the home office space divided by square footage of the entire home).

Typically, the business use percentage method will result in a larger home office deduction than the simplified method (being capped at just $1,500).  However, the percentage method requires more work because taxpayers must track the home’s expenses over the course of the year and maintain those documents and records in their files.

Claiming an automobile deduction: 

Like the home office deduction, taxpayers are allowed to choose between two different options when claiming the auto deduction on their tax return as a business expense.

  1. The simpler method is to claim the standard mileage rate.  This method requires the taxpayer to track their business miles driven in a year. The allowed deduction is calculated by multiplying the number of business miles driven in the year by the IRS published standard mileage rate for the year (67 cents per mile for 2024).
  2. The second method, known as the actual expense method, is a bit more involved and includes additional record-keeping by the taxpayer. When taxpayers use this alternative method, they are allowed to claim a percentage of the actual costs incurred related to using the automobile for business purposes in the year.  Using this method, the taxpayer will need to keep records of all the costs of maintaining the car for the year (or period of time that auto qualified for business use in the calendar year).  These costs generally include amounts paid for fuel, auto insurance, automobile excise tax and registration fees, plus repair & maintenance costs.  For taxpayers that own their car, a deduction is allowed for depreciation of the vehicle (amortizing the original purchase price of the automobile over several years based upon IRS tables).  And for taxpayers that lease their vehicles, the lease payments qualify as allowed automobile costs.  Using this method, taxpayers must 1.) track their driving miles throughout the year for business related purposes and 2.) track the total (business and personal) miles driven in the year (or period of the year used for business purposes).  Under this method, the taxpayer is allowed to deduct all of the costs of the automobile incurred in the year (or portion of the year) prorated by the ratio of business miles driven divided by total miles driven in the year (or portion of the year); thus, the total auto costs are allowed based upon the percentage of business use.

When using either auto deduction method, taxpayers should maintain a log of business miles driven and total miles (business and personal) driven in the year (or portion of the year).  If ever audited by the IRS, the IRS auditor will request to see a driving log to substantiate the miles claimed as business miles on the tax return.  When determining qualified business miles, “deductible” miles are those driving miles driven from one workplace to a second workplace in a day.  A taxpayer’s commute, first trip of the day – home to office and last trip of the day – office to home, does not qualify as business miles but are considered non-deductible personal miles driven.

A rough rule of thumb regarding the two options available to claim for the auto deduction, a larger business deduction will generally result from the percentage of actual expense method when the total miles driven in a year are low and the business driving miles are a high percent of those total miles.  When the amount of business miles driven in the year total a significant amount, then the standard mileage rate is generally more tax advantageous.

There is one additional tax benefit when claiming both a home office deduction and an auto deduction on a tax return.  For taxpayer’s that qualify to claim a home office as a regular workplace for tax purposes, the drive from the home office to another worksite in a day as well as the drive from another workplace to your home office would qualify as deductible business miles.  In this scenario, although the driving miles would be to and from the individual’s home, generally considered a commute for most taxpayers, these driving miles would not be considered commuting (personal) miles if a home office deduction is also claimed on a tax return because the home office would qualify as a worksite; generally, the first and last worksite of the day.

Solo 401(k) Filing Reminder

For self-employed individuals and business entities that have a Solo 401(k) as their company retirement plan, don’t forget to file with the IRS your company Form 5500-EZ if the plan’s asset value is $250,000 or greater at the end of the 2023 calendar year.  If at that value or higher, filing a Form 5500-EZ, Annual Return of A One-Participant Retirement Plan, is required.  The Form 5500-EZ tax return filing due date is July 31, 2024 for a solo 401(k) plan with a calendar year-end of December 31, 2023.  Missing this due date and filing late results in significant penalties – $250 per day, so be sure to check the Plan’s Asset Value as of December 31, 2023 in order to be in filing compliance!!

However, if your Form 5500-EZ filing requirement has been missed for past years, the IRS will allow retirement plans to get into compliance and will generally waive prior year penalties that would be assessed for the late filings by applying for the Delinquent Filer Voluntary Compliance Program (DFVCP).  Prior years’ missed Form 5500-EZ filings must be submitted as part of the program and there is a fee capped at $1,500 for most small plans.

If you cannot get the Form 5500-EZ filing completed by the July 31, 2024 due date, be sure to file for an extension of time by submitting Form 5558.

