Turning stock downturns into tax advantages
Turning stock downturns into tax advantages
Have you ever invested in a company only to see its stock value plummet? (This may become relevant in light of recent market volatility.) While such an investment might be something you’d rather forget, there’s a silver lining: you can claim a capital loss deduction on your tax return. Here are the rules when a stock you own is sold at a loss or is entirely worthless.
How capital losses work
As capital assets, stocks produce capital gains or losses when they’re sold. Your capital gains and losses for the year must be netted against one another in a specific order based on whether they’re short-term (held one year or less) or long-term (held for more than one year).
If, after netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 of ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit. If you have both net short-term and net long-term losses, the net short-term losses are used to offset ordinary income before the net long-term losses.
If you’ve realized capital gains from stock or other asset sales during the year, consider selling some of your losing positions to offset the gains. A good tax strategy is to sell enough losing stock to shelter your earlier gains and generate a $3,000 loss since this is the maximum loss that can be used to offset ordinary income each year.
Implications of the wash sale rule
If you believe that a stock you own will recover but want to sell now to lock in a tax loss, be aware of the wash sale rule. Under it, if you sell stock at a loss and buy substantially identical stock within the 30-day period before or after the sale date, you can’t claim the loss for tax purposes. In order to claim the loss, you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock.
When stock is worth nothing
In some cases, a stock you own may have become completely worthless. If so, you can claim a loss equal to your basis in the stock, which is generally what you paid for it. The stock is treated as though it had been sold on the last day of the tax year. This date is important because it affects whether your capital loss is short-term or long-term.
Stock shares become worthless when they have no liquidation value. That’s because the corporation’s liabilities exceed its assets and have no potential value and the business has no reasonable hope of becoming profitable. A stock can be worthless even if the corporation hasn’t declared bankruptcy. Conversely, a stock may still have value even after a bankruptcy filing, if the corporation continues operating and the stock continues trading.
You may not discover that a stock has become worthless until after you’ve filed your tax return for the year of worthlessness. In that case, you can amend your return for that year to claim a credit or refund due to the loss. You can do this for seven years from the date your original return was due, or two years from the date you paid the tax, whichever is later.
Maximize the tax benefits
As you can see, deducting stock losses or worthless stock on your tax return can be complex. Therefore, it’s important to maintain thorough documentation. We can help maximize the benefits. Keep in mind that other rules may apply. Let us know if you have any questions.
The “wash sale” rule: Don’t let losses circle the drain
The “wash sale” rule: Don’t let losses circle the drain
Stock, mutual fund and ETF prices have bounced around lately. If you make what turns out to be an ill-fated investment in a taxable brokerage firm account, the good news is that you may be able to harvest a tax-saving capital loss by selling the loser security. However, for federal income tax purposes, the wash sale rule could disallow your hoped-for tax loss.
Rule basics
A loss from selling stock or mutual fund shares is disallowed if, within the 61-day period beginning 30 days before the date of the loss sale and ending 30 days after that date, you buy substantially identical securities.
The theory behind the wash sale rule is that the loss from selling securities and acquiring substantially identical securities within the 61-day window adds up to an economic “wash.” Therefore, you’re not entitled to claim a tax loss and realize the tax savings that would ordinarily result from selling securities for a loss.
When you have a disallowed wash sale loss, it doesn’t vaporize. Instead, the disallowed loss is added to the tax basis of the substantially identical securities that triggered the wash sale rule. When you eventually sell the securities, the additional basis reduces your tax gain or increases your tax loss.
Example: You bought 2,000 ABC shares for $50,000 on May 5, 2024. You used your taxable brokerage firm account. The shares plummeted. You bailed out of the shares for $30,000 on April 4, 2025, harvesting what you thought was a tax-saving $20,000 capital loss ($50,000 basis – $30,000 sales proceeds). You intended to use the $20,000 loss to shelter an equal amount of 2025 capital gains from your successful stock market sales. Having secured the tax-saving loss — or so you thought — you reacquired 2,000 ABC shares for $31,000 on April 29, 2025, because you still like the stock. Sadly, the wash sale rule disallows your expected $20,000 capital loss. The disallowed loss increases the tax basis of the substantially identical securities (the ABC shares you acquired on April 29, 2025) to $51,000 ($31,000 cost + $20,000 disallowed wash sale loss).
