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When Can You Deduct Business-Related Meals . . . And How Much Can You Deduct?

The Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses paid or incurred after 2017. For example, you can no longer deduct any of the cost of taking clients out for a round of golf, to the theater or for a football game. But the TCJA didn’t specifically address the meals, beverages and snacks that often accompany entertainment activities.

Then the Consolidated Appropriations Act (CAA), which was signed into at law in December of 2020, temporarily increased the deduction for certain business-related meal expenses.

If you’re like many business owners today, you may not be sure what you can deduct or how much you can deduct. Here’s what you need to know.

A 100% deduction

The CAA allows taxpayers to deduct 100% of the cost of business-related food and beverage expenses incurred at restaurants in 2021 and 2022. In previous years, deductions for business meals at restaurants were limited to only 50% of the cost.

Under the new law, for 2021 and 2022, business meals provided by restaurants are 100% deductible, subject to the considerations identified in preexisting IRS regulations. IRS guidance in Notice 2021-25, released in April, defines “restaurants” for the purpose of this tax break to  include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption.

However, restaurants don’t include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.

Pre-CAA regulations

In October 2020, the IRS issued final regulations which clarified that taxpayers could still deduct 50% of business-related meal expenses under the TCJA. These regs were written before the CAA change that allows 100% deductions for business-related restaurant meals provided in 2021 and 2022, but they still provide some useful guidance on the following issues:

Definition of food and beverage costsFood or beverages means all food and beverage items, regardless of whether they are characterized as meals, snacks, or other types of food and beverages. Food or beverage costs mean the full cost of food or beverages, including any delivery fees, tips and sales tax.

Treatment of food and beverages provided with entertainmentFor purposes of the general disallowance rule for entertainment expenses, the term “entertainment” includes food or beverages only if the food or beverages are provided at or during an entertainment activity (such as a sporting event) and the costs of the food or beverages aren’t separately stated.

Specifically, to be deductible, amounts paid for food and beverages provided at or during an entertainment activity must be:

  • Purchased separately from the entertainment, or
  • Stated separately on a bill, invoice or receipt that reflects the venue’s usual selling price for such items if they were purchased separately from the entertainment or the approximate reasonable value of the items.

Otherwise, the entire cost is treated as a nondeductible entertainment expense; the taxpayer can’t attempt to allocate costs between the entertainment and the food or beverages.

Treatment of business mealsUnder the final regs, a deduction is allowed for business-related food or beverages only if:

  • The expense isn’t lavish or extravagant under the circumstances,
  • The taxpayer or an employee of the taxpayer is present at the furnishing of the food or beverages, and
  • The food or beverages are provided to the taxpayer or a business associate.

A business associate means a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business such as a customer, client, supplier, employee, agent, partner or professional advisor — whether established or prospective.

Treatment of meals while traveling on businessUnder the final regs, the long-standing rules for substantiating meal expenses still applies and they can be deductible.

The regs also reiterate the long-standing rule that no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business travel (or accompanying an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual. For example, meal expenses for the taxpayer’s spouse would be deductible if the spouse works in the taxpayer’s unincorporated business and accompanies the taxpayer for business reasons.

Under the new law, for 2021 and 2022, meals provided by restaurants while traveling on business are 100% deductible, subject to the preceding considerations.

Need help?

There are additional circumstances under which your business can deduct 100% of the cost of meals, other food and beverages. Contact your tax advisor if you have questions or want more information.

© 2021

Working Remotely From “Out of State” Can Be Taxing

The COVID-19 pandemic has required many people to work remotely, either from home or a temporary location. One potential consequence of remote work may surprise you: an increase in your state tax bill.

During the pandemic, it’s been fairly common for people to work remotely from another state — across state lines from the employer’s place of business or even across the nation. If that describes your situation, you may need to file tax returns in both states, potentially triggering additional state taxes. But the outcome depends on applicable law, which varies from state to state.

