How Tax-Smart HSAs Can Benefit Your Small Business and Employees

Posted on
by
Reply

How-Tax-Smart-HSAs-Can-Benefit-Your-Small-Business-and-Employees

As a small business owner, managing health care costs for yourself and your employees can be challenging. One effective tool to consider adding is a Health Savings Account (HSA). HSAs offer a range of benefits that can help you save on health care expenses while providing valuable tax advantages. You may already have an HSA. Now is a good time to review how these accounts work because the IRS has announced the relevant inflation-adjusted amounts for 2025. Keep reading to learn more about those amounts and how tax-smart HSAs can benefit your small business and employees.

Basic HSA Tax Benefits

For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Employees can’t be enrolled in Medicare or claimed on someone else’s tax return.

Here are the key tax benefits:

  • Contributions that participants make to an HSA are deductible, within limits.
  • Contributions that employers make aren’t taxed to participants.
  • Earnings on the funds within an HSA aren’t taxed, so the money can accumulate tax-free year after year.
  • HSA distributions to cover qualified medical expenses aren’t taxed.
  • Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Key 2024 and 2025 Amounts

To be eligible for an HSA, an individual must be covered by a “high-deductible health plan.” For 2025, a high-deductible health plan has an annual deductible of at least $1,650 for self-only coverage or at least $3,300 for family coverage.

For self-only coverage, the 2025 limit on deductible contributions is $4,300. For family coverage, the 2025 limit on deductible contributions is $8,550. Additionally, annual out-of-pocket expenses for covered benefits can’t exceed $8,300 for self-only coverage or $16,600 for family coverage.

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2025 of up to $1,000.

Making Contributions for Your Employees

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can build for years.

An employer that decides to make contributions on its employees’ behalf must generally make similar contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make similar contributions, the employer is subject to a 35 percent tax on the aggregate amount contributed by the employer to HSAs for that period.

Using HSA Funds for Medical Expenses

Your employees can take HSA distributions to pay for qualified medical expenses. This generally means expenses that would qualify for the medical expense itemized deduction. They include costs for doctors’ visits, prescriptions, chiropractic care, and premiums for long-term care insurance.

The withdrawal is taxable if funds are withdrawn from the HSA for any other reason. Additionally, an extra 20 percent tax will apply to the withdrawal unless it’s made after age 65 or in the case of death or disability.

We Are Here to Help

As you can see, tax-smart HSAs can benefit your small business and employees by offering a flexible option for providing health care coverage. But the rules are somewhat complex. If you have questions, the business tax professionals at Ramsay & Associates are here to help. Contact us if you’d like to discuss offering this benefit to your employees.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

What Household Employers Should Know About the Nanny Tax

Posted on
by
Reply
What-Household-Employers-Should-Know-About-the-Nanny-Tax

Whether you employ a nanny, housekeeper, or gardener, hiring household help can significantly ease the burden of childcare and daily chores. However, as a household employer, it’s critical to understand your tax obligations, commonly called the “nanny tax.” Keep reading to find out what household employers should know about the nanny tax.

Hiring Household Workers

If you hire a household employee who isn’t an independent contractor, you may be liable for federal income tax and other taxes (including state tax obligations).

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you can choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

Wage Thresholds for 2024 and 2025

In 2024, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,700 or more (excluding the value of food and lodging). The Social Security Administration recently announced that this amount will increase to $2,800 in 2025. If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time student babysitter, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2 percent for the employer and 6.2 percent for the worker (12.4 percent total). Medicare tax is 1.45 percent each for the employer and the worker (2.9 percent total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Making Payments

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, include your employer identification number (EIN), which is not the same as your Social Security number. You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) you file for the business. And you use your sole proprietorship EIN to report the taxes.

Maintain Detailed Records

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, amount of wages paid, taxes withheld, and copies of forms filed.

We Can Help with Questions

If you’ve hired or plan to hire a household employee, you may still have questions. Feel free to contact us. The tax professionals at Ramsay & Associates can further explain what household employers should know about the nanny tax to help ensure compliance with these requirements.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Think About Year-End Tax Planning for Your Small Business

Posted on
by
Reply
Think-About-Year-End-Tax-Planning-for-Your-Small-Business

With most of 2024 in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. The strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.

Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.

As you think about year-end tax planning for your small business, here are some other ideas that may help you save tax dollars if you act soon.

QBI Deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20 percent of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able to increase the deduction by increasing W-2 wages before the year’s end. The rules are complex, so consult us before acting.

Weigh Cash vs. Accrual Accounting

More small businesses can use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early, or making certain prepayments.

Section 179 Deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property (other than buildings), including equipment, off-the-shelf computer software, interior improvements to a building, HVAC, and security systems.

The high dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.

Bonus Depreciation

For 2024, businesses also can generally claim a 60 percent bonus first-year depreciation deduction for qualified improvement property as well as machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.

We Can Customize Your Plan

These are just some of the strategies you can apply to year-end tax planning for your small business that may help you in the long run. In addition, it’s important to stay informed about any changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of recent elections could result in new or repealed tax breaks. Our team at Ramsay & Associates is here to help. Contact us to customize a plan that works for you.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Are You Liable for Two Additional Taxes on Your Income?

Posted on
by
Reply
Are-You-Liable-for-Two-Additional-Taxes-on-Your-Income

Having a gainful income may mean you owe two extra taxes: the 3.8 percent net investment income tax (NIIT) and a 0.9 percent additional Medicare tax on wage and self-employment income. But what exactly are these taxes and how could they affect you? Let’s look at them both and the scenarios in which you may be liable for two additional taxes on your income.

