V9 — Issue 1

Navigating the Tax Implications of Remote Work for SMBs: A Comprehensive guide

In the wake of the pandemic, remote work has become the new norm for many American workers. As businesses across a wide range of industries have shifted to a remote model, employees and employers alike have experienced numerous benefits such as reduced overhead costs, increased employee satisfaction, and access to a broader talent pool. …

In the wake of the pandemic, remote work has become the new norm for many American workers. As businesses across a wide range of industries have shifted to a remote model, employees and employers alike have experienced numerous benefits such as reduced overhead costs, increased employee satisfaction, and access to a broader talent pool. However, it has also introduced a complex web of tax implications, particularly for small and medium-sized businesses (SMBs). 

Understanding these implications is crucial for SMBs to avoid potential penalties and ensure compliance with tax laws. Understanding the concept of a tax nexus is one of the most significant challenges for many business owners. A tax nexus is a specific kind of legal relationship between a taxing jurisdiction, such as a municipality or state, and a business. It is established when a business has a sufficient physical presence in a state, triggering tax obligations. 

In the context of remote work, an employee working from a different state can create a nexus, making the employer liable for additional state taxes in the state where the employee resides. This can often come as a surprise to many SMBs, who may not be aware of the tax obligations associated with remote work.

Employer Federal Responsibilities

As an employer, you should be aware of the following U.S. payroll taxes and your responsibilities when it comes to withholding taxes for all full-time (or W-2) employees. This includes all employees working remotely from another state permanently. Employers must withhold federal income taxes and pay payroll taxes, which consist of:

  1. Federal Unemployment Tax (FUTA):
    This tax is only paid by employers and aims to provide financial support to individuals with temporary job loss.
  2. Social Security and Medicare Taxes:
    These taxes are shared equally between employers and workers and enforced by the Federal Insurance Contribution Act, otherwise known as FICA. FICA assists retirees over 65, children, and those with disabilities in healthcare and hospitalization.

Employer State Responsibilities

Employers must withhold state income taxes, where applicable. For example, Washington doesn’t have a state income tax but has unique employment taxes and mandatory benefits such as paid family, medical, and sick leave. State-wise, payroll taxes may consist of: 

  1. State Unemployment Tax (SUTA):
    This tax is paid by employers in all states except Alaska, New Jersey, and Pennsylvania, where employees are also required to pay. It is meant to provide financial support to individuals with temporary job loss.
  2. Disability Fund Tax:
    This tax is used to fund state programs that provide benefits to workers who become disabled and cannot work.
  3. Worker’s Compensation Tax:
    This tax funds state programs that provide benefits to workers who get injured or become ill due to their jobs.

No State Income Taxes States

In the U.S., some states do not impose state income taxes. If your employee lives in one of these states, you won’t have to worry about withholding state income taxes. Currently,  the states that do not levy income tax are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. In addition, New Hampshire doesn’t tax earned wages. While these states don’t impose a state income tax, they make up for this lost revenue with other taxes – such as property taxes – or offer fewer public services.

Convenience Rule States

In the United States, there’s a convenience rule designed to simplify taxes for both employers and employees while preventing them from being taxed twice for the same income. These states are Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania. This rule can have different implications depending on whether the remote work is for the employer’s convenience or the employee’s convenience. 

Navigating the Tax Landscape

To avoid future penalties, it’s essential to have clear communications with your employees about their work locations and any changes they make. It’s easy for employees to assume that the flexibility of remote work means their location doesn’t affect their employer’s tax obligations. However, this assumption can lead to unexpected tax liabilities at the end of the year.

If your SMB includes remote workers, or you plan on offering remote work as an option in the future, it’s advisable to consult with this office. We can help you navigate the complex tax landscape associated with remote work and ensure you’re in full compliance with all relevant tax laws.