Watch out for double taxation

Generally, a state’s power to tax a person’s income is based on concepts such as domicile and residence. If you’re domiciled in a state — that is, you have your “true, fixed permanent home” there — the state has the power to tax your worldwide income. A state also may tax your income if you’re a “resident.” Usually, that means you have a dwelling in the state and spend a minimum amount of time there.

It’s possible to be domiciled in one state but a resident of another, which may require you to pay taxes to both states on the same income. Many states offer relief from such double taxation by providing credits for taxes paid to other states. But it’s still possible for remote work to result in higher taxes — for example, if the state where your employer is based, and where you usually live, has no income tax but you work remotely from a state with an income tax.

A state also may be able to tax your income if it’s derived from a source within the state, even if you aren’t a resident or domiciliary. Several states have so-called “convenience rules”: If you’re employed by an organization in the state, but live and work in another state for your convenience (not because the job requires it), then you owe income tax to the state where the employer is based.

If that happens, you also may owe tax to the state where you reside, which may or may not be reduced by credits for taxes paid to the other state. Some states have agreed not to impose their taxes on remote workers who are present in their state as a result of the pandemic. But in many other states there’s a risk of double taxation.

Know your options

If you’ve worked remotely from out of state in 2021, consult your tax advisor to determine whether you’re liable for taxes in both states. If so, ask if there are steps you can take to soften the blow.


How to Get Your 2022 Finances in Order

Believe it or not, the New Year is here. If you’re trying to wrap your head around everything that’s ahead, one of the best things you can do is prepare yourself financially. Here are a few tasks you can get started on right away.

Look Back at 2021

Depending on how in-depth you want to go, this could take a couple of hours or more. That said, ask yourself these questions: Did you spend as planned? Where do you want to adjust, increase or decrease spending thresholds? What kind of unexpected expenses came up? How did you handle it? Think about what you’ll do for the upcoming year. When it comes to money, the cliché “hindsight is always 20/20” will often ring true.

Tackle Your Debt

If you want 2022 to be the year you become debt-free, it can happen. We’re talking about consumer debt, not your mortgage, rent, car payments, or any other necessities. A good strategy is to make a list of your credit cards, balances, and interest rates. Start with the account balances that are the highest and create a payment plan, then move down the list until you’re finished. Balance transfers to cards with zero interest (for a limited time) are a smart idea, too. Then freeze your spending for 30 days, or however long you need. It might take some time, but these days, financial freedom is well worth it.

Increase Your Retirement Funds

Good news: the maximum contribution limit for your 401(k)s increases by $1,000 in 2022 compared to 2021, for a total of $20,500. If you’re 50 or older, the limit is $27,000, which is great for those closer to retirement. If you can’t max out your contribution, just increasing it by one percent can have an incredible effect. According to calculations from Fidelity Investments, if you’re 35 and earning $60,000, this tiny bump could yield an additional $85,000 to your retirement fund over 32 years. That’s equal to putting aside $12 per week (how easy is that?), assuming a 5.5 percent return and consistent salary growth.

Create a Back-Up Plan

This probably isn’t something you want to think about, but it’s necessary should something happen to you. Take a few minutes to update the beneficiaries on all your financial accounts, including retirement, investment, and benefits accounts. Next, make sure you have a durable power of attorney, someone you trust to take care of all your monetary affairs. After this, designate a healthcare proxy or power of attorney, who can speak for you if you become incapacitated. Finally, update your will. Decide who will inherit your assets. If you have children, you can even assign guardians for them. In the long run, if the worst-case scenario unfolds, you’ll save your loved ones a lot of time and trouble.

