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Timing is everything when it comes to accounting software upgrades

Management Advisory Services & Business Consulting|December 29, 2022

“Well, it still works, and everyone knows how to use it, but….”

Do these words sound familiar? Many businesses stick with their accounting software far too long for these very reasons. What’s important to find out and consider is everything that comes after the word “but.”

Managers and employees often struggle with systems that don’t provide all the functionality they need, such as being able to generate certain types of reports that could help the company better analyze its financials. Older software might constantly freeze up or crash. In some cases, the product may even be so old that support is no longer provided.

When it comes to accounting software upgrades, timing is everything. You don’t want to spend money unnecessarily if your system is fully functional and secure. But you also don’t want to wait too long and risk losing a competitive edge, suffering data loss or corruption, or incurring a security breach.

Building a knowledge base

The first question to ask yourself is: When was the last time we meaningfully upgraded our accounting software?

Many more products may have hit the market since you bought yours — including some that were developed specifically for your industry. Although most accounting software has the same essential features, it’s these specialized functions that hold the most potential value for certain types of companies.

To make an educated choice, business owners and their leadership teams need to gain a detailed understanding of their specific needs and the technological savvy of their employees. You can go about this knowledge-building effort in various ways, including conducting a user survey and putting together a comprehensive, detailed comparison of three or four accounting software products that appear best-suited to your business.

If it appears highly likely that a new accounting system would markedly improve your financial tracking and reporting, you’ll be able to make a confident and well-advised purchasing decision.

Preparing for the transition

Bear in mind that buying the software will be the easy part. Transitioning to the new system will probably be much more challenging. When changing or significantly upgrading their accounting software, companies have to walk a fine line between:

Rushing the timeline, potentially mishandling setup issues and not providing sufficient training, and
Dragging their feet, potentially falling behind on financial reporting.

You might need to engage an IT consultant to help oversee the data transfer from the old system to the new, catch and clean up errors, and ensure strong cybersecurity measures are in place.

It’s a big decision

Moving onward and upward from a long-used accounting system is a big decision. Let us help you determine what software features would be most beneficial to your business, identify which current products would best fulfill your needs, and develop a sensible budget for the purchase.

How savings bonds are taxed

Tax Prep, Planning & Strategy|December 27, 2022

Many people have savings bonds that were purchased many years ago. Perhaps they were given to your children as gifts or maybe you bought them yourself. You may wonder how the interest you earn is taxed. And if they reach final maturity, what action do you need to take to ensure there’s no loss of interest or unanticipated tax consequences?

Interest deferral

Series EE Bonds dated May 2005 and after earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE Bonds, issued between 1980 and 2012, are sold at half their face value. For example, you pay $25 for a $50 bond. The bond isn’t worth its face value until it matures. New electronic EE Bonds earn a fixed rate of interest that’s set before you buy the bond. They earn that rate for their first 20 years and the U.S. Treasury may change the rate for the last 10 years of the bond’s 30-year life. Electronic EE bonds are sold at their face value. For example, you pay $100 for a $100 bond.

The minimum ownership term is one year, but a penalty is imposed if the bond is redeemed in the first five years.

Series EE bonds don’t pay interest currently. Instead, accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing redemption values. Series EE bond interest isn’t taxed as it accrues unless the owner elects to have it taxed annually. If the election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, the election isn’t made so that the benefit of tax deferral can be enjoyed. On the other hand, if the bond is owned by a taxpayer with little or no other current income, it may be beneficial to incur the income in low or no tax years to avoid future inclusion. This may be the case with bonds owned by children, although the “kiddie tax” may apply.

If the election isn’t made, all of the accrued interest is taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond in an option available before September 1, 2004). The bond continues to accrue interest even after reaching its face value but at “final maturity” (after 30 years) interest stops accruing and must be reported (again, unless it was exchanged for an HH bond).

If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more profitable.

Inflation-indexed bonds

Series I savings bonds are designed to offer a rate of return over and above inflation. The earnings rate is a combination of a fixed rate, which will apply for the life of the bond, and the inflation rate. Rates are announced each May 1 and November 1.

Series I bonds are issued at par (face amount). An owner of Series I bonds may either:

Defer reporting the increase in the redemption (interest) to the year of final maturity, redemption, or other disposition, whichever is earlier, or
Elect to report the increase each year as it accrues.

