What does your tax return say about your financial situation? The fact is, the paperwork you file each year offers excellent information about how you are managing your money—and about areas where it might be wise to make changes in your financial habits. If you have questions about your financial situation, remember that we can help. Our firm is made up of highly qualified and educated professionals who serve as trusted business advisors and know how to work with clients like you all year long.

So whether you are concerned about budgeting; saving for college, retirement or another goal; understanding your investments; cutting your tax bite; starting a business; or managing your debt, you can turn to us for objective answers to all your tax and financial questions.

We Can Help You Address the Issues that Keep You Up at Night

Where will your business be in five years? Would strategic budget cuts in some areas improve your company’s health? Are there ways you can boost revenue? If you are nearing retirement, is there a buyer or successor in the wings? These are the kinds of questions that keep many business owners up at night. Fortunately, we can probably help you sleep a little easier.

We can review your financial situation and develop creative strategies to minimize your tax liability and help you meet your financial goals. Contact one of our professionals today.

Unincorporated, businesses are susceptible to high self-employment (SE) tax bills because of how they are taxed. One way around this is to convert your business to an S corporation. For many business owners, this is an appealing option. Before you make the switch, here is what you need to know.

The Basics: Certain income, such as sole proprietorship and partnership income, is subject to SE tax. Also subject to the SE tax are single-member limited liability companies (LLCs) and multimember LLCs. Effective 2017, the maximum federal SE tax rate of 15.3 percent applies to the first $127,200 of net SE income. That rate is inclusive of both the Social Security tax (12.4 percent) and the Medicare tax (2.9 percent).

The rate declines once SE income reaches $127,200 because the Social Security tax component is eliminated.  The Medicare tax will continue to accrue at the same rate of 2.9 percent. It will increase to 3.8 percent at higher income levels because of the additional Medicare tax (0.9 percent). As part of the Affordable Care Act, we anticipate the Medicare tax to disappear once the ACA is replaced.

For the purpose of this article, we make reference to the Social Security and Medicare taxes together as federal employment taxes.

How an S Corp can Lower SE Taxes: Converting your unincorporated business into an S corporation, can help lower your SE taxes. This is done by paying yourself a modest salary and then, distributing any remaining cash flow to shareholder-employees as federal-employment-tax-free distributions. This works in your favor because,

• For compensation paid to an S corporation employee, the FICA tax rate is 7.65 percent on the first $127,200. That rate is inclusive of both the Social Security tax (6.2 percent) and the Medicare tax (1.45 percent).
• Above $127,200, the rate drops to 1.45 percent because the Social Security tax component is eliminated. The Medicare tax component of 1.45 percent is indefinite.
• S corporation employees are required to pay an additional Medicare Tax of 0.9 percent at higher wage levels. The funds to pay FICA tax are withheld from employee paychecks.

The employer is responsible for matching the amounts of Social Security tax and Medicare tax, paid directly to the U.S. Treasury. The combined FICA and employer rate for the Social Security tax is still the same as the SE tax rates you face as an individual, but the employer is now responsible for them.

Where the tax savings arise is on the cash distributions made to shareholder-employees because only wages are subject to federal employment taxes.

In terms of federal employment tax treatment, S corporations are in a better position compared to businesses that are conducted as sole proprietorships, partnerships or LLCs.

Your Considerations – Before you change your business structure, consider the following caveats.

1. If you cannot prove your salary is reasonable, you are at a high risk of an IRS audit, back employment taxes, interest and penalties. To minimize the risk, collect evidence that proves someone hired externally to perform the same work would be paid the same salary.
2. Modest salaries will reduce the maximum eligible contribution to your retirement accounts. One workaround would be to set up 401(k) plans, where modest salaries won’t prevent substantial contributions.
3. Consider the added administrative tasks that are associated with operating as an S corporation. For example, S corporations are required to file a separate federal return. Also, there are state-law corporation requirements to abide by such as holding board of director’s meetings and keeping minutes.

Depending on the situation, converting your business to an S corporation can be a strategic move that reduces federal employment taxes. However, there are many legal implications to consider. The professionals in our office can answer the questions you may have. Call us today.

 

Income from Sole Proprietorship (LLC)	$75,000
35% Tax Rate	$26,250
15.3% Employer Matching Tax	$11,475
Total Taxes:	$37,725

 

Tax Savings on an S Corporation

Salary from S-Corporation:	$40,000
Dividends:	$35,000
Total Income:	$75,000
35% Tax Rate:	$26,250
15.3% Employer Matching Tax	$6,120
Total Taxes:	$32,370

 

Tax Savings:

$5,355

 

Operating in one physical location is no longer ideal for businesses that want to remain profitable in the ever-changing landscape. To adapt, many businesses are straying away from traditional business models where they would typically operate in physical locations and moving towards virtual business models. As businesses expand their operations across state lines, it becomes increasingly complex for states to collect taxes.

To adapt, many states are making necessary updates to tax laws. For instance, several states have implemented the “economic nexus” standard, which requires businesses to file a state tax return regardless of whether they have a physical presence there.

The AICPA defines economic nexus as the amount and degree of a taxpayer’s business activity that must be present in a state before the taxpayer becomes subject to the state’s taxing jurisdiction or taxing power. There are numerous business activities that can prompt a tax filing. We have listed the most common below. Consider which of these might apply to your business.

• Presence of employees, even without sales.
• Execution of contracts
• Others acting in an “agent” capacity
• Employees who work remotely
• Product delivery via a company-owned truck
• Data stored on a server

While the economic nexus standard can be helpful in determining if your business is subject to state tax, there is inconsistency between states that define economic benefit differently. To help provide some consistency, some states have gone a step further to set a “bright-line rule.” The purpose of such a rule is to define a standard, leaving little or no room for interpretation.

When determining if your business is subject to state tax, you must first identify in which states you have a filing requirement. Next, based on that states regulations, determine what income must be attributed to that state.

If you have questions regarding your state tax return filing requirements, please contact one of our professionals today.

The Internal Revenue Service (IRS) has released the annual contribution limitations for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans. These limitations are updated annually to reflect cost-of-living adjustments. Business owners should inform employees of the HSA contribution limits increase for 2017.

Employers commonly offer employees HSA contributions as part of their healthcare benefit packages. HSAs are a popular option because of its dual purpose. Employees can utilize HSAs to save for the future or pay for qualified medical expenses tax free.

Under Sec. 223 of Rev. Proc. 2016-28, individuals who participate in a health plan with a high deductible are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. To be eligible to contribute to an HSA you must participate in a high deductible health plan.

The following chart summarizes the contribution and out-of-pocket limits for HSAs and high-deductible health plans for 2017. There was only one minor change between 2016 and 2017.

	2016	2017	Change
HSA contribution limit	Self: $3,350 Family: $6,750	Self: $3,400 Family: $6,750	Self: $50 Family: No Change
HSA catch up contribution (age 55+)	$1,000	$1,000	No Change
HDHP minimum deductible	Self: $1,300 Family: $2,600	Self: $1,300 Family: $2,600	No Change
HDHP maximum out of pocket	Self: $6,550 Family: $13,100	Self: $6,550 Family: $13,100	No Change

 

Employers should remind employees who are contributing to or using their HSA:

• They have until April 15, 2018 to make contributions for the 2017 tax year.
• Unqualified medical expenses are subject to a 20% tax penalty
• Withdrawing from your HSA for nonqualified purposes are subject to income tax

There are other options available that employers can offer which take advantage of tax-free medical spending and reimbursement. The professionals in our office can clarify any questions you may have on HSAs. Call on us today.