How to Secure Tax Savings Before the End of 2022

To get started…

Tax planning starts now! You should NOT wait until tax season to start tax planning. A lot of tax tips and strategies should be implemented before the year is over. Here are the top 3 things you should know about preparing for the upcoming tax season.

Let’s get into it:

Tax Benefits are Expiring Soon

There are some tax benefits that are expiring at the end of 2022:

• Bonus depreciation allows you to take a 100% deduction on certain business assets.

• Dec 31st is the deadline to take the 100% deduction. It goes down to 80% starting Jan. 1st 2023.

• Dec 31st is the deadline to fully deduct business meals. Starting Jan 1st business meals will only be 50% deductible.

• The American Rescue Plan Act (ARPA) temporarily enhanced and expanded eligibility for premium tax credits on Affordable Care Act (ACA) Marketplace plans in 2021 and 2022.

• The Inflation Reduction Act extended most of the premium tax credit enhancements through 2025.

However, the expanded eligibility requirements for people who received unemployment compensation in 2021 was not extended by past 2022.

Pay your Estimated Taxes

Don't forget to pay estimated taxes throughout the year. Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments.

Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more.

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

If you receive a paycheck, the Tax Withholding Estimator will help you make sure you have the right amount of tax withheld from your paycheck. You don’t have to pay estimated tax for the current year if you meet all three of the following conditions:

• You had no tax liability for the prior year.

• You were a U.S. citizen or resident for the whole year.

• Your prior tax year covered a 12-month period.

Choose S-Corporation to Save

Consider changing your business structure to save on self employment taxes. One of the biggest benefits of an S corporation is that it helps business owners avoid costly self-employment taxes. Self-employment taxes are Social Security and Medicare (FICA) taxes that self-employed individuals must pay.

If you're self-employed, you'll need to pay 15.3% in FICA taxes. This tax is in addition to any federal or state taxes owed. A common way to get around these costly self-employment taxes is to establish an S corporation. By establishing an S corporation, you’re separating your income into two types of income: employment income and distribution income.

Distributions are profits that you receive from your business and are not subject to FICA taxes. Only employment income is subject to FICA taxes. As a reminder, the government requires that owners who work for their S-corporations pay themselves a reasonable salary prior to taking out any corporate distributions. As such, it is only advisable to elect S corporation status if you make a certain amount of money or if the benefits from establishing an S corporation outweigh the costs.

It’s also important to remember that states often levy higher taxes on corporations. Always talk to a financial advisor prior to making any business structure changes.

What this means….

Long story short, you should start tax planning before the end of the tax year. This ensures that you're not missing out on valuable tax benefits and stragies. It's never too late to get your business finances in order. Check out the Pachira Financials website to learn more about small business resources.

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