If 2 is elected, the election applies to all Series I bonds then owned by the taxpayer, those acquired later, and to any other obligations purchased on a discount basis, (for example, Series EE bonds). You can’t change to method 1 unless you follow a specific IRS procedure.

State and local taxes

Although the interest on EE and I bonds is taxable for federal income tax purposes, it’s exempt from state and local taxes. And using the money for higher education may keep you from paying federal income tax on the interest. Contact us if you have any questions about savings bond taxation.

Intangible assets: How must the costs incurred be capitalized?

Quickbooks Consulting, Training & Configuration|December 22, 2022

These days, most businesses have some intangible assets. The tax treatment of these assets can be complex.

What makes intangibles so complicated?

IRS regulations require the capitalization of costs to:

Acquire or create an intangible asset,
Create or enhance a separate, distinct intangible asset,
Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or
“Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible at all, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

What’s an intangible?

The term “intangibles” covers many items. It may not always be simple to determine whether an intangible asset or benefit has been acquired or created. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entity (for example, corporations, partnerships, LLCs, trusts, and estates) and other rights, assets, instruments and agreements.

Here are just a few examples of expenses to acquire or create intangibles that are subject to the capitalization rules:

Amounts paid to obtain, renew, renegotiate or upgrade a business or professional license;
Amounts paid to modify certain contract rights (such as a lease agreement);
Amounts paid to defend or perfect title to intangible property (such as a patent); and
Amounts paid to terminate certain agreements, including, but not limited to, leases of the taxpayer’s tangible property, exclusive licenses to acquire or use the taxpayer’s property, and certain non-competition agreements.

The IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it is paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any type of business, and many ordinary business transactions. Examples of costs that facilitate acquisition or creation of an intangible include payments to:

Outside counsel to draft and negotiate a lease agreement;
Attorneys, accountants and appraisers to establish the value of a corporation’s stock in a buyout of a minority shareholder;
Outside consultants to investigate competitors in preparing a contract bid; and
Outside counsel for preparation and filing of trademark, copyright and license applications.

Are there any exceptions?

Like most tax rules, these capitalization rules have exceptions. There are also certain elections taxpayers can make to capitalize items that aren’t ordinarily required to be capitalized. The above examples aren’t all-inclusive, and given the length and complexity of the regulations, any transaction involving intangibles and related costs should be analyzed to determine the tax implications.

Need help or have questions?

Contact us to discuss the capitalization rules to see if any costs you’ve paid or incurred must be capitalized or whether your business has entered into transactions that may trigger these rules. You can also contact us if you have any questions.

Is your business closing? Here are your final tax responsibilities

Management Advisory Services & Business Consulting|December 20, 2022

Businesses shut down for many reasons. Some of the reasons that businesses shutter their doors:

An owner retirement,
A lease expiration,
Staffing shortages,
Partner conflicts, and
Increased supply costs.

If you’ve decided to close your business, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.

For example, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Duties involving workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

More tax issues to consider

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.

Understand your spouse’s inheritance rights if you’re getting remarried

Estate & Wealth Transfer Planning|December 13, 2022

If you’re taking a second trip down the aisle, you may have different expectations than you did when you got married the first time — especially when it comes to estate planning. For example, if you have children from a previous marriage, your priority may be to provide for them. Or perhaps you feel that your new spouse should have limited rights to your assets compared to those of your spouse from your first marriage.

Unfortunately, the law doesn’t see it that way. In nearly every state, a person’s spouse has certain property rights that apply regardless of the terms of the estate plan. And these rights are the same, whether it’s your first marriage or your second. Here’s an introduction to spousal property rights and strategies you may be able to use to limit them.

Defining a spouse’s “elective share”

Spousal property rights are creatures of state law, so it’s critical to familiarize yourself with the laws in your state to achieve your planning objectives. Most, but not all, states provide a surviving spouse with an “elective share” of the deceased spouse’s estate, regardless of the terms of his or her will or certain other documents.

Generally, a surviving spouse’s elective share ranges from 30% to 50%, though some states start lower and provide for progressively larger shares as the duration of the marriage increases. Perhaps the most significant variable, with respect to planning, is the definition of assets subject to the surviving spouse’s elective share rights.

In some states, the elective share applies only to the “probate estate” — generally, assets held in the deceased spouse’s name alone that don’t have a beneficiary designation. In other states, it applies to the “augmented estate,” which is the probate estate plus certain nonprobate assets. These assets may include revocable trusts, life insurance policies, and retirement or financial accounts that pass according to a beneficiary designation or transfer-on-death designation.