Upcoming Deadlines for Practice Owners

Everything takes time and nothing these days seems to be easy.  With that in mind, please be aware of the following deadlines coming up during the second half of 2024:

12/31/24: Filing the Beneficial Owner Information Report:

In 2024, a stringent new filing requirement takes effect under the Corporate Transparency Act. The act compels all qualifying small businesses, including S-Corps and LLC, to disclose certain identifying information on “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN).

Penalties for noncompliance are extremely steep, so we are strongly urging all small business owners to make CTA compliance a priority. Please read through the compliance guide on your own, or plan to work with an attorney to gather the required information, complete the BOI report, and then submit to FinCEN prior to the January 1, 2025 deadline.

Learn more by reading these articles posted on our blog:

90 Days After Setting Up a New Entity:

While existing businesses set up prior to 1/1/24 don’t need to file under the new CTA rules until 1/1/25, new businesses established after 12/31/23 have a much shorter window to comply.  The revised rules give new businesses set up in 2024 only 90 days to file. Starting in 2025, new businesses only have 30 days to file. For that reason, please ensure that the lawyer who is setting up your new business will take care of this time-sensitive filing as part of the services they are providing.

Learn more by reading through this article posted on our blog:

8/30/24: Opt into $5.6B Visa and Mastercard Settlement

Good news for procrastinators and class action skeptics.  You now have until 8/30 to register your practice to receive a tiny percentage of a whopping $5.6 billion settlement related to merchant fees paid between 1/1/2004 and 1/25/2019.

Learn more by reading this article posted on our blog:

Returning Money to a 529 Plan

If you run into a situation where your child stops attending their college or university part way through a semester and as a result tuition and other college costs that were paid using your child’s 529 plan are returned to you, what options are available to you with regard to this unexpected refund of college payments?

The easiest option is to return the funds back into the 529 plan that the funds came from.  Or you can fund a different 529 plan as long as the 529 plan pertains to the same beneficiary (child).  There is a strict timeline involved with this option – the funds need to be recontributed back to the 529 plan within 60 days from the date the check was issued by the educational institution.  Missing this 60-day window will result in taxes plus a 10% penalty on the earnings portion of the 529 plan funds returned to you.  We also recommend contacting the 529 Plan’s customer service to determine other documentation that might be required by the 529 plan in recontributing the funds.

Additionally, there are a few other options when students are refunded tuition that was paid from 529 plan distributions:

  • First, you can use the returned funds to pay for other qualified college costs for this same child. However, the funds must be used in the same year and if not used for qualified educational expenses by year-end, then the earnings portion of the refund allocated to the 529 plan funds becomes a taxable event, plus the 10% penalty as noted above.  If risk and/or uncertainty exists on using the funds for this beneficiary elsewhere, then this option may not be the best option.
  • Another option would be to use these funds to pay down educational debt. However, there is a lifetime limit of $10,000 on the repayment of student debt using 529 plan distributions.  This lifetime limit is per borrower (child).
  • The final option would be to keep the money and pay the taxes on it. If keeping the funds and paying taxes, have the funds distributed in your child’s name.  The receiver of the refunded costs related to the 529 plan funds will be the one required to report the amount as income on their tax return.  Most likely, your child will be in a low tax bracket.  If the refund is sent to the account owner/parent, most likely the tax burden would be higher based upon the parents being in a higher tax bracket than the child.  And whether the college returns the funds to the parent or child, in this situation, the 10% penalty is not avoided.

Planning for Your Child’s Upcoming Semester Abroad

Although your child may have just returned home from college in the past few weeks, it’s probably on your radar to begin planning for your college payments for the upcoming semester in the fall or perhaps a summer program.

But what if attending a foreign university abroad is the plan for your child’s next semester. Spending a semester or year abroad at a foreign university is common for many US students; generally, an opportunity offered to students in their junior year at college. If your child will be attending a foreign university in the coming year, 529 plan distributions may still qualify to be used for foreign educational expenses. US universities that offer a study-abroad program will be 529-plan eligible to pay for those college costs as long as your child’s US college accepts the foreign university study-abroad academic credits. Additionally, if your child plans to attend all four years and be fully enrolled at a foreign university, as long as the foreign university participates in the US federal student aid program and such host school is approved by the US Department of Education then the foreign college costs would be 529-plan eligible as well.