Carve Out Time for a Life Audit

This task might sound big, but it’s necessary if you want to achieve your dreams – financial or otherwise. Start with a pen or pencil, about 100 sticky notes, a journal, and a large space, perhaps a door, board, or wall. Turn your phone off, then get started. Look back at your life. Assess where you’ve been, where you are, and where you’d like to go, then brainstorm. Do you want to save a certain amount of money this year? Put away some cash for a dream trip? Learn a language? When you think you’ve finished, organize your goals into three categories: personal, work/career, and money. After that, further, divide them into short-term and long-term goals. Take a photo of your notes and keep it near to remind yourself of what you’re trying to accomplish. More often than not, your dreams involve money, which is directly related to your priorities and how you budget.

Budget for 2022

Now that 2021 is in your rearview mirror (and perhaps you’ve even done a life audit), take what you’ve decided upon and create a budget you can live with. Then, download a budget app to keep you on track. If last year’s budget worked well and you’re already on your way to living your dreams, just hit “repeat.” If not, make changes. That said, no matter the status of your finances, it might be a good idea to increase your emergency fund, given all the uncertainty we’re facing in our world.

If you think about it, taking time in January to look closely at your finances is kind of like going to the doctor for your yearly checkup: You want to make sure there are no red flags you need to address. After all, your fiscal health might be as important as your physical health.


The Risks of Using Self-Directed IRAs

Self-directed IRAs (SDIRAs) are becoming more and more popular as IRA holders look to enter alternative investments. While SDIRAs can open up a world of investment options, the rules around them are complicated and compliance can be tricky. Below, we’ll look at a couple of relevant court cases that illustrate some of the potential pitfalls.

Self-Directed Equals Higher Fees

An SDIRA can own an investment in pretty much any type of asset except life insurance or collectibles. The downside to accessing investments beyond stocks, mutual funds, ETFs, and bonds is that it is more expensive.

The SDIRA custodian usually charges an annual fee as well as transaction fees. The assets also need to be valued at the end of every year for reporting purposes so there is usually a custodial appraisal or valuation fee. These fees and structures often lead to SDIRA owners taking shortcuts to save money or ease administration.

Side-Stepping Rules is Looking for Trouble

One recent case that went before the tax court involved a taxpayer whose SEP-IRA owned an LLC where he was the only owner and manager, with a national bank as the custodian. The taxpayer opened a checking account for the LLC at the same bank.

The taxpayer took distributions from his SEP-IRA and put the money into the LLC account. He then used the money to fund loans on real estate to third parties. The loans were paid back over time and the repayments, including interest, were deposited back into the IRA.

The bank issued a Form 1099-R reporting the distributions as taxable events; however, the taxpayer included this income on his tax return. The IRS taxed distributions, plus the 10 percent penalty because he was under 59½. The case went to tax court with the taxpayer claiming he never actually took distributions because the money went from the IRA custodian to the LLC checking account.

The tax court found in favor of the IRS for several reasons. Most importantly, the taxpayer held full control of the funds that were distributed. Another mistake was that he owned the LLC, which held his checking account and not the IRA. As a result, the bank as an IRA custodian no longer held legal control over the money.

In the end, the taxpayer didn’t want to change custodians from the national bank, which held his SEP-IRA, because he didn’t want to pay the fees associated with setting up a proper SDIRA. If he had, then he could have structured the investments to be made via the LLC, with the IRA as the owner of the LLC, and avoided the taxable distributions completely. In the end, it cost him far more than the fees ever would have.

Collectibles Versus Property and Possession

In another case that went before the tax courts, the taxpayer opened an LLC owned by her IRA where she was the sole managing member. The IRA then purchased American Eagle gold coins, which she took physical delivery of and held in her possession.

IRAs are not allowed to own collectibles, with gold bullion and coins generally considered collectibles. There are exceptions, however, with gold American Eagles being one of them – so no issue here.

The problem centered on whether the taxpayer took physical possession of the coins. The tax code says that exempt precious metals can be held in physical possession by an IRA custodian. As a result, the taxpayer taking physical possession of the gold was deemed a distribution.


These two cases show that LLCs created to invest through an SDIRA must follow all the IRA rules. This is because the IRA is the entity considered to be engaged in all transactions executed by the LLC. Further, the IRA owner shouldn’t be the managing member of the LLC or take physical possession of the assets. It should always be the IRA custodian who holds the assets and maintains control.

