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Limiting the IRS’s Impact on your Business

March 27, 2022

Most self-employed persons know the impact the Internal Revenue Service (IRS) can have on your business. They can often be an unwanted partner, sharing in your profits at rates over 50%. For many, it seems the harder they work, the harder the IRS wants to squeeze. For this reason, I would like to share a few tips to keep more of your money in your pocket, and out of the hands of the IRS.

The first strategy I want to mention is proper entity election. I spoke in a previous article about the different types of entities available to the self-employed. Current tax law allows most small businesses to make an S election and be taxed as an S Corporation. After taking a “reasonable wage” for your services provided to your business, the remaining profits from the S Corporation avoid the 15.3% self-employment tax. In addition, you need to determine if your participation and investment in the business is material enough to be considered non-passive. Or, are you simply a passive investor. If your passive income is defined as such by the IRS, then it is not subject to self-employment tax. On the flip side, losses from passive activity may be suspended but can be used to offset income in future years.

A second strategy is to offer a retirement plan. There are an array of retirement plan options available to self-employed persons and small businesses. For the most part, you will have to offer a plan to your employees if you want to participate in a retirement plan through your business. Contributions on behalf of your employees, and certain funds contributed to yourself through the proper entity, are a business deduction and can reduce your taxable income for both income and self-employment tax. If you have no other employees, you still have retirement plan options available to you. Depending on your entity and income, you can contribute upwards of $60,000 into a retirement plan each year. That $60K contribution is a deduction on your tax return, and limits the IRS’s impact on your business and profits. The retirement plan contribution goes into an account that can be invested and used for your future retirement. Withdrawing from the retirement account will be taxable, but with proper planning, the tax affect will be much less severe in retirement. Think of retirement contributions from self-employed income as a way to park profits in an investment account, out of the hands of the IRS, until the time comes that you will need the funds.

The final strategy to mention is for self-employed parents. Instead of giving your able-bodied offspring free money, make them work for it. While the IRS does not have any age restrictions, your child must be providing a service for your business to count as an employee. If your child is under the age of 18, no FICA taxes will have to be withheld from their wages. The 2022 standard deduction is $12,950. This means if you were to pay your child less than $12,950 to perform services for your business (and they had no other income), no taxes would be owed on their wages. In addition, your business will receive the deduction reducing both taxable income and self-employed earnings. This will open the ability for your child to invest in IRAs. The wages can also be managed in a savings or UTMA account to plan for your child’s future, college or otherwise.

In summary, just be aware that there are many opportunities to limit the IRS’s impact on your hard-earned money, while also planning for your future and the future of those you love. As always, I recommend speaking to your attorney, CPA and CFP® to make sure you are selecting all the right options for yourself and your business.

Published in the Victoria Advocate

Adam Baucom, CPA/CFP® is a Senior Tax Manager for Keller & Associates CPAs, PLLC and an Associate Advisor for KMH Wealth Management, LLC.

https://kellercpas.com/wp-content/uploads/2022/03/Small-Businses.png 247 500 KMH Wealth http://kellercpas.com/wp-content/uploads/2022/04/keller-logo-290-1.png KMH Wealth2022-03-27 14:33:032022-03-28 14:39:12Limiting the IRS’s Impact on your Business

Review your “Free Money” Match

March 13, 2022

Folks in my profession often refer to an employer-sponsored retirement plan match as “free money”. Are you lucky enough to work for a company who 1) offers a retirement plan, and 2) has a contribution match? The advice that follows “yes” to those questions, is typically to take full advantage, if at all possible. A message of caution to high earners or lofty savers is to work with HR and your financial advisor. Plan ahead to ensure you are taking full advantage of ALL of this free money.

To pocket this employer benefit, an eligible employee must choose to defer a specific portion of their salary to their employer’s retirement plan account. Employers can then fully or partially match the salary deferral in the form of an employer contribution, directly to the employee’s retirement account on their behalf. Free money for contributing to your own retirement savings is a win-win. The IRS does however limit contribution amounts, which can create complications for employees who wish to take full advantage of their employer’s match.

Consider this: Bob has a $150,000 salary. As an employee benefit, his employer matches 401K contributions at 10% of Bob’s salary. Bob is eager to save for retirement and decides to defer 20% of his annual salary ($2,500/month) to his 401K. At this rate, Bob will exceed his employee contribution limit of $20,500 (2022 IRS limit) for the whole year by the end of September and must stop his future contributions. Since Bob cannot make employee contribution for October through December, he will not receive his employer’s 10% match for those three months. Consequentially, $3,750 ($1,250/month x 3 months) that could have been Bob’s is left in the company bank account. Matching rules are matching rules, even if you stopped contributions because of good reason, such as meeting the annual limit.

A small change to his benefit election, could mean the difference between receiving the full advantage and leaving “free money” on the table. If you wish to take advantage fully of this prized employee benefit, you may check with your HR department to see if you are able to contribute a set dollar amount instead of by percentage of pay. You or your financial advisor can easily calculate the appropriate salary deferral per pay check by reviewing the annual IRS limit or your remaining limit and dividing by the number of pay periods remaining in the year.

I am fortunate to have this benefit at my firm. It has been rewarding to see how participating in my firm‘s plan helps grow my retirement savings faster. You bet that I am taking advantage of the full benefit, and encourage you to do the same!

It’s matching season! With the year still young, you have plenty of time to reconfigure your max employee contribution per paycheck and update percentage or dollar amounts. Go get your free money!

Published in the Victoria Advocate

Beth Koonce is a CFP® Professional and Lead Advisor with KMH Wealth Management, LLC.

https://kellercpas.com/wp-content/uploads/2022/03/match-1.png 247 500 KMH Wealth http://kellercpas.com/wp-content/uploads/2022/04/keller-logo-290-1.png KMH Wealth2022-03-13 21:41:072022-03-14 22:06:16Review your “Free Money” Match

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