Several hundred foreign educational institutions qualify to use 529 plan distributions. Parents and students can check this link provided by the savingforcollege.com website to determine if a student’s foreign (and US) educational institution qualify for the 529 funds to be used for education costs.

One final note on foreign college expenses and qualifying 529 plan distributions, travel costs related to attending the foreign university are not 529-plan eligible (qualifying) expenses. However, costs such as tuition & fees, books, and room & board are all 529-plan eligible expenses when used to pay for US study-abroad programs and for enrollment at a foreign university. A full list of qualifying and non-qualifying 529 plan distributions can be found on our website here.

Business Owners Should Consider Hiring Their Kids This Summer

If you are self-employed and have children that are old enough to work, consider adding them onto your company payroll. Below are 5 key tax benefits and retirement planning opportunities that families will qualify for when shifting earned income within the family by hiring their children as employees of their small business.

1. Income received up to the federal standard deduction are tax-free. Thus, for 2024, the first $14,600 of wages paid to your child are federally tax-free income to your employed child. Because the 2024 standard deduction is $14,600, this allowed federal tax deduction will offset the wages paid to your child and no federal taxes would be owed from the paid wages up to this threshold. And the wages paid to your children from your business is an allowed business expense (tax deduction) reducing the business owner’s taxable income and resulting taxes. A great tax planning strategy to reduce a family’s overall taxes!
2. 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 2024, the maximum IRA contribution is the lesser of earned income or $7,000. 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.
3. For your college age kids, the wages paid by your business to your kids can be used to pay their higher education expenses. Thus, a small business owner would indirectly be getting a tax deduction for payments to their children’s colleges and private schools.
4. Depending on what type of retirement plan you may have in place for your company, the wages paid to your children may also qualify them to be in your business’s retirement plan. Not only would you be decreasing your income taxes by deducting a larger business expense related to the retirement plan contribution for your kids, but you would also be increasing your family’s overall retirement planning opportunity and tax deferral of income.
5. 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 also exempt from federal and state unemployment taxes paid by the company.

A few considerations when paying your children. Document the work being performed by your children and maintain a log of their actual hours worked per pay period. They should be doing actual work based upon the business needs and the child’s abilities. Be sure the hourly rate paid to your children is reasonable and not overly excessive for the work they are hired to do. And pay your children at the same time that you pay other employees and on the same pay cycle. You will need to issue a W-2 to each employed child as well. In the eyes of the IRS, record-keeping is key to document that the payments to your children truly qualify as a valid business expense for actual work performed. Thus, if your business is ever audited by the IRS, the IRS will want to confirm that both the work completed by and total hours worked by your children for the period under audit are accurate.

Guidance on Completing Your Child’s Form W-4 for Their Summer Job

When your child begins their summer job and will be paid as a W-2 employee, their new employer will require them to complete a Form W-4, Employee’s Withholding Certificate. The purpose of the form is to instruct the employer how to withhold income taxes from your child’s weekly paycheck. However, if your child’s expected wages will be small (less than $14,600 in 2024), then he or she will be allowed to claim an exemption from federal tax withholdings from their wages. To claim this exemption, they must meet the following qualifications:

1. Last year your child had no federal income tax liability, and
2. This year your child expects to have no federal tax liability again.

To claim this special exemption on the Form W-4:

1. Complete Step 1 (name and address).
2. Leave blank Steps 2, 3 and 4.
3. In the space below Step 4(c), your child will write “Exempt”. By claiming “Exempt” no federal income taxes will be withheld from your child’s pay.

Assuming your child has no significant investment income and their wages earned will be less than $14,600 (the standard deduction for 2024), then there will be no federal tax liability for your child for 2024. Additionally, if no federal income taxes are withheld, your child’s wages are below $14,600 for 2024, and there is no other income received by your child; then no federal tax return will be required to be filed by your child. One final note – Although there will be no federal income taxes withheld from the paycheck when claiming “Exempt” status, your child will still be subject to social security and Medicare taxes being withheld from his or her paycheck.

Plan Ahead To Use 529 Contributions To Fund A Roth IRA For Your Child

Beginning in 2024 excess funds held in a 529 college savings plan will be eligible to be rolled over to a Roth IRA for the beneficiary.

