How to Turn Your Side Hustle into Tax Savings

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If you took on an extra gig last year to earn some extra cash, you may have found an unexpected surprise when you filed your taxes — a big bill. That’s because independent contractors don’t have money withheld by their employer.

But don’t worry. With the right preparation, your side hustle could actually help lower your taxes. Follow these tips to help ensure your extra work pays off.

Estimate what you expect to earn. When you have a good idea of how much income you’ll generate, you can better plan for potential deductions and make tax payments in advance to help avoid tax penalties later. Estimate your earnings by looking at how much you made last year. To further fine-tune the calculations, examine your monthly earnings to date and use that number to project this year’s income.

Consider a health savings account (HSA). Opening a health savings account can help reduce your taxable income more than you might expect. The money you contribute is fully tax deductible, and can be used to pay for out-of-pocket medical expenses. The earnings in the account grow tax free, and any funds left over at the end of the year are rolled over for future health expenses.

Open a self-employed retirement plan. There are a variety of retirement plans for the self-employed, allowing you to make tax-deductible contributions. If you’re simultaneously holding down a full-time job that offers a traditional 401(k) plan, you may also be eligible for a SEP-IRA — one of the simplest ways to shelter your self-employment income.

If your side-hustle becomes a second full-time job, you may also look into a solo 401(k). This type of retirement plan offers high contribution limits and has enormous potential for tax savings. Keep in mind, you’ll need to apply for an employer identification number (EIN) to open one.

Take advantage of deductions and write-offs. Do you run your busines out of your home? You may be eligible for the home office deduction, allowing you to write off part of your mortgage, utilities and other costs. You can also take a standard home office deduction based on the square footage of your dedicated workspace and the size of your home. Always consult your tax professional before claiming these deductions.

All it takes is one small misstep…

If you’re not careful, your hard-earned side hustle money can cost you big time when tax season rolls around. Find out how the tax experts at Magone & Company can help keep more money in your wallet.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

 

 

5 Actions That Can Unexpectedly Raise Your Taxes

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Knowing what factors can raise your taxes is one of the best ways to keep more money in your pocket. That’s why proper tax planning is a year-round practice. Here are five actions that can unexpectedly increase your tax bill:

  1. Cashing in your retirement plan. There are many reasons not to cash in your plan early, and the tax penalty is one of the biggest. If you take the proceeds from your 401(k) plan in cash, instead of rolling it over into an IRA, you’ll have to pay taxes on the money you withdraw. Even worse, you’ll be subject to a 10% penalty. By the time you’re done, you could lose up to half your hard-earned retirement plan to taxes and penalties.
  2. Working as a freelancer. Working for yourself is great, but it can trigger tax headaches. Freelancers and other self-employed workers are subject to self-employment tax, which represents the combined employer and employee share of the Medicare and Social Security tax. The tax hit can be substantial, especially if you don’t plan for it.
  3. Failing to take your RMD. You can’t keep retirement funds in your account indefinitely. You’re required to start pulling money from your IRA and workplace retirement plans when you turn 70. If you fail to make that required minimum distribution (RMD), the penalty fees can easily offset your savings.
  4. Skipping your IRA contribution. If you’re accustomed to making an annual IRA contribution, skipping that contribution can cost you. Before you omit it completely, run the numbers and see how the decision will affect your tax bill.
  5. Paying off the mortgage. Eliminating mortgage debt can be very freeing, but it can also raise your taxes. Mortgage interest is deductible if you itemize your deductions. Losing that deduction may leave you owing more to the IRS. That’s not necessarily a reason to keep a mortgage, but it can be an important consideration.

With smart strategies for tax planning, the CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

Return to the Office: Managing Employee Pushback on In-person Work

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The pandemic fueled a massive work-from-home trend that many non-essential businesses have maintained for the past 18 months or more. But despite the current surge in COVID-19 cases, more and more employers are asking employees to return — causing a fair share of anxiety and fear, especially among the unvaccinated. As employers receive pushback from their teams, what can be done to ease employee comfort and peace of mind around colleagues, customers and clients after an extended hiatus?

A heavy-handed request?

With the FDA fully approving the vaccine beyond emergency use, employers may increasingly be making vaccination a requirement for returning to the office.

As an employer, you have options up to and including termination (in some circumstances) if employees refuse to return to the office or get vaccinated. But will on-site work directly impact or negate your success?

Here are some potential reasons to reconsider a blanket return-or-quit policy.

  • Employees may be genuinely reluctant for legitimate health reasons.
  • It may cause more stress for employees whose lives have already been turned upside down by COVID-19.
  • You risk damaging morale across the workforce.
  • You may have wrongly assessed the legal risks of doing so.
  • It might be harder than expected to recruit replacements for terminated employees.

The first step in formulating a return-to-work strategy is uncovering why your employees are reluctant to stop working from home. Consider conducting a survey, but avoid giving the impression that simply preferring to work at home is a compelling enough reason to allow it.