How One Small Company Found Its Opening and Disrupted an Entire Industry in the Process

If you had to make a list of some of the fastest-growing industries in the United States, activewear would undoubtedly be on it.

It’s a field that is made up of a few different categories: athletic clothing, swimwear, yoga items and footwear, to name a few. According to one recent study, the industry was worth about $354 million in 2020. By as soon as 2026, that number is expected to grow by an impressive 25%.

Yes, some of this can be attributed to the impact of the COVID-19 pandemic. People suddenly found themselves stuck in their homes and were looking for any opportunity to get outdoors; physical fitness was just as good as any. But there’s also been an increasing trend over the last decade of people taking more accountability in terms of their health and well-being, and an entire industry has benefited during the process.

It’s also an incredibly competitive marketplace, with new organizations cropping up all the time. At this point, you’d think that there wasn’t room for new companies and that every possible niche had already been exploited.

You’d think that, but you’d be wrong.

Enter: Vuori

Flashing back to 2015, entrepreneur Joe Kudla decided to create a new company based on a significant gap that he saw in the activewear industry.

Roughly 10 years prior, he was experiencing significant back pain, and after trying a variety of different methods for relief, he ended up turning to yoga to ease his pain. The issues themselves stemmed from a lifetime of playing everything from football to lacrosse. Even after his problems were resolved, he still found that he loved yoga on a conceptual level.

Around the same time, he watched other activewear companies like Lululemon become enormously successful, but there was a catch. Almost all of these brands catered mainly to women, as that is who was seen to be the primary audience. Some of them offered yoga clothing for men, but to him it always came off as an afterthought.

With that simple realization, an idea was born.

Joe Kudla got to work on the organization that would eventually become Vuori. It was inspired not only to give men similar options to those that had always been available to women, but also by where he lived in Southern California. The place where he was living at the time was a big beach community, and he wanted to bring a “surf-inspired DNA” into the world of performance clothing.

Kudla had a hunch that he had identified a woefully underserved part of the activewear marketplace… and he was absolutely right. After a somewhat slow start in 2015, the company became profitable just two years later in 2017. Earlier in 2021, the company was able to raise $400 million from the Vision Fund, which valued the company at an incredible $4 billion at the same time.

All this from someone who ultimately just wanted to be more comfortable while practicing yoga.

Consistency Begets Results

As stated, when Vuori originally launched in 2015, it got off to something of a slower start than Joe Kudla and his other team members were expecting. All the while, they doubled down on the original idea – soliciting as much feedback as possible from potential customers as to what they wanted and needed, while using that insight to fuel the direction of the company as much as possible.

During that period, they learned something interesting; a lot of women were buying Vuori’s products that were aimed at men. They wanted something that was comfortable and sophisticated, and they didn’t much care how they got it. That realization, coupled with an emphasis on the Vuori message of positivity and healthiness, saw the company make just as big an impact with women as it did with men.

Because of this, Vuori launched the female-driven side of its business in 2018. The response to both directions has been significant.

Right around that same time, Vuori began partnering with various retail outlets to stock its clothing. One of the largest – REI – began an initial test run, stocking the company’s clothing in 30 of its stores. After an overwhelming success, Vuori was soon expanded to all of their locations. Nordstrom and Equinox soon followed suit.

What was once a small business based in California soon became a company with national recognition and availability.

As stated, Vuori recently received $400 million in funding, essentially to “execute on its growth strategy.”

Joe Kudla, on the other hand, sees things a bit differently.

Even given all the uncertainty going on in the world right now with just about every industry you can name having been disrupted, Kudla insists that Vuori doesn’t actually need the money it just raised. It’s doing perfectly fine on its own. In early 2020 as the pandemic was still beginning to take hold, Vuori had around 100 employees. Today, it has 450 employees. By as soon as 2024, Kudla anticipates that this number will have climbed to approximately 1,000.