One way to defeat the rule
Avoiding the wash sale rule is only an issue if you want to sell securities to harvest a tax-saving capital loss but still want to own the securities. In most cases, investors do this because they expect the securities to appreciate in the future.
One way to defeat the wash sale rule is with the “double up” strategy. You buy the same number of shares in the stock or fund that you want to sell for a loss. Then you wait 31 days to sell the original batch of shares. That way, you’ve successfully made a tax-saving loss sale, but you still own the same number of shares as before and can still benefit from the anticipated appreciation.
Cryptocurrency losses are exempt (for now)
The IRS currently classifies cryptocurrencies as “property” rather than securities. That means the wash sale rule doesn’t apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency shortly before or after the loss sale. You just have a regular short-term or long-term capital loss, depending on your holding period.
Warning: Losses from selling crypto-related securities, such as Coinbase stock, can fall under the wash sale rule. That’s because the rule applies to losses from assets that are classified as securities for federal income tax purposes, such as stock and mutual fund shares.
Beware when harvesting losses
Harvesting capital losses is a viable tax-saving strategy as long as you avoid the wash sale rule. However, you currently don’t have to worry about the wash sale rule when harvesting cryptocurrency losses. Contact us if you have questions or want more information on taxes and investing.
Business owners: Be sure you’re properly classifying cash flows
Business owners: Be sure you’re properly classifying cash flows
Properly prepared financial statements provide a wealth of information about your company. But the operative words there are “properly prepared.” Classifying information accurately isn’t always easy — especially as the business grows and its financial transactions become more complex.
Case in point: your statement of cash flows. Customarily, it shows the sources (money entering) and uses (money exiting) of cash. That may sound simple enough, but optimally classifying different cash flows can be complicated.
Under U.S. Generally Accepted Accounting Principles (GAAP), statements of cash flows are typically organized into three sections: 1) cash flows from operating activities, 2) cash flows from investing activities, and 3) cash flows from financing activities. Let’s take a closer look at each.
Operating activities
This section of the statement of cash flows usually starts with accrual-basis net income. Then, it’s adjusted for items related to normal business operations. Examples include income taxes; stock-based compensation; gains or losses on asset sales; and net changes in accounts receivable, inventory, prepaid assets, accrued expenses and payables.
The cash flows from operating activities section is also adjusted for depreciation and amortization. These noncash expenses reflect wear and tear on equipment and other fixed assets.
The bottom of the section shows the cash used in producing and delivering goods or providing services. Several successive years of negative operating cash flows can signal that a business is struggling and may be headed toward liquidation or a forced sale.
Investing activities
If your company buys or sells property, equipment or marketable securities, such transactions should show up in the cash flows from investing activities section. It reveals whether a business is reinvesting in its future operations — or divesting assets for emergency funds.
Business acquisitions and disposals are generally reported in this section, too. However, contingent payments from an acquisition are classified as cash flows from investing activities only if they’re paid soon after the acquisition date. Later contingent payments are classified as financing outflows. Any payment over the liability is classified as an operations outflow.
Financing activities
This third section of the statement of cash flows shows your company’s ability to obtain funds from either debt from lenders or equity from investors. It includes new loan proceeds, principal repayments, dividends paid, issuances of securities or bonds, additional capital contributions by owners, and stock repurchases.
Noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, suppose a business buys equipment using loan proceeds. In such a case, the transaction would typically appear at the bottom of the statement rather than as a cash outflow from investing activities and an inflow from financing activities.
Other examples of noncash financing transactions are:
- Issuing stock to pay off long-term debt, and
- Converting preferred stock to common stock.
In those two instances and others, no cash changes hands. Nonetheless, financial statement users, such as investors and lenders, want to know about and understand these transactions.