Net Investment Income Tax

In addition to income tax, the net investment income tax (NIIT) applies to your net investment income. The NIIT only affects taxpayers with adjusted gross incomes (AGIs) exceeding $250,000 for joint filers, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately.

If your AGI is above the threshold that applies ($250,000, $200,000 or $125,000), the NIIT applies to the lesser of

  1. your net investment income for the tax year, or
  2. the excess of your AGI for the tax year over your threshold amount.

The “net investment income” that’s subject to the NIIT consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Wage income and income from an active trade or business aren’t included. However, passive business income is subject to the NIIT.

Income that’s exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the NIIT. Thus, switching some taxable investments to tax-exempt bonds can reduce your exposure. Of course, this should be done after taking your income needs and investment considerations into account.

Does the NIIT apply to home sales? Yes, if the gain is high enough. Here’s how the rules work: If you sell your principal residence, you may be able to exclude up to $250,000 of gain ($500,000 for joint filers) when figuring your income tax. This excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax. Gain from the sale of a vacation home or other secondary residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the NIIT. However, those distributions may push your AGI over the threshold that would cause other types of income to be subject to the tax.

The Additional Medicare Tax

In addition to the 1.45 percent Medicare tax that all wage earners pay, some high-wage earners pay an extra 0.9 percent Medicare tax on part of their wage income. The 0.9 percent tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. It applies only to employees, not to employers.

Once an employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9 percent tax. However, this withholding may prove insufficient if the employee has additional wage income from another job or if the employee’s spouse also has wage income. To avoid that result, an employee may request extra income tax withholding by filing a new Form W-4 with the employer.

An extra 0.9 percent Medicare tax also applies to self-employment income for the tax year in excess of the same amounts for high-wage earners. This is in addition to the regular 2.9 percent Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds are reduced by the taxpayer’s wage income.

We Can Help You Understand and Mitigate Tax Effects

As you can see, the NIIT and additional Medicare tax may have significant effects. And depending on your circumstance, you may be liable for two additional taxes on your income. The tax professionals at Ramsay & Associates are here to answer your questions and help you understand if and how you may be affected. Contact us to discuss ways to potentially reduce any tax impact.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

A Dynasty Trust Provides for Future Generations

Posted on
by
Reply
A-Dynasty-Trust-Provides-for-Future-Generations

When creating estate plans, people generally take their children and grandchildren into consideration and will organize accordingly. For those who would like to prepare beyond that, a dynasty trust provides for future generations and may be a viable option. Let’s look at some of the specifics of this long-term trust.

A dynasty trust can preserve substantial amounts of wealth—and potentially shelter it from federal gift, estate, and generation-skipping transfer (GST) taxes—for generations to come. Plus, it can provide various other benefits and protections for families over an extended time period (perhaps forever).

Establishing and Funding a Dynasty Trust

A dynasty trust can be established during your lifetime, as an inter-vivos trust, or part of your will as a testamentary trust. With an inter-vivos transfer, you’ll avoid estate tax on any appreciation in value from the time of the transfer until your death. Generally, though, with an inter-vivos transfer, the assets won’t be eligible for step-up in basis at your death.

Because the emphasis is on protecting appreciated property, consider funding the trust with securities, real estate, life insurance policies, and business interests. Ensure you retain enough assets in your personal accounts to continue to enjoy your lifestyle.

Factoring in Taxes

Previously, dynasty trusts were primarily used to minimize transfer tax between generations. Without one, if a family patriarch or matriarch leaves assets to adult children, the bequests are subject to federal estate tax at the time of the initial transfer to the second generation. They are then taxed again when the assets pass from the children to the grandchildren, and so on. Although the federal gift and estate tax exemption can shield the bulk of assets from tax for most families, the top federal estate tax rate on the excess is 40 percent—a hefty amount.

Furthermore, the GST tax applies to certain transfers made to grandchildren, thereby discouraging transfers that skip a generation. The GST tax exemption and 40 percent GST tax rate are the same as they are for regular gift and estate tax.

With a dynasty trust, assets are taxed just once, when they’re initially transferred to the trust. There’s no estate or GST tax due on any subsequent appreciation in value. This can save some families millions of tax dollars over the durations of their trusts.

When the assets are subsequently sold, any gain will be taxable. Note that the basis of the assets will be determined at the time of the initial transfer, although depending on the circumstances, the “step-up in basis” rules may help reduce the taxable amount.

Recognizing Nontax Benefits

Regardless of the tax implications, there are many nontax reasons to set up a dynasty trust.

For example, you can designate the trust’s beneficiaries spanning multiple generations. Typically, you might provide for the assets to follow a line of descendants, such as your children, grandchildren, great-grandchildren, etc.

You can also impose certain restrictions. For example, you may limit access to funds until a beneficiary graduates from college.

We Can Help You Plan for Your Family’s Future

A dynasty trust provides for future generations by creating a legacy that will live on long after you’re gone. Be aware, however, that a dynasty trust is irrevocable. In other words, you can’t undo the arrangement if you have a sudden change of heart. If you’re going to chart the course for future generations, you must have the courage of your convictions. The professional team at Ramsay & Associates is here to answer questions about estate planning and other tax concerns. Contact us for guidance.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.