Our monthly newsletter offers you the latest tax and accounting news. We welcome your thoughts, questions or comments on any of these topics. Please contact us for further discussion.
It's never too early to start thinking about cutting next year's tax bill. In this month's newsletter, read about several ideas to help lower your 2023 tax obligation. And speaking of taxes, summer work often introduces several tax wrinkles that hit young workers and seasonal workers alike. So included this month are some hints to address taxes and summer employment.
Spring is also graduation season! In addition to all those congratulation cards, why not spend a minute reviewing some classic money basics. It's a great review for both the newly graduated and for the rest of us as a reminder of how we can make our financial lives run a bit more smoothly.
Finally, there's a word or two about managing cash for your business and how the concept of separation of duties is a classic way to head off any problems.
As always, feel free to pass this information on to anyone that may find it useful and call if you have any questions or concerns.
Calling All Taxpayers: Plan Now or Pay Later
Procrastination is easy, especially when it comes to summertime tax planning. But waiting to implement strategies to reduce your 2023 tax obligations could cost you money. Here are some suggestions to help jumpstart your midyear review:
- Safeguard your deductions. Ensure you can take deductions by keeping great records throughout the year. You’ll need proof if you want tax breaks for things like childcare expenses, charitable contributions, gambling losses, vehicle costs and travel expenses. So create a system to keep track of these expenses.
- Save more for retirement. You can save more for retirement in 2023 thanks to inflation increasing annual contribution limits. You've even got time to increase the amount you set aside over the remainder of 2023. This year you can deposit up to $22,500 in your 401(k) and $6,500 into your IRA (additional catch-up contributions apply if you’re 50 or older). You can also contribute to both a 401(k) and an IRA, though tax deductibility on IRA contributions may be limited depending on your income.
- Be tax-savvy about school savings. If you're setting aside money in a taxable account to pay for your child’s school expenses, you could realize tax savings by opening a 529 education savings account. The sooner you do this, the sooner your earnings will start growing tax-deferred. Your earnings will also generally be tax-free when withdrawals are used for qualified education expenses.
- Adjust your withholdings and estimated payments. If you haven’t already, update your withholdings and estimated tax payments to reflect any changes needed since last year. Updates may be in order if you experience a big life event, such as marriage, divorce or a new job. Overpaying your 2023 tax reduces the cash you have on hand throughout the year, and underpaying can lead to penalties and interest.
Please call if you have questions about tax planning for your 2023 tax return.
Tax Tips for Your Summer Job
Summer brings warm weather, fun outdoor activities, and new opportunities to earn some additional income. Taxes on seasonal income, however, need to be handled with care, whether they're related to your child's first job or an extra income opportunity for you. Here are some tips to help manage the taxes on your summer earnings:
- Take advantage of tax-free earnings limits. If you anticipate making less than the annual standard deduction ($13,850 for single taxpayers in 2023), none of your earnings are subject to federal taxes! If possible, earn at least that amount each year to maximize your tax-free earnings. Remember, this only applies to earned income like your summer job. These rules do not apply to sources of income such as interest income or dividend income.
Tip: If your annual earnings will be less than the standard deduction, you can claim EXEMPT on your Form W-4. That prevents federal income taxes from being withheld from your paycheck.
- Review the need to make estimated payments. As an independent contractor, you are responsible for paying all the taxes on your earnings. This is done by making quarterly estimated tax payments to the IRS using Form 1040-ES. In addition to income taxes, contractors also need to pay a self-employment tax of 15.3% of earnings at the federal level. You may also need to pay estimated taxes at the state level.
Tip: Track your expenses and save receipts. By doing this, you can subtract eligible expenses like mileage and supplies from your gross earnings. Use this lower income number to calculate your self-employment tax and correctly estimate your income tax obligation.
- Closely monitor tax withholdings. As an employee, your employer withholds taxes based on what you claim on Form W-4. The tax tables used by this form to calculate your withholdings unfortunately do not account for seasonal jobs. This typically results in paycheck withholdings being too low for supplemental income workers and too high for students working during the summer.