He indicated that the majority of the funds being raised were going to reward those people who became shareholders early – the people who could see the same vision that he could and who believed in the company from the time of its initial launch.

Having said that, some money is planned to go back into the business. Kudla wants to invest in Vuori’s infrastructure and technology – strategic moves that will allow it to better serve its customers nationwide. He also wants to continue to develop a veritable “Murderer’s Row” of executive team members – something that will allow him to secure the future of the company he worked so hard to build from the ground up.

All of this is very impressive, especially given the fact that the company was founded because one man wanted to be more comfortable doing yoga. It also underlines the value inherent in a good idea, regardless of where that idea may come from.

Retroactive Termination of the Employee Retention Credit

If you claimed the employee retention credit (ERC) in the fourth quarter of 2021, you better read this about a retroactive change affecting the credit for the fourth quarter of 2021.

Background: The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the American Rescue Plan Act (ARP Act) extended the ERC for wages paid through December 31, 2021.

Now the recently passed Infrastructure Investment and Jobs Act (IIJ Act) has retroactively repealed the ERC for the fourth quarter of 2021 for all taxpayers except recovery start-up businesses. A recovery start-up business is an employer that began carrying on any trade or business after February 15, 2020, and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the ERC is determined.

Many businesses already claimed the ERC for wages paid the fourth quarter of 2021 before the IIJ Act was passed in mid-November. Thus, other than recovery start-up businesses, employers that have claimed a fourth quarter 2021 ERC will be required to repay advance payments but will not be subject to any penalties. IRS Notice 2021-65 provides guidance on how to repay any advance credit payments and how to avoid penalties.

Employers That Received Advance Payments – If an employer requested and received an advance payment of the ERC for wages paid in the fourth calendar quarter of 2021, and the employer is not a recovery startup business, the employer must repay the amount of the advance. Employers who need to repay these advance ERC payments must do so by the due date for the applicable employment tax return that includes the fourth calendar quarter of 2021.

Employers That Reduced Fourth Quarter 2021 Employment Tax Deposits – Thinking that they would qualify for an ERC for wages paid in the fourth quarter, some employers reduced their fourth quarter employment tax deposits before the ERC was repealed. The IRS has said that penalties will not be imposed for these employers that reduced fourth quarter 2021 employment tax deposits prior to December 21, 2021, if:

  1. The employer reduced its deposits in anticipation of the ERC, consistent with the rules provided in Notice 2021-24; and
  2. The employer deposits the amounts initially retained in anticipation of the ERC on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer; and
  3. The employer reports the tax liability resulting from the termination of the employer’s ERC on the applicable employment tax return.

Failure to deposit penalties will not be waived for reduced deposits made after December 20, 2021.

Please contact our office if you need assistance correcting payroll for this change.

Does Your Business Need to File Forms 1099-NEC or 1099-MISC?

If you use independent contractors to perform services for your business, for each one that you pay $600 or more for the year, you are required to issue the worker and the IRS a Form 1099-NEC no later than January 31, 2022, for 2021 payments.

Generally, a 1099-NEC is not required to be issued if the independent contractor or service provider is a corporation. However, payments to attorneys for legal fees of $600 or more must be reported, even if the attorney operates as a corporation.

To properly complete the form, you’ll need the individual’s name and tax identification number. But it isn’t unusual to, say, hire a repairman early in the year to whom you pay less than $600, and then use the repairman’s services again later and have the total for the year exceed the $600 limit. If you overlooked getting the information, such as the individual’s complete name and tax identification number (TIN), needed to file the 1099-NEC for the year, you may have difficulty getting the information after-the-fact. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form W-9 is provided by the government as a way for you to obtain the data required to file the 1099s for your contract workers and service providers. This data includes the person’s name, address, type of business entity and TIN (usually a Social Security number or an Employer Identification Number), plus certifications as to the ID number and citizenship status, among others. It also provides you with verification that you complied with the law should the independent contractor provide you with incorrect information. We highly recommend that you have a potential independent contractor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen on the IRS’ website and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS. The W-9 was last revised by the IRS in October 2018, so if you have older blank W-9s that you give to your service providers, you may want to print copies of the latest version (including the instructions) and discard the older unused forms.