By developing an understanding of how elective share laws apply in your state, you can identify potential strategies for bypassing them.

Using planning strategies

Elective shares are designed to protect surviving spouses from being disinherited. But there may be good reasons for limiting the amount of property that goes to your spouse when you die. For one thing, your spouse may possess substantial wealth in his or her own name. And you may want most of your estate to go to your children from a previous marriage.

Strategies for minimizing the impact of your spouse’s elective share on your estate plan include making lifetime gifts. By transferring property to your children or other loved ones during your lifetime (either outright or through an irrevocable trust), you remove those assets from your probate estate and place them beyond the reach of your surviving spouse’s elective share. If your state uses an augmented estate to determine a spouse’s elective share, lifetime gifts will be protected so long as they’re made before the lookback period or, if permitted, your spouse waives the lookback period.

Seeking professional help

Elective share laws are complex and can vary dramatically from state to state. If you’re remarrying, we can help you evaluate their impact on your estate plan and explore strategies for protecting your assets.

Annual gift tax exclusion amount increases for 2023

Estate & Wealth Transfer Planning|December 8, 2022

Did you know that one of the most effective estate-tax-saving techniques is also one of the simplest and most convenient? By making maximum use of the annual gift tax exclusion, you can pass substantial amounts of assets to loved ones during your lifetime without any gift tax. For 2022, the amount is $16,000 per recipient. In 2023, the amount will increase by $1,000, to $17,000 per recipient.

Maximizing your gifts

Despite a common misconception, federal gift tax applies to the giver of a gift, not to the recipient. But gifts can generally be structured so that they’re — at least to a limited degree — sheltered from gift tax. More specifically, they’re covered by the annual gift tax exclusion and, if necessary, the unified gift and estate tax exemption for amounts above the exclusion. (Using the unified exemption during your lifetime, however, erodes the available estate tax shelter.)

For 2022, you can give each family member up to $16,000 a year without owing any gift tax. For instance, if you have three adult children and seven grandchildren, you may give each one up to $16,000 by year end, for a total of $160,000. Then you can turn around and give each one $17,000 beginning in January 2023, for $170,000. In this example, you could reduce your estate by a grand total of $330,000 in a matter of months.

Furthermore, the annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift, also called a “split gift,” the exclusion amount is effectively doubled to $32,000 per recipient in 2022 ($34,000 in 2023).

Bear in mind that split gifts and large gifts trigger IRS reporting responsibilities. A gift tax return is required if you exceed the annual exclusion amount, or you give joint gifts with your spouse. Unfortunately, you can’t file a “joint” gift tax return. In other words, each spouse must file an individual gift tax return for the year in which they both make gifts.

Coordinating with the lifetime exemption

The lifetime gift tax exemption is part and parcel of the unified gift and estate tax exemption. It can shelter from tax gifts above the annual gift tax exclusion. Under current law, the exemption effectively shelters $10 million from tax, indexed for inflation. In 2022, the amount is $12.06 million, and in 2023 the amount will increase to $12.92 million. However, as mentioned above, if you tap your lifetime gift tax exemption, it erodes the exemption amount available for your estate.

Exceptions to the rules

Be aware that certain gifts are exempt from gift tax, thereby preserving both the full annual gift tax exclusion amount and the exemption amount. These include gifts:

From one spouse to the other,
To a qualified charitable organization,
Made directly to a healthcare provider for medical expenses, and
Made directly to an educational institution for a student’s tuition.

For example, you might pay the tuition for a grandchild’s upcoming school year directly to the college. That gift won’t count against the annual gift tax exclusion.

Planning your gifting strategy

The annual gift tax exclusion remains a powerful tool in your estate-planning toolbox. Contact us for help developing a gifting strategy that works best for your specific situation.

Choosing a retirement plan for your small business

Management Advisory Services & Business Consulting|December 6, 2022

Most growing small businesses reach a point where the owner looks around at the leadership team and says, “It’s time. We need to offer employees a retirement plan.”

Often, this happens when the company is financially stable enough to administer a retirement plan and make substantive contributions. Other times it occurs when the business grows weary of losing good job candidates because of a less-than-impressive benefits package.

Whatever the reason, if you don’t have a retirement plan and see one in your immediate future, you’ll want to carefully select the one that will work best for your company and its employees. Here are some basics about three of the most tried-and-true plans.