Help is available
As you can see, deciding how to classify some transactions to comply with GAAP can be tricky. Whenever confusion or uncertainty arises, give us a call. We can work with you and your accounting team to make the best decision. We can also help you improve your financial reporting in other ways.
The amount you and your employees can save for retirement is going up slightly in 2025
The amount you and your employees can save for retirement is going up slightly in 2025
How much can you and your employees contribute to your 401(k)s or other retirement plans next year? In Notice 2024-80, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for retirement plans, as well as other qualified plans, for 2025. With inflation easing, the amounts aren’t increasing as much as in recent years.
401(k) plans
The 2025 contribution limit for employees who participate in 401(k) plans will increase to $23,500 (up from $23,000 in 2024). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.
The catch-up contribution limit for employees age 50 or over who participate in 401(k) plans and the other plans mentioned above will remain $7,500 (the same as in 2024). However, under the SECURE 2.0 law, specific individuals can save more with catch-up contributions beginning in 2025. The new catch-up contribution amount for taxpayers who are age 60, 61, 62 or 63 will be $11,250.
Therefore, participants in 401(k) plans who are 50 or older can contribute up to $31,000 in 2025. Those who are age 60, 61, 62 or 63 can contribute up to $34,750.
SEP plans and defined contribution plans
The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $69,000 to $70,000 in 2025. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will remain $750 in 2025.
SIMPLE plans
The deferral limit to a SIMPLE plan will increase to $16,500 in 2025 (up from $16,000 in 2024). The catch-up contribution limit for employees who are age 50 or over and participate in SIMPLE plans will remain $3,500. However, SIMPLE catch-up contributions for employees who are age 60, 61, 62 or 63 will be higher under a change made by SECURE 2.0. Beginning in 2025, they will be $5,250.
Therefore, participants in SIMPLE plans who are 50 or older can contribute $20,000 in 2025. Those who are age 60, 61, 62 or 63 can contribute up to $21,750.
Other plan limits
The IRS also announced that in 2025:
- The limitation on the annual benefit under a defined benefit plan will increase from $275,000 to $280,000.
- The dollar limitation concerning the definition of “key employee” in a top-heavy plan will increase from $220,000 to $230,000.
- The limitation used in the definition of “highly compensated employee” will increase from $155,000 to $160,000.
IRA contributions
The 2025 limit on annual contributions to an individual IRA will remain $7,000 (the same as 2024). The IRA catch-up contribution limit for individuals age 50 or older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.
Plan ahead
The contribution amounts will make it easier for you and your employees to save a significant amount in your retirement plans in 2025. Contact us if you have questions about your tax-advantaged retirement plan or want to explore other retirement plan options.
From flights to meals: A guide to business travel tax deductions
From flights to meals: A guide to business travel tax deductions
As a business owner, you may travel to visit customers, attend conferences, check on vendors and for other purposes. Understanding which travel expenses are tax deductible can significantly affect your bottom line. Properly managing travel costs can help ensure compliance and maximize your tax savings.
Your tax home
Eligible taxpayers can deduct the ordinary and necessary expenses of business travel when away from their “tax homes.” Ordinary means common and accepted in the industry. Necessary means helpful and appropriate for the business. Expenses aren’t deductible if they’re for personal purposes, lavish or extravagant. That doesn’t mean you can’t fly first class or stay in luxury hotels. But you’ll need to show that expenses were reasonable.
Your tax home isn’t necessarily where you maintain your family home. Instead, it refers to the city or general area where your principal place of business is located. (Special rules apply to taxpayers with several places of business or no regular place of business.)
Generally, you’re considered to be traveling away from home if your duties require you to be away from your tax home for substantially longer than an ordinary day’s work and you need to get sleep or rest to meet work demands. This includes temporary work assignments. However, you aren’t permitted to deduct travel expenses in connection with an indefinite work assignment (more than a year) or one that’s realistically expected to last more than a year.