To avoid a penalty, the government’s copies of the 1099-NECs must be sent to the IRS by January 31, 2022, along with transmittal Form 1096. They must be submitted on magnetic media or on optically scannable forms. However, a business that files more than 250 information returns (such as 1099s, W-2s, and 1095s) in a calendar year is required to file them electronically. The 250-return requirement may be lowered to 100 if proposed regulations are finalized by the IRS, but the change wouldn’t be effective until 2023.

In some cases, for payments of $600 or more, you may need to file Form 1099-MISC, which is used to report rents, certain prizes and awards, and income your business paid other than that includible on Form 1099-NEC or payable to employees. The 2021 Form 1099-MISC must be provided to the income recipient by January 31, 2022, and to the IRS by February 28 (March 31 if filed electronically) accompanied by transmittal Form 1096.

This firm provides 1099 preparation services. If you need assistance or have questions, please give our office a call.

Do You Need a New IRS Identity Verification?

In November of 2021, the Internal Revenue Service launched an improved identity verification and sign-in process that enables more people to securely access and use IRS online tools and applications.

Taxpayers using this new mobile-friendly verification procedure can gain entry to existing IRS online services such as the:

The IRS will transition additional IRS applications to the new method over the next year. Identity verification is critical to protect taxpayers and their information and is the reason the IRS has been making improvements in this area, and this new verification process is designed to make IRS online applications and tools as secure as possible.

This new process can reach more people through the expanded use of identity documents and increased help desk assistance for taxpayers who encounter a problem when attempting to verify their identity online.

To provide this verification service, the IRS is using, a trusted technology provider. The new process is one more step the IRS is taking to ensure that taxpayer information is provided only to the person who legally has a right to the data.

When accessing the tools listed above, taxpayers will be asked to sign in with an account. People who already have IRS usernames may continue to use their credentials from the old system to sign-in until summer 2022 but are prompted to create an account as soon as possible. Anyone with an existing account from the Child Tax Credit Update Portal, or from another government agency, can sign in with their existing credentials.

Create an Account – If you do not already have an account and wish to create a new account, you’ll be asked to verify your email address, create a password, and secure your account. Afterward, you will be presented with steps to verify your identity. To verify your identity with, you’ll need to provide a photo of an identity document such as a driver’s license, state ID, or passport. You’ll also need to take a selfie with a smartphone or a computer with a webcam. If you need help verifying your identity or to submit a support ticket, you can visit the IRS Help Site. If you need further registration assistance, a support request can be submitted on the help site by selecting the “Contact Us” option in the Support page header. Fill out the form as instructed on the page to submit a support request.

If you have multiple identity verification failures, may send you to a “Trusted Referee” process where you can upload alternative identity documentation, take a selfie, and then talk to an Trusted Referee via a video call. Video calls are offered in American Sign Language if requested.

If you have questions about your need for an account, please contact our office.

Worker Classification Is Still Important

In 2020 and 2021, many companies have experienced “workforce fluctuations.” If your business has engaged independent contractors to address staffing needs, be careful that these workers are properly classified for federal tax purposes.

Tax obligations

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).

No uniform definition

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.

The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)

Asking for a determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Consult a CPA before filing Form SS-8 because filing the form may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.

Latest developments

In January 2021, the Trump Administration published a final rule revising the Fair Labor Standards Act’s employee classification provision. The rule change was considered favorable to employers.

The Biden Administration initially delayed the effective date and then issued a Notice of Proposed Rulemaking (NPRM) to withdraw the rule. After reviewing approximately 1,000 comments submitted in response to the NPRM, it withdrew the rule change before the deferred effective date. Contact your tax advisor for any help you may need with employee classification.