1. 401(k) plans offer flexibility

Available to any employer with one or more employees, a 401(k) plan allows employees to contribute to individual accounts. Contributions to a traditional 401(k) are made pretax, reducing taxable income, but distributions are taxable.

Both employees and employers can contribute. For 2023, employees can contribute up to $22,500 (up from $20,500 in 2022). Participants who are age 50 or older by the end of the year can make an additional “catch-up” contribution of $7,500 (up from $6,500 in 2022). Within limits, employers can deduct contributions made on behalf of eligible employees.

Plans may offer employees a Roth 401(k) option, which, on some level, is the opposite of a traditional 401(k). This is because contributions don’t reduce taxable income currently but distributions are tax-free.

Establishing a 401(k) plan typically requires, among other steps, adopting a written plan and arranging a trust fund for plan assets. Annually, employers must file Form 5500 and perform discrimination testing to ensure the plan doesn’t favor highly compensated employees. With a “safe harbor” 401(k), however, the plan isn’t subject to discrimination testing.

2. Employers fully fund SEP plans

Simplified Employee Pension (SEP) plans are available to businesses of any size. Establishing one requires completing Form 5305-SEP, “Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement,” but there’s no annual filing requirement.

SEP plans are funded entirely by employer contributions, but you can decide each year whether to contribute. Contributions immediately vest with employees. In 2023, contribution limits will be 25% of an employee’s compensation or $66,000 (up from $61,000 in 2022).

3. SIMPLEs target small businesses

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of plan available only to businesses with no more than 100 employees. It’s up to employees whether to contribute. Although employer contributions are required, you can choose whether to:

Match employee contributions up to 3% of compensation, which can be reduced to as low as 1% in two of five years, or
Make a 2% nonelective contribution, including to employees who don’t contribute.

Employees are immediately 100% vested in contributions, whether from themselves or their employers. The contribution limit in 2023 will be $15,500 (up from $14,000 in 2022).

A big step forward

Obviously, choosing a retirement plan to offer your employees is just the first step in the implementation process. But it’s a big step forward for any business. Let us help you assess the costs and tax impact of any plan type that you’re considering.

Reinforce your cybersecurity defenses regularly

Management Advisory Services & Business Consulting|December 1, 2022

If you’ve been in business for any amount of time, you probably don’t need anyone to tell you about the importance of cybersecurity. However, unlike the lock to a physical door, which generally lasts a good long time, measures you take to protect your company from hackers and malware need to be updated and reinforced much more regularly.

Two common categories

Most of today’s business cyberattacks fall into two main categories: ransomware and social engineering.

In a ransomware attack, hackers infiltrate a company’s computer network, encrypt or freeze critical data, and hold that data hostage until their ransom demands are met. It’s become a highly common form of cybercrime. Just one example, which occurred in October 2022, involved a major health care system that had recently executed a major M&A deal.

On the other hand, social engineering attacks use manipulation and pressure to trick employees into granting cybercriminals access to internal systems or bank accounts. The two most common forms of social engineering are phishing and business email compromise (BEC).

In a typical phishing scam, cyberthieves send fake, but often real-looking, emails to employees to entice them into downloading attachments that contain malware. Or they try to get employees to click on links that automatically download the malware.

In either case, once installed on an employee’s computer, the malware can give hackers remote access to a company’s computer network — including customer data and bank accounts. (Also beware of “smishing,” which is when fraudsters use text messages for the same purpose.)

BEC attacks are similar. Here, cyberthieves send fake emails mainly to accounting employees saying the company’s bank accounts have been frozen because of fraud. The emails instruct employees to reply with account usernames and passwords to supposedly resolve the problem. With this information, thieves can wreak financial havoc — including initiating unauthorized wire transfers — which can be difficult, if not impossible, to reverse.

Preventative measures

Here are a few things you can do to guard against cyberattacks:

Continually train employees. Conduct mandatory training sessions at regular intervals to ensure your employees are familiar with your cybersecurity policies and can recognize the many possible forms of a cyberattack.

Maintain IT infrastructure. Instruct and remind employees to download software updates when they’re available. Enforce a strict policy of regular password changes. If two-factor authentication is feasible, set it up. This is particularly important with remote employees.

Encrypt and back up data. All company data should be encrypted and regularly backed up on a separate off-site server. In the event of a ransomware attack, you’ll still be able to access that data without paying the ransom.