Tip: If you anticipate earnings in excess of the standard deduction, request a revision of your withholdings. Use tools on the IRS web site, review last year's tax return, or ask for help to estimate the correct amount to withhold. From there, ask your employer to increase or decrease your federal and/or state withholdings.
With a little tax planning, you can ensure that your summer job provides the income you are looking for without the disappointment of unexpected taxes. Please call if you have any questions.
Graduation Season: A Great Time to Review Money Basics
With graduation season just around the corner, now it a great time to review five key money basics for both students and the entire family.
- Understand your net worth. Get used to making this calculation at least once per year. It equals everything you own minus everything you owe others. For young graduates, this number will probably be negative due to debts, which is ok. The key is to measure this number over time and set a goal to improve it each year. Positive net worth opens many doors, including the ability to start a business, get a first home, or even lower your car insurance bill.
- Understand basic money mechanics. Review and understand a paycheck, along with learning about the basics of Social Security, Medicare, and common withholdings to pay for taxes. Then review and understand basic banking products. Actively managing your cash in today's high inflation environment can yield meaningful interest income, something long missing from banks. Learn how to review and catch banking errors or fraud, and understand how your debit and credit cards work, as well as overdraft protection.
- Carefully manage debt. It is easy to burden yourself under a pile of debt. Credit card companies will fight each other over getting their credit card in your hands. And they love when you carry a balance on their card. If you do carry a balance, you are often paying 2 to 5 times the cost for every purchase you make. So ALWAYS pay the credit card bill in full each month. The next debt mountain built is from student loans. While unavoidable for many, try to minimize the size of the loans as much as possible.
- Understand basic expenses. Food, transportation, utilities, insurance, taxes, rent, and medical expenses are just several examples of everyday expenses. The best way to understand these expenses is by creating a budget. Then, before every big decision, research the costs and talk to people that have been in your shoes so you see how it fits into your budget. In addition to recurring expenses, plan to save three-to-six months of expenses for unforeseen emergencies.
- Invest in yourself. Remember, your most valuable asset is you. So invest in things that make you more employable and provide greater lifelong income earning potential. The best return is often one that is made to create a better future.
The world of money and finance can seem overly complicated. So keep asking questions and seek advice until you fully understand the mechanics of money and how it impacts your situation. You'll be amazed at how powerful that feeling can be.
Safeguarding Your Business's Cash with Segregation of Duties
Fraud and embezzlement don't just happen at large companies. In fact, theft may be more common in small businesses because many lack internal controls that are typically in place at larger organizations. But the good news is that effective internal controls don't have to be complicated or expensive.
The best way for small businesses to battle fraud is to create a segregation of duties framework. With segregation of duties, you have one person responsible for each of three different areas: Authorization of cash expenditures, physical custody of cash and reconciliation of cash expenditures.
Here's what you need to know:
- Segregate cash disbursements. Only a designated, trusted manager should sign checks, authorize electronic payments, or perform fund transfers. This control has a dual purpose: management sees how the company is spending its money, and the cash disbursement function is kept separate from bookkeeping and accounting. The opportunity to embezzle is much higher if the same person signs checks, authorizes electronic transactions, and enters disbursement transactions in the accounting records. You can strengthen this function by having solid purchase order policies and having separate functions approving bills. Then the person who signs checks or authorizes transactions can ensure the payment is approved prior to disbursing the cash.
- Segregate control of cash. Have an owner or manager occasionally spot check incoming electronic transactions and tie them to the company bank account. If you receive physical checks, have an owner or manager open the mail before passing it on to accounting. That’s one way to detect unusual transactions before they’re recorded in the company books. Alternatively, you might ask someone separate from accounting to open the mail and prepare a deposit slip, or prepare a daily reconciliation of all transactions.
- Segregate reconciliations. For companies with limited resources, a periodic review of bank reconciliations by someone outside of accounting can provide a mitigating control. Non-accounting personnel performing these reviews will need to be trained. They’ll need to understand the risks involved and the types of unusual or unsupported transactions needing further investigation. Cross training staff also helps to ensure continuity of operations when accounting employees take vacations or leave the company. Or better yet, bring in an outside accounting expert to conduct periodic audits of key functions.
Segregation of duties can help your company keep track of cash and help prevent theft by an employee before it happens.