While remote work offers many benefits, it also comes with its share of challenges, particularly in the realm of taxation. SMBs must be proactive in understanding and managing these tax implications to avoid unexpected liabilities and ensure compliance. If you need assistance navigating these complexities, don’t hesitate to reach out to our office. Our team of professionals is ready to help you navigate the tax implications of remote work and ensure your business remains compliant now and for years to come. If you have questions about how this tax benefit might apply in your situation, please give our office a call.

Saver’s Credit Can Help You Save for Retirement

Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. The saver’s credit, also called the retirement savings credit, helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE IRAs, SEPs, 401(k) plans, 403(b) plans for employees of …

Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit.

The saver’s credit, also called the retirement savings credit, helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. Self-employed individuals may also enjoy the benefit of the credit.

Credits are determined from the tables shown below and are based upon both filing status and income (AGI). Each year the tables are adjusted for inflation and the tables for 2023 and 2024 are illustrated below.

2023 PHASE-OUTS

Modified Adjusted Gross Income*

Joint Return

Head of Household

Others

Applicable Percentage

Over

Not Over 

Over

Not Over

Over

Not Over

  

$ 0

$43,500

$ 0 

$30,750

$ 0

$21,750

50

$43,500

$47,500

$32,625

$33,000

$21,750

$23,750

20

$47,500

$73,000

$35,625

$51,000

$23,750

$36,500

10

$73,000

  

$54,750

  

$36,500

  

0

 

2024 PHASE-OUTS

Modified Adjusted Gross Income*

Joint Return

Head of Household

Others

Applicable Percentage

Over

Not Over 

Over

Not Over

Over

Not Over

  

$ 0

$46,000

$ 0 

$30,750

$ 0

$23,000

50

$46,000

$50,000

$34,500

$33,000

$23,000

$25,000

20

$50,000

$76,500

$37,500

$51,000

$25,000

$38,250

10

$76,500

  

$57,375

  

$38,250

  

0

 

* Modified AGI is determined without regard to the foreign earned income exclusion (also applies to US possessions) and foreign housing exclusion or deduction.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples if both spouses contribute to a plan), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits and may in fact be zero for some taxpayers.

The amount of a taxpayer’s saver’s credit is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs.

Examples

Eric’s 401(k) contribution was $3,000, but only the first $2,000 can be used

$2,000

Heather’s IRA contribution was $500, so it can all be used

500

Total qualifying contributions

2,500

Credit percentage for a joint return with AGI of $40,000 from the table

X.20

Saver’s credit

$500

 

This example illustrates how the credit phases out for higher-AGI taxpayers. In this example, the couple’s AGI of $44,000 limits the credit to 20% of their qualifying contributions. Had their AGI been $43,500 or less, their credit percentage would have been 50% of their qualified contributions, for a credit of $1,250.

The saver’s credit supplements the other tax benefits available to people who set money aside for retirement. Generally, except for Roth IRA contributions, workers’ contributions to retirement plans are tax deductible, either in the form of a deduction on their tax return (traditional IRAs and certain self-employed retirement plans) or through a reduction of wages that would otherwise be taxable (such as pre-tax contributions to a 401(k), 403(b), etc.). So, in addition to the saver’s credit, contributions to retirement plans provide a tax deduction for traditional IRAs or income reductions for certain other plans, which lowers an individual’s tax before the credit is applied. The credit itself can only be used to reduce taxes (income and alternative minimum taxes only) to zero, and any amount in excess of a taxpayer’s tax liability is lost.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as a dependent on someone else’s return cannot take the credit.
  • A full-time student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a full-time student.

The credit is provided to encourage taxpayers to save for retirement. To prevent taxpayers from taking distributions from existing retirement savings and re-depositing them to claim the credit, qualifying retirement contributions used to figure the credit are reduced by any retirement plan distributions taken during a “testing period.” The testing period includes the prior two tax years, the current year, and the subsequent tax year before the due date (including extensions) for filing the taxpayer’s return for the tax year of the credit.