For families who contributed to 529 college savings plans for their children and did not fully exhaust the accounts while paying for qualified education expenses, there is a new alternative for the remaining funds.  Beginning in 2024, taxpayers can begin to “take a tax-free distribution in the form of a Roth Conversion” and the remaining 529 funds be moved to the Roth as a trustee-to-trustee transfer. The 529 owner can’t take a distribution from the account and then subsequently contribute that money to a Roth IRA for the 529 beneficiary.

Prior to the coming rule change, withdrawals made from the 529 plan not used for qualified education expenses resulted in taxpayers being assessed income taxes plus a 10% penalty on the earnings portion of the distribution from the plan.

This new law change comes with a few requirements that taxpayers need to be aware of.

  1. There is a $35,000 lifetime cap on the total amount of transfers.
  2. The beneficiary’s 529 plan must have been open for at least 15 years
  3. 529 plan contributions (and associated earnings) made in the prior five years are not eligible to be rolled over.
  4. Each year the maximum allowed transfer from the 529 plan to a Roth IRA is capped at the annual Roth IRA contribution limit and subject to Roth contribution rules such as meeting the earned income requirement and the phase-out for higher income earners.
  5. The transfer must be to the beneficiary’s Roth IRA and not to the parent’s Roth IRA.

With proper planning and familiarity with these qualifying rules, this new taxpayer friendly rule will allow the accumulated earnings on unused 529 plans to continue to grow tax-free for your child or other beneficiary within a Roth IRA over his or her lifetime.

 

 

 

FTC Invalidates Almost All Non-Competes, Including Those In Existing Contracts

By Guest writer Dental Attorney Jonathan Eskow

Whether you are a practice owner, partner, or associate/employee, there is a good chance that a restrictive covenant or non-compete agreement has been part of your practice dynamic. The paradigm of restrictive covenants has left a lot of confusion and differing ideas in the past:

  • Will this covenant hold up in court?
  • What are the consequences of breaking the covenant?
  • What’s the difference between non-compete and non-solicit?
  • Is the covenant stronger because there’s financial consideration built in?
  • How strict is the distance restriction?
  • Does this covenant inhibit a dentist from making a living?

All these questions and more suddenly take on a different and most likely less significant meaning with the recent U.S. Federal Trade Commission ruling banning non-compete clauses. It has the potential of drastically impacting or changing dental practice employment contracts, how Associates are considered and treated, and long-term career and practice planning.

Below are 8 bullet points about the new ruling:

TOP 8 THINGS TO KNOW ABOUT THE FTC BAN ON NON-COMPETITION CLAUSES

  1. The ban will go into effect on September 4, 2024,and applies to non-competition clauses in all employment agreements (whether entered into before or after the ban goes into effect).
  2. The ban does notapply to non-competition clauses that are part of asset or stock purchase agreements. For any dental practice acquisition, the buyer can still enforce non-competition clauses against the seller.
  3. This ban onlyapplies to non-competition clauses and does not apply to all other restrictive covenants (such as non-solicitation, non-interference, non-disclosure and non-disparagement covenants). These other restrictive covenants can and should continue to be used without any restriction, and in fact, will become even more important in employment agreements due to the lack of non-competition clauses.
  4. After the ban goes into effect, employers will be required to provide written notice to those employees with non-competition clauses in their employment agreements stating that such clauses will not be enforced. The FTC provided model language which can be copied and provided to employees with non-competition clauses.
  5. There is an exemption from the ban which applies to “senior executives” who already have non-competition clauses in their employment contracts. An associate dentist would likely notbe considered a “senior executive” for purposes of this exemption.
  6. The final rule was silent on whether non-competes tied to equity ownership in a company are enforceable. This means it may remain possible to enforce a non-competition agreement tied to equity ownership (i.e. a partnership) and you should continue to maintain those provisions in your company governing documents until and unless further clarification from the FTC is provided.
  7. The final rule does not discuss any penalties or enforcement actions for those employers that continue to include non-competes in their agreements. This will likely only be clarified through litigation after the ban goes into effect.
  8. It is anticipated that there will be a significant amount of litigation concerning the FTC’s final rule. At this point, it is unclear whether courts will stay (or postpone) the enforcement of the rule while litigation is pending. You should therefore plan to comply with the rule in its entirety unless advised otherwise.

BOTTOM LINE: Before making or planning a move, it’s advised to seek counsel with a reputable attorney who have both preferably had history with dental practice business and law… and maybe consider some open and collegial dialogue between the two parties to come to an equitable agreement beforehand.

Resources available from the FTC: