All the talk about the fiscal cliff may be behind us, but the tax law changes that came about as a result are still ahead. Do you know how the new tax rules will affect your small business in 2013? If not, schedule an appointment with your tax advisor today: The earlier in the year you plan for these adjustments, the better and more accurately you can budget for the remainder of 2013.
Taxes on Your Profits
Most small-business owners pay income tax on their share of business profits on their personal returns. Cost-of-living adjustments to federal income tax brackets for individuals mean you can receive more income without being pushed into a higher tax bracket next year. Various other personal tax rules, including the personal and dependency exemption, the standard deduction and the deductible portion of long-term care insurance, have also been increased due to inflation.
However, “high-income taxpayers” face a number of tax increases for 2013:
- A new top income tax bracket of 39.6 percent if your taxable income is over $400,000 for singles, $425,000 for heads of households, $450,000 for joint filers and $225,000 if married filing separately.
- A 20 percent tax rate on long-term capital gains and qualified dividends. The same definition for “high income” applies here as the one for the top income tax bracket.
- An additional 0.9 percent Medicare tax on earnings (e.g., wages from employment; net earnings from self-employment). This tax applies to earnings over $200,000 if single or $250,000 if married filing jointly.
- An additional 3.8 percent Medicare tax on net investment income. If you actively participate in your business, don’t worry about this tax. But if you’re a “silent partner,” this tax may apply to your share of profits.
Your payroll taxes for 2013 will likely be higher due to a couple of factors:
What you pay for employees. The wage base on which you (and employees) pay the Social Security portion of FICA is $113,700 in 2013. This is up from $110,000 in 2012. Thus, an employee with taxable compensation over the wage basis will cost you an additional $275.40. There continues to be an unlimited amount of compensation subject to the Medicare portion of FICA.
What you pay for yourself. The employee share of FICA and self-employment tax is two percentage points higher than in 2012, due to the expiration of the payroll tax holiday that ran in 2010 and 2011. If you’re self-employed, you can deduct the so-called employer share (i.e., one half of self-employment tax).
Note: There is no employer matching for the additional Medicare tax on earnings mentioned above as there is for the regular Medicare tax that is part of FICA and self-employment tax; the additional tax applies only to earnings recipients (employees and self-employed individuals).
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Most of the breaks you currently provide to employees on a tax-advantaged basis will continue to apply for 2013. Thus, employer-provided health coverage is tax free to employees. Some tax-advantaged fringe benefits that can be offered may be somewhat higher due to cost-of-living-adjustments (COLAs):
- Contributions to qualified retirement plans. Companies can contribute on a tax-deductible basis up to $51,000 to profit-sharing plans and SEPs in 2013 (up from $50,000 in 2012).
- Transportation assistance. If you provide certain transportation fringe benefits, changes are afoot. The limit on the value for monthly free parking, transit passes and van-pooling is $245 (up from $240). Bicycling assistance will stay at $20 per month.
- Adoption assistance. Companies that pay for or reimburse employee adoption costs are limited to $12,970 (up from $12,650 in 2012)
For more great tax tips, check out these finance articles.
Barbara Weltman is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com.
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