Deductible expenses
Assuming you meet these requirements, common deductible business travel expenses include:
- Air, train or bus fare to the destination, plus baggage fees,
- Car rental expenses or the cost of using your vehicle, plus tolls and parking,
- Transportation while at the destination, such as taxis or rideshares between the airport and hotel, and to and from work locations,
- Lodging,
- Tips paid to hotel or restaurant workers, and
- Dry cleaning / laundry.
Meal expenses are generally 50% deductible. This includes meals eaten alone. It also includes meals with others if they’re provided to business contacts, serve an ordinary and necessary business purpose, and aren’t lavish or extravagant.
Claiming deductions
Self-employed people can deduct travel expenses on Schedule C. Employees currently aren’t permitted to deduct unreimbursed business expenses, including travel expenses.
However, businesses may deduct employees’ travel expenses to the extent they provide advances or reimbursements or pay the expenses directly. Advances or reimbursements are excluded from wages (and aren’t subject to income or payroll taxes) if they’re made according to an “accountable plan.” In this case, the expenses must have a business purpose, and employees must substantiate expenses and pay back any excess advances or reimbursements.
Mixing business and pleasure
If you take a trip in the United States primarily for business, but also take some time for personal activities, you’re still permitted to deduct the total cost of airfare or other transportation to and from the destination. However, lodging and meals are only deductible for the business portion of your trip. Generally, a trip is primarily for business if you spend more time on business activities than on personal activities.
Recordkeeping
To deduct business travel expenses, you must substantiate them with adequate records — receipts, canceled checks and bills — that show the amount, date, place and nature of each expense. Receipts aren’t required for non-lodging expenses less than $75, but these expenses must still be documented in an expense report. Keep in mind that an employer may have its own substantiation policies that are stricter than the IRS requirements.
If you use your car or a company car for business travel, you can deduct your actual costs or the standard mileage rate.
For lodging, meals and incidental expenses (M&IE) — such as small fees or tips — employers can use the alternative per-diem method to simplify expense tracking. Self-employed individuals can use this method for M&IE, but not for lodging.
Under this method, taxpayers use the federal lodging and M&IE per-diem rates for the travel destination to determine reimbursement or deduction amounts. This avoids the need to keep receipts to substantiate actual costs. However, it’s still necessary to document the time, place and nature of expenses.
There’s also an optional high-low substantiation method that allows a taxpayer to use two per-diem rates for business travel: one for designated high-cost localities and a lower rate for other localities.
Turn to us
The business travel deduction rules can be complicated. In addition, there are special rules for international travel and travel with your spouse or other family members. If you’re uncertain about the tax treatment of your expenses, contact us.
Surprise IT failures pose a major financial risk to companies
Surprise IT failures pose a major financial risk to companies
It’s every business owner’s nightmare. You wake up in the morning, or perhaps in the middle of the night, and see that dreaded message: “We’re down.” It could be your website, e-commerce platform or some other mission-critical information technology (IT) system. All you know is it’s down and your company is losing money by the hour.
A report released this past June by cybersecurity solutions provider Splunk drove home the financial risk of unanticipated downtime for today’s businesses. Entitled The Hidden Costs of Downtime, it was produced in partnership with Oxford Economics researchers who surveyed 2,000 large-company executives worldwide. They found that the total cost of downtime for responding businesses, including direct and hidden costs, was a staggering $400 billion annually. The biggest direct cost was revenue loss, averaging $49 million annually per company.
More than revenue
Of course, such losses for large businesses will be proportionately higher given the bigger amounts of revenue they generate. However, small to midsize companies are arguably at even greater risk because they may not be able to readily absorb any substantial revenue losses.
Diminished revenue is just one of the direct costs of surprise IT failures. Others include regulatory fines, blown IT budgets from coping with crises and elevated insurance premiums. Hidden costs may arise from diminished shareholder value (for publicly traded businesses), reduced productivity and brand/reputational damage.
Common threats
Worried yet? The good news is that your business can proactively address the threat of unanticipated technological downtime. The first step is to conduct a formal risk assessment to identify the most likely causes of IT failures based on the distinctive features of your systems and users.
Spoiler alert: You’ll probably find cyberattacks, such as phishing and ransomware scams, are your biggest threat. Unfortunately, these crimes have become so common that you should probably operate under the assumption that you’ll incur attacks fairly often, be they minor or major.
Indeed, the Splunk report attributed 56% of downtime incidents to cybersecurity breaches. Not far behind, however, were software or IT infrastructure failures. These caused 44% of reported downtime. And whether it was a cyberattack or a technological gaffe, human error was identified as the chief underlying cause. So, don’t be surprised if a risk assessment also identifies your employees as a major threat to your company’s ability to stay up and running.
Key strategies
Once you’ve pinpointed the IT risks with the greatest probability of occurring, you can address them. Just a few key strategies to strongly consider include:
Tracking incidents carefully. When downtime occurs, you should have an incident response plan in place to investigate and resolve the matter — as well as to record all pertinent details. Look for trends: As incidents happen more often, the likelihood of a major crisis increases.
Investing wisely in cybersecurity. Today’s companies need to look at substantial investment in cybersecurity as a cost of doing business. However, you must still scale these expenditures to your actual needs and risk level.
Training new hires and regularly upskilling employees. The Splunk report highlighted an essential truth: No matter how technologically advanced businesses become, people still make the difference.
Establishing a disaster recovery plan. As the saying goes, expect the best but plan for the worst. Implement a comprehensive plan involving sound backup policies and procedures, as well as recovery time and point objectives.
Assessing and testing regularly. The risk assessment mentioned above shouldn’t be a one-time thing. Adhere to a strict schedule of assessments and “stress tests” of mission-critical systems.
Continuous improvement
To prevent surprise IT failures at your company, apply a mindset of continuous improvement to all aspects of your policies, procedures and infrastructure. Our firm can help you identify and manage your technology costs.
How can you build a golden nest egg if you’re self-employed?
How can you build a golden nest egg if you’re self-employed?
If you own a small business with no employees (other than your spouse) and want to set up a retirement plan, consider a solo 401(k) plan. This is also an option for self-employed individuals or business owners who wish to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan.
A solo 401(k), also known as an individual 401(k), may offer advantages in terms of contributions, tax savings and investment options. These accounts are geared toward self-employed individuals, including sole proprietors, owners of single-member limited liability companies, consultants and other one-person businesses.
How much can you contribute?
You can make large annual tax-deductible contributions to a solo 401(k) plan. For 2024, you can make an “elective deferral contribution” of up to $23,000 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $30,500 if you’ll be age 50 or older as of December 31, 2024. The larger $30,500 figure includes an extra $7,500 catch-up contribution that’s allowed for older owners.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for a solo 401(k). This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2024 tax year, the combined elective deferral and employer contributions can’t exceed:
- $69,000 ($76,500 if you’ll be 50 or older as of December 31, 2024), or
- 100% of your net SE income.
Net SE income equals the net profit shown on Form 1040, Schedule C, E or F for the business, minus the deduction for 50% of self-employment tax attributable to the business.
What are the advantages and disadvantages?
Besides the ability to make significant deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans. This feature can be valuable if you need access to funds for business opportunities or emergencies.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
You can’t have a solo 401(k) if your business has one or more employees. Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there are a few important loopholes. You can contribute to a plan if your spouse is a part-time or full-time employee. You can also exclude employees who are under 21 and part-time employees who haven’t worked at least 1,000 hours during any 12-month period.
Who’s the best candidate for this plan?
For a one-person business, a solo 401(k) can be a smart retirement plan choice if:
- You want to make large annual deductible contributions and have the money,
- You have substantial net SE income, and
- You’re 50 or older and can take advantage of the extra catch-up contribution.
Before establishing a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple, but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation.
Should your company offer fertility benefits?
Should your company offer fertility benefits?
Most businesses today understand all too well that they must craft a robust and varied benefits package to draw good job candidates and retain valued employees. But beyond basics such as health insurance and a retirement plan, there are so many options. Well, you can add one more to the list: fertility benefits.
Recent surveys
Indeed, interest in fringe benefits related to helping employees conceive children and build their families appears to be growing for both companies and workers.