As you can see, qualifying for and using this credit involves following a complicated set of rules, but the credit can be very beneficial. If you are not sure you can afford to fund your retirement plan, contributions to an IRA or a self-employed retirement plan (SEP) can be made after the close of the year, allowing you time to determine the tax benefit of the saver’s credit and your overall tax refund before you make a contribution to one of those plans. For example, IRA contributions for 2023 can be made up to April 15, 2024, while SEP contributions can be made until October 15, 2024, if your return is on extension.

If you have questions about how this tax benefit might apply in your situation, please give this office a call.

2024 Standard Mileage Rates Announced

As it does every year, the Internal Revenue Service recently announced the inflation- adjusted 2024 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes.Beginning on Jan. 1, 2024, the standard mileage rates for the use of a car (or a van, pickup …

As it does every year, the Internal Revenue Service recently announced the inflation- adjusted 2024 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes.

Beginning on Jan. 1, 2024, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

  • 67 cents per mile for business miles driven (including a 30-cent-per-mile allocation for depreciation). This is up from 65.5 cents per mile in 2023;
  • 21cents per mile driven for medical or moving purposes, down from 22 cents per mile in 2023; and
  • 14 cents per mile driven in service of charitable organizations.

The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for over 25 years.

When using a personal vehicle while performing services for a charitable organization, and instead of using the 14 cents a mile method, a taxpayer who itemizes their deductions can deduct directly-related out-of-pocket expenses, such as the cost of gas and oil. However, the expenses of general repair and maintenance, depreciation, registration fees, or the costs of tires or insurance aren’t deductible.

Important Considerations for Business Use of a Vehicle – Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to volatile fuel prices, the bonus depreciation as well as increased depreciation limitations for passenger autos may make using the actual expense method worthwhile during the first year a vehicle is placed in business service. While the bonus depreciation rate had been 100% during 2018-2022, it was 80% for 2023, and will be 60% for vehicles put in service in 2024.

However, the standard mileage rates cannot be used if you have used the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.

What business owners using the standard mileage rate frequently overlook is that parking and tolls, as well as state and local property taxes paid for the vehicle and attributable to business use, may be deducted in addition to the standard mileage rate.

Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel.

The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, during these years employees may not take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks, or vans.

However, self-employed taxpayers can still deduct the business use of a vehicle. Regardless of whether the standard mileage rate or actual expense method is used, a self-employed taxpayer may also deduct the business use portion of interest paid on an auto loan on their Schedule C.

Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation; taxpayers with these vehicles can utilize both the Section 179 expense deduction (up to a maximum of $30,500 in 2024) and the bonus depreciation (the Section 179 deduction must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to the taxpayer’s income (SE income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.

If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give this office a call.

Major Tax Sunset on the Horizon

Back in late 2017 Congress passed the Tax Cuts & Jobs Act of 2017 (TCJA) that made enormous changes to income tax laws as outlined below. However, most of the provisions of TCJA were only temporary changes that will expire after 2025. During the Covid pandemic Congress made other tax law changes that will …

Back in late 2017 Congress passed the Tax Cuts & Jobs Act of 2017 (TCJA) that made enormous changes to income tax laws as outlined below. However, most of the provisions of TCJA were only temporary changes that will expire after 2025. During the Covid pandemic Congress made other tax law changes that will also soon expire. So far Congress has not addressed these expiring tax provisions. Will they extend them, let them just expire and return to old law, or address them individually with new legislation? With the potential for significant tax changes on the horizon, taxpayers should begin thinking more urgently about their estate and income tax planning.

What Congress might do is up in the air, especially with 2024 being an election year. It is expected these expiring issues will not be addressed until after the elections. However, to give taxpayers a heads up to the TCJA and other legislation provisions expiring after 2025 the following list has been compiled of the more significant expiring provisions compared to pre-TCJA tax law.