© 2021

5 Tax Planning Tips For Retirees

There’s a common misconception that, when you retire, your tax bills shrink, your tax returns become simpler and tax planning is a thing of the past. That may be true for some, but many people find that the combination of Social Security, pensions and withdrawals from retirement accounts increases their income in retirement and may even push them into a higher tax bracket.

If you’re retired or approaching retirement, consider these five tax-planning tips:

1. Take inventory. Estimate how much money you’ll need in retirement for living expenses and inventory your income sources. These sources may include taxable assets, such as mutual funds and brokerage accounts; tax-deferred assets, such as IRAs, 401(k) plan accounts and pensions; and nontaxable assets, such as Roth IRAs, Roth 401(k) plans or tax-exempt municipal bonds. Social Security benefits may be nontaxable or partially taxable, depending on your other sources of income.

Develop a plan for drawing retirement income in a tax-efficient manner, being sure to keep state income tax, if applicable, in mind. For example, you might minimize current taxes by tapping nontaxable assets first, followed by assets that generate capital gains, and putting off withdrawals from tax-deferred accounts as long as possible.

On the other hand, if you’re approaching age 72 and will have substantial required minimum distributions (RMDs) from tax-deferred accounts when you reach that age (see No. 3 below), it may make sense to withdraw some of those funds earlier. Why? It can help you avoid having large RMDs that would push you into a higher tax bracket later.

For example, you might withdraw as much as you can from IRAs or 401(k) accounts each year without exceeding the lower tax brackets. That way, you keep current taxes on those funds at a reasonable level while reducing the size of your accounts and, in turn, the size of your RMDs down the road. You can obtain additional funds from nontaxable or capital gains assets, if needed.

2. Consider the timing of Social Security benefits. You can begin receiving Social Security benefits as early as age 62 or as late as age 70. The later you start, the larger the benefit amount — so, if you don’t need the money right away, putting it off may be a good investment. Also, benefits are reduced if you start them before you reach full retirement age and continue to work.

Keep in mind that, if your income from other sources exceeds certain thresholds, your Social Security benefits will become partially taxable. For example, married couples filing jointly with combined income over $44,000 are taxed on up to 85% of their Social Security benefits. (Combined income is adjusted gross income plus nontaxable interest plus half of Social Security benefits.)

3. Make qualified charitable distributions. You’re required to begin RMDs from tax-deferred retirement accounts once you reach age 72 (up from 70½ for people born before July1, 1949) though you’re able to defer your first distribution until April 1 of the year following the year you reach age 72. RMDs generally are taxed as ordinary income and you must take them regardless of whether you need the money. As noted in No. 1, a large RMD can push you into a higher tax bracket.

One strategy for reducing the amount of RMDs, at least if you’re charitably inclined, is to make a qualified charitable distribution (QCD). If you’re age 70½ or older (this age didn’t increase when the RMD age increased), a QCD allows you to distribute up to $100,000 tax-free directly from an IRA to a qualified charity and to apply that amount toward your RMDs.

The funds aren’t included in your income, so you avoid tax on the entire amount, regardless of whether you itemize. In addition, the income-based limits on charitable deductions don’t apply. Any amount excluded from your income by virtue of the QCD is similarly excluded from being treated as a charitable deduction.

4. Pay estimated taxes. Your retirement income sources may or may not withhold income taxes. To avoid tax surprises and penalties, estimate whether your withholdings will be sufficient to pay your tax liability for the year and make quarterly estimated tax payments to cover any expected shortfall.

5. Track your medical expenses. Currently, medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income. If you have significant medical expenses, track them carefully. Then if you exceed this threshold or are close to exceeding it, consider bunching elective expenses into the year to maximize potential deductions.

If you’re nearing retirement age and have questions on how your tax situation may change, contact your tax advisor.

© 2021