Earlier this year, women-focused health care consultancy Maven released Maven’s State of Women’s and Family Health Benefits 2024. The report includes the results of a survey of more than 1,200 human resources leaders and over 3,000 full-time employees. It found that 75% of employers believe “reproductive and family benefits are important or very important for retaining employees.” Also, about half (48%) of employers stated that they intend to “increase their family health benefit offerings in the next two to three years.”
A different survey highlighted the apparent strong interest of workers in fertility benefits. Last year, Carrot Fertility, a global fertility benefits provider, published a report entitled Fertility at Work. It features a survey of 5,000 working people from across the globe. Only about a third (32%) of those respondents said they could afford fertility treatments. Meanwhile, 65% said they’d “change jobs to work for a company that offers fertility benefits,” and 72% reported they’d “stay at their company longer if they had access to fertility benefits.”
Some examples
So, evidence of interest in fertility benefits is pretty strong. But what do these benefits actually look like? Here are some examples:
Fertility assessments. These include a wide range of tests, as well as consultations with reproductive medical specialists, to help individuals determine their fertility health. Many businesses partner with health care providers or fertility clinics to give employees affordable access to assessments.
In vitro fertilization (IVF). This is a medical procedure whereby an egg is fertilized outside the body and then implanted in the birth mother. Companies may offer full or partial benefits coverage for IVF treatments, which tend to be quite pricey.
Fertility medications. There are a variety of medications for stimulating and supporting the reproductive process. Businesses can expand their prescription drug coverage to include clomiphene, gonadotropins and other hormone treatments.
Oocyte cryopreservation. This is the process of retrieving and freezing eggs for later fertilization. Companies may offer coverage for initial retrieval, the freezing itself and storage thereafter.
Practical matters
There are various mechanisms you can use to offer these benefits and others. Assuming your company sponsors a health insurance plan, it might already include fertility benefits that you or your participants aren’t fully aware of. If your plan doesn’t include the fertility benefits you want to offer, you may be able to expand its coverage to do so. This will, of course, likely raise your costs.
Many businesses today sponsor Flexible Spending Accounts for employees or offer Health Savings Accounts along with high-deductible health plans. In such cases, participants can generally use those funds for fertility-related expenses.
Some companies set up reimbursement programs. Under these, employees pay for fertility-related assessments, treatments and medications upfront, and their employers reimburse all or part of the costs. As mentioned, businesses may also be able to partner with certain health care providers to give employees access to discounted or fully covered services.
A question worth asking
There’s no easy answer to whether your company should offer fertility benefits. But it’s a question worth asking. We can help you dig deeper into the details, including estimating all the potential costs involved and identifying the likely tax impact.
Employers: In 2025, the Social Security wage base is going up
Employers: In 2025, the Social Security wage base is going up
As we approach 2025, changes are coming to the Social Security wage base. The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $176,100 for 2025 (up from $168,600 for 2024). Wages and self-employment income above this amount aren’t subject to Social Security tax.
If your business has employees, you may need to budget for additional payroll costs, especially if you have many high earners.
Social Security basics
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other is for Hospital Insurance, which is commonly known as the Medicare tax.
A maximum amount of compensation is subject to the Social Security tax, but there’s no maximum for Medicare tax. For 2025, the FICA tax rate for employers will be 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2024).
Updates for 2025
For 2025, an employee will pay:
- 6.2% Social Security tax on the first $176,100 of wages (6.2% × $176,100 makes the maximum tax $10,918.20), plus
- 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns), plus
- 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns).
For 2025, the self-employment tax imposed on self-employed people will be:
- 12.4% Social Security tax on the first $176,100 of self-employment income, for a maximum tax of $21,836.40 (12.4% × $176,100), plus
- 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
- 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns).
History of the wage base
When the government introduced the Social Security payroll tax in 1937, the wage base was $3,000. It remained that amount through 1950. As the U.S. economy grew and wages began to rise, the wage base needed to be adjusted to ensure that the Social Security system continued to collect sufficient revenue. By 1980, it had risen to $25,900. Twenty years later it had increased to $76,200 and by 2020, it was $137,700. Inflation and wage growth were key factors in these adjustments.
