Tax time is a dreaded time of the year for many people. This year, small business owners have to adjust to new tax laws brought about in 2013. With a number of tax changes approved as we entered the New Year, small businesses are facing a variety of new laws and regulations. Some of these changes include higher rates on several taxes that affect small business owners, while also providing changes to credits and deductions that many small business owners find helpful.
One change that took place immediately on January 1st, was the elimination of the two-year reduction in the payroll tax, requiring business owners to withhold 2% more from employees’ pay. As a result of this tax increase, the 2013 FICA tax rate that employees’ pay, which is a combination of the social security tax and Medicate tax, was increased to a rate of 7.65%.
Kate Barton, the Americas vice chairwoman for tax services at Ernst & Young also noted in a New York Times article, that “tax rates on dividends also increased for those with high incomes, which could affect owners of businesses set up as C corporations, who often extract money from their companies as dividends instead of salary.” Additionally, “the higher rate on dividends could make a C corporation less tax efficient than a sole proprietorship or an entity like a partnership, LLC or a subchapter S corporation, in which income ultimately accrues to the owners as individuals.” It is important for small business owners to think through these changes and see what would be the optimal structure for their business.
However, it is not all bad news for business owners. When it comes time to file 2013 tax returns, business owners will have the option to take a new home-office deduction. This new deduction allows qualified taxpayers to deduct $5 per square foot of their home-office space, for a maximum deduction of $1,500 annually. This new method is more direct than the current laborious tax form that requires taxpayers to calculate numerous expenses associated with their home office. However, quick and easy may not be the best method for all. In certain circumstances, the old laborious tax form may still be worth the effort because it can offer business owners a greater deduction. The only way to know which way will yield the greater deduction is to calculate and compare.
Another last-minute provision that a small business can take advantage of is the Work Opportunity Credit (WOC), which is available to employers who employ workers from certain specific groups. To take advantage of the WOC, business owners must request and obtain a certification for each employee they hire from identified target groups such as: unemployed veterans, long-term family assistance recipient, vocational rehabilitation referrals, SNAP recipients, and at-risk youth to a name a few. It is important to check the rules surrounding tax changes for these and other tax credits with a tax professional.
With these changes now in place, small businesses have to take an in-depth look at their business and determine what is best. Many companies are grappling with the changes to the tax laws and are ill prepared. Becoming educated is important. Small Business owners really need to think through their options, become informed, so that they are ready to face these new changes.
I would like to thank Caroline Ryder for preparing this article with me. Caroline is a Marketing Analyst with C2G Resourcing, a subsidiary of Consultants 2 Go, LLC. Don’t forget, you can email me at Peggy@Consultants2Go.com with any questions you might have and I’ll be glad to answer them. You can also follow me and my business on Twitter @peggymchale and @consultants2go