Coaxing tips

Reassuring employees of your commitment to maintaining a safe environment may help alleviate concerns. Here are some tips to help them get on board:

  • Give a generous heads up. Set the onsite work deadline a month or two into the future to give employees time to adjust and plan head.
  • Have a conversation. If feasible, have one-on-one conversations with employees who express worry about returning to work. They’re more likely to come around if they know you respect their concerns and want to understand them. A reasonable compromise might emerge.
  • Educate, educate, educate. Inform employees about the Centers for Disease Control and Prevention (CDC) workplace safety standards and the scientific basis for those practices, as well as your compliance practices.
  • Enact a policy phase-in period. Instead of setting an all-or-nothing date of return, allow employees to slowly acclimate. You may ask them to return for one or two days a week initially, adding more days over time.
  • Be flexible and fair. Cutting deals with individual employees may create resentment from others. While doing your best to accommodate individual needs, it’s important to ensure that your practices are reasonable for everyone.

Help from Uncle Sam

If you’re considering a mandatory vaccination policy to accompany your return-to-work policy, you may consider incentivizing hesitant employees to get their jab.

One possible solution is to offer paid time off for COVID-19 vaccine appointments. Some employers take this a step further, offering a financial bonus on top of regular pay.

A little compassion goes a long way

No matter how you approach the task at hand, be aware of the many health conditions that may make people more vulnerable to contracting or having an acute case of COVID-19. The CDC’s list includes cancer, chronic kidney disease, COPD, heart conditions, obesity, pregnancy, smoking and diabetes. And some employees with these conditions might worry about COVID-19-related health risks at the workplace, even if they’ve been vaccinated.

In all cases, be sure to review how federal, state and local statutes may impact the approaches you can take.

Just Married? Financial and Legal To-dos for Newlyweds

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Wedding season is upon us. September and October are typically the most popular months to tie the knot. And despite the pandemic still raging in many parts of the country, the wedding industry is forecasting a temporary boost in revenue, with the number of fall weddings scheduled already close to pre-pandemic levels for now.

Many engaged couples and their families are remaining hopeful and cautiously planning for their big day. Whether you’re preparing for a wedding celebration now or later, it’s important to remember the administrative tasks to address when you say, “I do.”

 Housekeeping chores for name changes

The majority of pre-marital tasks relate to taking your spouse’s name or vice versa. If your name is changing, here’s the protocol after you’re legally wed:

  • Visit your local SSA office. Notify the Social Security Administration (SSA) after you’re married to protect Social Security benefits and credit ratings. To get a new Social Security card, you need to complete an application and provide proof of identification with your old and new names, such as a driver’s license and a marriage certificate. If you were born outside the United States, you’ll also need proof that you’re a citizen or legally in the country. Keep in mind, the SSA doesn’t accept photocopies, notarized copies or your old Social Security card as evidence of identity.
  • Update IRS records. The SSA informs the IRS about name changes, and the tax agency’s records are generally updated 10 days later. If you don’t notify the SSA and file a tax return with your new married name, IRS computers won’t be able to match the new name with the Social Security number.
  • Spread the word. Once your name is officially changed with the SSA, share the good news with everyone else. To avoid confusion, also be sure to update your driver’s license, passport, tax records, voter registration, vehicle registration, utility records, retirement plans and more.

When you get back to work, consult your company’s HR department to evaluate how your change in marital status affects your benefits options. For example, you might save money by eliminating duplicate healthcare or life insurance coverage.

Joining your finances

Are you combining your savings, checking and credit card accounts into one? Even if you decide to maintain separate accounts, it may be helpful to have at least one joint account to pay for shared expenses, such as rent, mortgage costs, household expenses or childcare.

A joint account can also help avoid trouble in certain situations. When a spouse or common law partner dies and there are separate accounts, the survivor will be excluded from the separate account if the estate goes into probate. That could take months. CPAs often help newlyweds establish joint financial goals, including annual budgets and contingency plans in case a spouse passes away, becomes disabled or gets laid off.

Managing legal matters

From a legal perspective, you’ll need to update deeds, wills and power of attorney documents. Your attorney can also discuss the full array of estate planning tools, such as various trusts, that might be relevant now that you’re married.

People who have been previously married bring additional financial issues to the table, especially if there are children, alimony payments and child support involved.

  • Do you have business debts or obligations with your former spouse?
  • Are you required to keep a former spouse on your insurance?
  • Does a former spouse have a claim on your employer-sponsored retirement account?
  • If you’re entitled to assets from a former spouse (for example, an inheritance or other financial interest) will your remarriage end that entitlement?

Marriage is a celebration — but it also involves a lot of paperwork. Don’t let administrative chores prevent you from living happily ever after. Contact the CPAs at Magone & Company at (973) 301-2300 to help tackle the critical tasks head on.

Overhead Expenses Starting to Accumulate? Manage Them Now Before They Get Out of Hand

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It’s not uncommon for overhead expenses to increase over time. In fact, it’s part of doing business.

