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.
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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)
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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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