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On our blogs you will find our Tax Sherpa Stories series as well as additional posts covering all manner of tax topics. Some items are timely as there are multiple tax filing dates throughout the year and some items are important larger concepts.
The Power of Educational Assistance Programs in Light of Student Loan Payment Resumption
October 2nd, 2023, marked a significant shift as the federal government resumed student loan payments. With changes in income-based repayment rules, penalty rules, and more, there's a lot to unpack. But one aspect that's not getting enough attention is the revision to Section 127 of the Internal Revenue Code. Let's dive in.
The CARES Act and Its Extension:
The CARES Act introduced a $5,250 maximum exclusion that employers can use to pay student loans on behalf of their employees or their dependents. This amount is excluded from the employee's taxable income, making it a win-win for both parties.
Benefits for Employers and Employees:
Employers can use this as an attractive bonus for their employees, especially in a time when student loans are a significant burden. For employees, this means potentially less taxable income and more savings.
Things to Keep in Mind:
This benefit is primarily for the rank and file, not the owners.
No discrimination between high paid and low paid employees.
It can't be offered as an alternative to wages or other income.
As we approach the end of 2023 and look forward to 2024 and 2025, it's essential for employers to consider these educational assistance programs. They not only offer tax benefits but also serve as a valuable tool for employee retention and satisfaction.
Frequently Asked Questions
Q:
What's the difference between tax advisory and just filing my taxes?
Filing your taxes each year is a necessary task, but it is always backwards looking. Tax advisory works with you throughout the year to make sure that you are on the right track when it comes to your taxes and have strategies in place to save money now.
Q:
I've heard about tax write-offs for small businesses. What exactly can I write off, and how does it benefit my business?
Tax write-offs, also known as tax deductions, are expenses that a business incurs that can be subtracted from its revenue to reduce the amount of taxable income. Common write-offs include office supplies, mileage, rent for a business location, and advertising expenses, among many others. By writing off legitimate business expenses, you can significantly reduce your taxable income, which can lead to a lower tax bill. It's essential, however, to maintain proper records and ensure that the expenses are truly business-related.
Q:
What's the difference between a tax deduction and a tax credit?
A tax deduction reduces the amount of your income that is subject to taxation, which in turn can lower your tax liability. Common deductions include expenses like mortgage interest, student loan interest, and business expenses. A tax credit, on the other hand, is a direct reduction of your tax bill. This means if you owe $1,000 in taxes and have a $200 tax credit, your tax due would be reduced to $800. Some popular credits include the Child Tax Credit, the Earned Income Tax Credit, and credits for energy-efficient home improvements.
Q:
I'm thinking of hiring an independent contractor instead of an employee. Are there different tax implications for each?
Yes, there are significant tax differences between hiring an employee and an independent contractor. When you hire an employee, you're responsible for withholding federal and possibly state income taxes, Social Security, and Medicare taxes from their paychecks. You also typically pay unemployment taxes on wages paid to employees. Independent contractors, on the other hand, are responsible for their own taxes. As a business owner, you'd provide them with a Form 1099-NEC (if you pay them $600 or more during the year) instead of a W-2, and they would be responsible for their own self-employment taxes. It's important to correctly classify your workers, as misclassifying can lead to penalties.
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