Restrict access to your Wi-Fi network. First and foremost, it should be password-protected. Also, move your router to a secure location and install multiple firewalls. If you offer free Wi-Fi to customers, use a separate network for that purpose.

Consider insurance coverage. Insurers now sell policies that will help pay costs associated with data breaches while also covering some legal fees associated with cyberattacks. However, you’ll need to shop carefully, set a reasonable budget and read the fine print.

Defend your data

None of the measures mentioned above are one-time activities. On a regular basis, businesses need to determine what new training employees need and whether there are better ways to secure IT infrastructure and sensitive data. Let us help you assess, measure and track the costs associated with preserving your company’s cybersecurity.

Providing fringe benefits to employees with no tax strings attached

Tax Prep, Planning & Strategy|November 29, 2022

Businesses can provide benefits to employees that don’t cost them much or anything at all. However, in some cases, employees may have to pay tax on the value of these benefits.

Here are examples of two types of benefits which employees generally can exclude from income:

A no-additional-cost benefit. This involves a service provided to employees that doesn’t impose any substantial additional cost on the employer. These services often occur in industries with excess capacity. For example, a hotel might allow employees to stay in vacant rooms or a golf course may allow employees to play during slow times.
A de minimis fringe benefit. This includes property or a service, provided infrequently by an employer to employees, with a value so small that accounting for it is unreasonable or administratively impracticable. Examples are coffee, the personal use of a copier or meals provided occasionally to employees working overtime.

However, many fringe benefits are taxable, meaning they’re included in the employees’ wages and reported on Form W-2. Unless an exception applies, these benefits are subject to federal income tax withholding, Social Security (unless the employee has already reached the year’s wage base limit) and Medicare.

Court case provides lessons

The line between taxable and nontaxable fringe benefits may not be clear. As illustrated in one recent case, some taxpayers get into trouble if they cross too far over the line.

A retired airline pilot received free stand-by airline tickets from his former employer for himself, his spouse, his daughter and two other adult relatives. The value of the tickets provided to the adult relatives was valued $5,478. The airline reported this amount as income paid to the retired pilot on Form 1099-MISC, which it filed with the IRS. The taxpayer and his spouse filed a joint tax return for the year in question but didn’t include the value of the free tickets in gross income.

The IRS determined that the couple was required to include the value of the airline tickets provided to their adult relatives in their gross income. The retired pilot argued the value of the tickets should be excluded as a de minimis fringe.

The U.S. Tax Court agreed with the IRS that the taxpayers were required to include in gross income the value of airline tickets provided to their adult relatives. The value, the court stated, didn’t qualify for exclusion as a no-additional-cost service because the adult relatives weren’t the taxpayers’ dependent children. In addition, the value wasn’t excludable under the tax code as a de minimis fringe benefit “because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable.” (TC Memo 2022-36)

You may be able to exclude from wages the value of certain fringe benefits that your business provides to employees. But the requirements are strict. If you have questions about the tax implications of fringe benefits, contact us.

Employers: In 2023, the Social Security wage base is going up

Management Advisory Services & Business Consulting|November 23, 2022

The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $160,200 for 2023 (up from $147,000 for 2022). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Basics about Social Security

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is for the Old Age, Survivors and Disability Insurance program, which is commonly known as Social Security. The other is for the Hospital Insurance program, which is commonly known as Medicare.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022).

2023 updates

For 2023, an employee will pay:

6.2% Social Security tax on the first $160,200 of wages (6.2% of $160,200 makes the maximum tax $9,932.40), plus
1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

For 2023, the self-employment tax imposed on self-employed people is:

12.4% Social Security tax on the first $160,200 of self-employment income, for a maximum tax of $19,864.80 (12.4% of $160,200), plus
2.9% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
3.8% (2.9% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

Employees with more than one employer

What happens if one of your employees works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

Looking forward

Timing is everything when it comes to accounting software upgrades

How savings bonds are taxed

Intangible assets: How must the costs incurred be capitalized?

Is your business closing? Here are your final tax responsibilities

Understand your spouse’s inheritance rights if you’re getting remarried

Annual gift tax exclusion amount increases for 2023

Choosing a retirement plan for your small business

Reinforce your cybersecurity defenses regularly

Providing fringe benefits to employees with no tax strings attached

Employers: In 2023, the Social Security wage base is going up

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