But when overhead begins to mushroom out of control, it’s critical to confront the situation in a timely manner to avoid bigger problems down the road. Here are a few tips to help you manage runaway overhead costs:

Oversight is essential. Always be aware of your overhead expenses. Set time aside regularly to review them. Being conscious of what you are spending alerts you to changes that must be made.

Conduct an overhead review. The goal of your overhead review should not be only to reduce costs, but also to make certain those reductions allow you to deliver anticipated service levels to customers and clients. To that end, you must be aware of what your clientele expects from you. Involve employees in making a list of what your customers most value about your services and what they think might be improved. Awareness of customer satisfaction levels gives you a head start in determining what overhead cuts might be detrimental to your business.

Calculating overhead expenses. Use this simple equation to decide if you need to conduct an overhead review:

(Overhead ÷ monthly sales) x 100 = Overhead percentage

Recommended overhead ratios vary by industry. However, an overhead percentage that is no higher than 35 percent of total sales is considered positive.

Classify overhead activity. Overhead activity can be categorized into three areas: core, support and diversionary. Core activities such as sales add direct value to the company. Support activities such as record keeping do not add direct value, but they support the core activity. Diversionary activity such as time spent on correcting errors adds no value to the business. Since diversionary activities can account for as much as 20-40% of total overhead activity, special attention must be given to this category in determining overhead reductions.

Ideas for reducing overhead. These are some of the key areas you should look at in deciding overhead reductions:

  • Renegotiate your lease. The US Chamber of Commerce recommends that you make sure you know how much of a reduction to ask for based on market conditions and your business’s financial projections.
  • Evaluate your utility usage. Determine the levels of service your business actually requires. Odds are that you’ll find you’re spending much more than you need to, especially with the advent of competing utility services.
  • Rethink Insurance. Keeping certain that you remain adequately covered, review your policies to see what might safely be cut. Failing that, don’t auto-renew when your policy comes due annually. Ask your broker to shop around, as rates can vary widely.
  • Rent equipment instead of buying. This eliminates many upfront and maintenance costs. Leasing is not only less expensive, it also helps you keep your technology current.
  • Review your contracts. Cancel contracts you may no longer need, and renegotiate the necessary ones.

Benefits of an overhead review

According to the Managers-Net Archive, a properly executed overhead review can result in at least a 20% reduction in overhead costs, usually within a 10- to 14-week period.  But it also can benefit your company in other ways. The changes you make can result in improved services critical to your customers. It can make you aware of costly diversionary activity and present the opportunity to minimize it. And it can help provide your management team with a better understanding of the current state of the business, resulting in commitment to your proposals for improvement.

Why Preserving a Healthy Cash Flow is Key to Your Company’s Survival

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Cash flow is the lifeblood of a business. It’s what keeps the lights on and the doors open. And lack of it is one of the biggest reasons businesses fail. In fact, 82% of small businesses fold due to cash flow mismanagement.

If you’re spending more on bills, payroll, inventory and interest than your company is bringing in, you have negative cash flow — a key indicator that your business’s financial health is suffering. In that case, it’s time to make some serious changes, as the future of your business depends on it.

Having just enough won’t cut it

Not only do you need adequate funds for day-to-day business expenses, but you need enough cash to pay suppliers, creditors and your employees before you actually generate a profit. Understanding how cash flows in and out of your business gives you the power to plan strategically for the future, improve vendor relationships and increase the likelihood that you never run out of cash.

The sooner you learn how to manage your cash flow, the better your chances of success. Here are some tried and true strategies for improvement:

  • Control inventory. Holding too much inventory ties up cash, but not having enough can lead to a loss in sales and unhappy customers. Through consistent analysis, you can ensure that you’re on top of your needs.
  • Collect receivables. Establish a formal collections schedule and follow up on non-payers. Consider charging interest to penalize late payers or end unprofitable relationships entirely.
  • Control access to bank accounts. Keep the number of people who can access your accounts to a minimum, and be sure to update passwords as needed.
  • Outsource when it’s cost-effective. For certain areas of your business — like accounting, marketing, payroll and HR — it might make more financial sense to subcontract to a firm that specializes in those functions.
  • Consider leasing vs. buying — or vice versa. If you’ve been leasing, your costs are likely predictable. But purchasing equipment can substantially alter your cash flow. Reevaluate your costs and your needs to see what works best.
  • Run monthly cash flow reports. Whether you use Excel (not recommended!) or software such as enterprise cloud versions depending on your needs (Great Plains, NetSuite or Intaact), take time for a weekly overview of cash received and cash paid out to show your business’s cash position.

Understanding the financial environment of your business

According to Inc., “If you haven’t considered cash management an important issue, then you’re probably undermining your business’s short-term stability and its long-term survival.”

There are few things more important to your business than cash flow — especially if you’re striving for growth. That’s why Magone & Company offers business advisory services that look ahead in real time rather than relying on typical rear-facing accounting services.

Reach out to see how we can help get your cash flow on track for the long term.