Estate and Gift Tax – Probably the most significant of expiring provisions is the exemption from estate and gift tax, which was about doubled under TCJA and is $13.61 million for 2024. Under pre-TCJA law the exemption would have been approximately $5.49 million adjusted for inflation in 2024. How Congress deals with the exemption amount will mean significant estate planning issues for the more well to do.

Personal Exemptions – Prior to TCJA, taxpayers were allowed an exemption deduction for everyone included in the family. The exemption amount adjusted for inflation is $5,050 for 2024. As an example, if a married couple filing jointly had 2 children dependents and the exemption deduction was allowed for 2024, they would have an income deduction of $20,200 (4 x $5,050). However, TCJA suspended the exemption deduction through 2025.

Standard Deduction – Under TCJA the deduction for taxpayers not itemizing their deductions, termed the standard deduction, was approximately doubled from the pre-TCJA amounts. As an example, the 2024 standard deduction for a married couple filing jointly is $29,200. Under pre-TCJA law it would have been approximately $14,950 adjusted for inflation. The higher standard deduction under TCJA has allowed more taxpayers to skip having to itemize their deductions.

Home Mortgage Interest Deduction – TCJA limited the itemized deduction for home mortgage interest on a taxpayer’s principal and second homes to the interest on a combined acquisition debt of $750,000 ($375,000 for married individuals filing separately) and eliminated the deduction for interest on $100,000 of equity debt. Since that time, homes have soared in value, and correspondingly the amount of mortgage loans, and interest rates have increased significantly. Pre-TCJA law allowed an interest deduction on up to $1 million of home acquisition debt and $100,000 of equity debt. The real estate market will feel the effects of how the deduction for home mortgage interest is treated after 2025.

Limitation on Tax Deductions (SALT) – SALT is the acronym for state and local taxes. Pre-TCJA taxpayers who itemized their deductions were allowed an unlimited deduction on their federal return for property taxes and state and local income tax. TCJA imposed a $10,000 limit on that deduction, which generally impacted higher income taxpayers and those who reside in states with high state income taxes such as CA, NJ, and NY. Many states developed workarounds.

Suspension of Tier 2 Miscellaneous Itemized Deductions – Tier 2 miscellaneous itemized deductions are those which are deductible to the extent they exceed 2% of a taxpayer’s income (AGI). TCJA prohibited these expenses from being deducted. They include legal expenses, which, when not deductible, can be a substantial hardship for someone who wins a taxable lawsuit and then must pay taxes on the entire award or settlement without being able to deduct the amount paid for legal services, which in many cases are 40% of the award or settlement. Tier 2 miscellaneous deductions also include employee business expenses, and not being able to deduct these costs can also be a hardship for employees who must supply their tools, uniforms, supplies or have unreimbursed work-required vehicle or other transportation expenses. Also included are investment fees, job-search expenses, home office for employees, and other work-related expenses.

Suspension of the Limitation on Itemized Deductions – Pre-TCJA itemized deductions were subject to a phaseout that generally affected higher income taxpayers. That provision limited itemized deductions to the lesser of 3% of income (AGI) or 80% of those otherwise allowable deductions for the year.

Individual Tax Rates – TCJA not only reduced the top tax bracket for individuals from 39.6% to 37% (this generally only impacts higher income taxpayers), but also reduced the tax rates at almost every level, and adjusted the bracket thresholds.

Child Tax Credit – The child tax credit was $1,000 pre-TCJA. TCJA temporarily increased it to $2,000 through 2025. What Congress decides to do about the credit can have a substantial impact on families with children under the age of 17, especially lower income families.

Special Rule for Certain Discharges of Student Loans – Although not a part of the TCJA changes, current tax law enacted in 2021 excludes cancellation of debt income to any loan provided expressly for post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if such loan was made, insured, or guaranteed by the U.S., DC, state, eligible education institution, etc. This provision is available only through 2025.

