The tax-filing system is still months away but now is a great time to start thinking about next year’s return. Here are some things to consider.
Review Your Retirement Plan Options – There are three.
Self-employed workers and small-business owners who want an easy and inexpensive retirement plan should consider a Simplified Employee Pension IRA, or SEP IRA for short. They are relatively easy to establish and have lower administrative costs. SEP IRA plans are easier to establish than other retirement plans and have lower costs to administer. They are available for a variety of small-business types and allow you to set up a traditional IRA for yourself and any employees you may have.
Pro Tip: This type of account is also a good option for a worker with a side gig as well as his or her regular job. It would allow you to contribute fully to your employer’s 401(k) and use the SEP IRA for self-employment income.
The one-participant (or Solo) 401(k) is a traditional 401(k) plan covering a business owner with no employees. It has the same rules and requirements as any other 401(k) plan. It’s suitable for sole proprietors, partnerships, C corporations and S-corporation business owners. It must be established in the year in which you take the deduction on your tax return. Elective deferrals are up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $22,500 in 2023. A Solo 401(k) can be funded with either pre-tax, after-tax, or designated Roth contributions. Know that you may be required to file an annual Form 5500 (EZ or SF) with the Department of Labor.
You can choose to participate in an IRA or Roth IRA program if you meet the following conditions:
You are not eligible to participate in a company retirement plan, or if you are eligible, you must have an adjusted gross income of $68,000 or less for singles, or $109,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully deductible as long as your combined gross income does not exceed $204,000. For 2022, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the year). Although you won’t get a tax break with a Roth, it could be a better choice because all withdrawals can be tax free in retirement. To contribute the full amount, you must earn $129,000 or less a year if you are single or $204,000 if you’re married and file a joint return.
Look at Wealth Transfer Strategies – Because annual exclusion gifts don’t count against your lifetime gift tax exemption, this is a great way to transfer assets without incurring taxes. You can give up to $15,000 tax-free, to a single recipient. Spouses can give another $15,000. You can use this gift-tax exclusion for an unlimited number of recipients.
For example, a married couple with two children could give as much $60,000 in a single year. The Gift Tax Exemption in 2022 is $12.06 million. You can also create an estate plan to establish long-term lifetime trusts or trusts at death via your will that hold business interests. That may significantly maximize your income and transfer tax savings–especially if you are considering transitioning your business to the next generation.
Make a last-minute estimated tax payment – If you didn’t pay enough to the IRS during the year, you may have a big tax bill, plus interest and penalties. Don’t get caught with an underpayment penalty.
Pro Tip: If you make an estimated payment by January 15, you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then. But, if your income windfall arrived after August 31, you can file Form 2210: Underpayment of Estimated Tax to annualize your estimated tax liability, and possibly reduce any extra charges.
Be sure to get what’s yours – Businesses can deduct ordinary and necessary costs, such as advertising, salaries and wages, interest expense and insurance. You can find more information on deductible business expenses in IRS Publication 535. Work with a CPA or other financial professional to ensure that your businesses is taking full advantage of deductions, write-offs and other tax advantages. These professionals also will help you stay informed about tax laws and regulations, which are constantly changing.