Employees with more than one employer
You may have questions about employees who work for your business and have second jobs. Those employees would have taxes withheld from two different employers. Can the employees ask you to stop withholding Social Security tax once they reach the wage base threshold? The answer is no. Each employer must withhold Social Security taxes from an employee’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employees will get a credit on their tax returns for any excess withheld.
Looking ahead
Do you have questions about payroll tax filing or payments now or in 2025? Contact us. We’ll help ensure you stay in compliance.
Turnaround acquisitions are risky growth opportunities for today’s companies
Turnaround acquisitions are risky growth opportunities for today’s companies
When it comes to growth, businesses have two broad options. First, there’s organic growth — that is, progress made through internal efforts such as boosting sales, expanding into other markets, innovating new products or services, and improving operational efficiency. Second, there’s inorganic growth, which is achieved through externally focused activities such as mergers and acquisitions (M&A), and strategic partnerships.
Organic growth is, without a doubt, imperative to the success of most companies. But occasionally, or more often if you pursue M&A proactively, you may encounter the opportunity to acquire a troubled business. Although “turnaround acquisitions” can yield considerable long-term rewards, acquiring a struggling concern poses greater risks than buying a financially sound company.
Due diligence
Generally, successful turnaround acquisitions begin by identifying a floundering business with hidden value, such as untapped market potential, poor (but replaceable) leadership or excessive (yet fixable) costs.
But be careful: You’ve got to fully understand the target company’s core business — specifically, its profit drivers and roadblocks — before you start drawing up a deal. If you rush into the acquisition or let emotions cloud your judgment, you could misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action. This is why so many successful turnarounds are conducted by buyers in the same industry as the sellers or by investors, such as private equity firms, that specialize in particular types of companies.
During the due diligence phase, pinpoint the source(s) of your target’s distress. Common examples include excessive fixed costs, lack of skilled labor, decreased demand for its products or services, and overwhelming debt. Then, determine what, if any, corrective measures can be taken.
Don’t be surprised to find hidden liabilities, such as pending legal actions or outstanding tax liabilities. Then again, you also might find potential sources of value, such as unclaimed tax breaks or undervalued proprietary technologies.
Cash management
Another critical step in due diligence is identifying cash flows, both in and out. Determine what products or services drive revenue and which costs hinder profitability. Would it make sense to divest the business of unprofitable products or services, subsidiaries, divisions, or real estate?
Implementing a long-term cash-management plan based on reasonable forecasts is also critical. Revenue-generating and cost-cutting measures — such as eliminating excessive overtime pay, lowering utility bills, and collecting unbilled or overdue accounts receivable — can often be achieved following a thorough evaluation of accounting controls and procedures.
Reliable due diligence hinges on whether the target company’s accounting and financial reporting systems can produce the appropriate data. If these systems don’t accurately capture transactions and fully list assets and liabilities, you’ll likely encounter some unpleasant surprises and struggle to turn around the business.
Buyers vs. sellers
Parties to a business acquisition generally structure the deal as a sale of either assets or stock. Buyers usually prefer asset deals, which allow them to select the most desirable items from a target company’s balance sheet. In addition, buyers typically receive a step-up in basis on the acquired assets, which lowers future tax obligations. And they’re often able to negotiate new contracts, licenses, titles and permits.
On the other hand, sellers generally prefer to sell stock, not assets. Selling stock simplifies the deal, and tax obligations are usually lower for sellers. However, a stock sale may be riskier for the buyer because the struggling target business remains operational while the buyer takes on its debts and legal obligations. Buyers also inherit sellers’ existing depreciation schedules and tax basis in target companies’ assets.
Reasonable assurance
For any prospective turnaround acquisition, you’ve got to establish reasonable assurance that the return on investment will likely exceed the acquisition’s immediate costs and ongoing risks. We can help you gather and analyze the financial reporting and tax-related information associated with any prospective M&A transaction.