Employer Payments of Student Loans – A temporary provision included in 2020 Covid pandemic relief legislation permits employers, via their employer-provided educational assistance programs, to make tax excludable payments up to $5,250 towards an employee’s student loan debt. This, too, expires after 2025.

Moving Expenses – TCJA suspended (except for military) both the deduction for a job-related move and the income exclusion for reimbursements.

Bicycle Commuting – Although not a big tax issue, TCJA did suspend the exclusion of the per month $20 inflation adjusted employee fringe benefit for bicycle commuting to work.

Discharge of Indebtedness on Principal Residence – When TCJA was passed the housing market was in decline and homes were being foreclosed upon or voluntarily being surrendered to the lender. In many cases the lender was forced to sell the home for less than the mortgage and generally did not pursue the homeowner for the difference. This resulted in debt relief income for the homeowner, which for tax purposes is taxable income. TCJA included a provision that excluded up to $750,000 ($375,000 for married individuals filing separately)of debt relief income from the discharge of indebtedness on a principal residence. Because of the current strong housing market, losing this provision after 2025 should affect a very few taxpayers.

Premium Assistance Credit – Premium assistance credit is a credit for individuals who obtain their medical insurance from a government marketplace. Legislation during the Covid epidemic provided certain premium assistance enhancements that have benefitted nearly all those who purchase their health insurance through the marketplace. These enhancements extend through 2025. If Congress doesn’t extend the enhancements, it will mean higher out-of-pocket costs for insurance coverage for a significant number of people.

Casualty Losses – Although TCJA retained the itemized deduction for casualty and theft losses incurred in a federally declared disaster, it did suspend other casualty losses incurred during 2018 through 2025.

Achieving a Better Life Experience (ABLE) Accounts – Federal law enacted in 2014 authorized states to establish qualified ABLE programs which provide the means for individuals and families to contribute and save for the purpose of supporting individuals, blind or severely disabled before turning age 26 (46 beginning for years after 2025), in maintaining their health, independence, and quality of life. However, several enhancements to the program will expire after 2025. They include the qualifying contributions for the saver’s credit, accepting rollovers from qualified tuition (Sec 529) plans, and an increase in contribution limits.

Paid Family and Medical Leave Credit – Provides a credit to an employer for wages paid to employees while they are on paid family or medical leave. Originated by TCJA for 2018 and 2019, the credit was subsequently extended by Congress through 2025.

New Markets Credit – Not part of TCJA but nevertheless sunsetting after 2025, this provision provides a tax credit for making certain investments in qualified entities resulting in the creation of jobs and material improvement in the lives of residents of low-income communities. Subject to credit carryovers through 2030. This credit generally benefits big business.

Work Opportunity Credit – Not part of TCJA but nevertheless sunsetting after 2025, employers may qualify for a credit for hiring workers from one of several targeted groups. The credit is generally 40% of first-year wages, up to $6,000, which provides a maximum credit of $2,400 per employee.

Bonus Depreciation – Bonus Depreciation allows businesses to expense in the year of purchase the cost of business assets (e.g., equipment) rather than spreading the cost over their useful life (depreciating the cost). Bonus depreciation was originally allowed on 100% of the cost of a qualified business asset but has entered a phase where a smaller percentage applies to purchases in succeeding years until bonus depreciation is totally phased out.

Year

2023

2024-2025

2026

2027

2028

Percentage

80%

60%

40%

20%

-0-

 Employer De Minimis Meals and Related Eating Facilities – TCJA ended the employer deduction for employer de minimis meals and related eating facility, and meals for the convenience of the employer.

Although it is unknown at this time how Congress will deal with these expiring tax issues, if you have any questions, please give this office a call.

About us

De Boer, Baumann & Company provides professional accounting, tax, and business advisory services to individuals and businesses in West Michigan and the surrounding areas. With expertise in a variety of industries, DBC specializes in comprehensive and innovative solutions to help clients achieve their financial goals.