Tax Help For Individuals

Top Tax Planning Mistakes High-Income Earners Make—and How to Avoid Them

For high-income earners, managing wealth presents incredible opportunities—but also unique challenges. With higher earnings comes greater tax complexity, and without a clear strategy, it’s easy to lose money to missed deductions or avoidable penalties. Whether you’re working with an Austin TX accountant or tackling taxes on your own, understanding common pitfalls and solutions is key.

As one of the best CPA firms in Austin, Texas, we’ve identified the top tax planning mistakes high-income earners make and how to resolve them with strategic, actionable steps.

Mistake #1: Failing to Plan for Quarterly Taxes

The Problem:

Many high-income earners, particularly those with income from freelance work, investments, or business ventures, fail to pay quarterly taxes on time. This oversight often results in penalties and interest.

Why It Happens:

Without automatic withholdings, self-employed individuals or investors must proactively calculate and remit taxes. It’s easy to underestimate payments or miss deadlines.

The Solution:

Estimate Accurately: Use IRS Form 1040-ES to account for all income streams and deductions. Partner with an Austin accounting firm for precise calculations.
Automate Payments: Utilize IRS EFTPS or similar tools. For peace of mind, consult with a tax accountant in Austin to streamline your payment process.
Hire a CPA: An experienced professional from an accounting firm in Austin can ensure your quarterly payments are accurate and timely.

Mistake #2: Overlooking Entity Structuring

The Problem:

Operating as a sole proprietor often results in higher taxes. Many high-income earners miss out on the tax benefits offered by forming an S-Corporation, LLC, or C-Corporation.

Why It Happens:

Without proper guidance, high earners may not understand how entity structuring impacts taxes and liability.

The Solution:

Evaluate Tax Savings: S-Corporations, for example, allow income to be split between salary and distributions, reducing self-employment taxes.
Seek Expert Advice: Work with a tax advisor in Austin to ensure the right structure for your business.
Review Annually: Needs change over time. Trusted Austin CPA firms can reassess your structure regularly.

Mistake #3: Missing Retirement Savings Opportunities

The Problem:

While contributing to a 401(k) is common, many high-income earners neglect advanced retirement savings strategies, leaving significant tax advantages on the table.

Why It Happens:

Lack of awareness about tax-advantaged accounts like SEP-IRAs or defined benefit plans leads to missed opportunities.

The Solution:

Open a SEP-IRA or Solo 401(k): These accounts allow higher contributions than traditional IRAs.
Consider a Defined Benefit Plan: Ideal for maximizing contributions in high-earning years.
Consult an Austin Tax Expert: Let an experienced CPA in Austin Texas guide your retirement planning strategy.

Mistake #4: Ignoring Tax-Loss Harvesting

The Problem:

High-income earners with significant investments often fail to offset capital gains with losses, resulting in higher tax liabilities.

Why It Happens:

Regular portfolio reviews and coordinated tax strategies are frequently overlooked.

The Solution:

Conduct Annual Reviews: Identify underperforming assets that can offset gains.
Coordinate with Advisors: Work with both a financial planner and an Austin accounting service to optimize tax-loss harvesting.
Know the Limits: Offset up to $3,000 of ordinary income annually, with additional losses carried forward.

Mistake #5: Mismanaging Stock Options or Equity Compensation

The Problem:

Stock options or equity packages often carry complex tax implications, and poor timing can result in excessive taxes.

Why It Happens:

Executives and high earners often don’t understand the differences between ISOs (incentive stock options) and NSOs (non-qualified stock options).

The Solution:

Understand Tax Implications: An Austin TX CPA firm can help you navigate the rules for ISOs and NSOs.
Plan Exercise Timing: Coordinate option exercises during lower-income years to minimize tax impacts.
Diversify Investments: Reduce risk and optimize taxes by avoiding overconcentration in company stock.

Mistake #6: Neglecting Charitable Deductions

The Problem:

Many high-income earners miss out on the dual benefits of giving back and reducing taxes.

Why It Happens:

A lack of strategic planning in charitable giving often results in overlooked deductions.

The Solution:

Donate Appreciated Assets: Avoid capital gains taxes while receiving a full market value deduction.
Use Donor-Advised Funds: Make contributions in high-income years and distribute them over time.
Work with Experts: An experienced CPA in South Austin can help you track contributions and plan effectively.

Mistake #7: Focusing Only on Federal Taxes

The Problem:

Ignoring state-level tax opportunities often leads to missed savings.

Why It Happens:

Complex and varying state tax laws make it challenging to identify incentives.

The Solution:

Research Local Incentives: States like Texas offer benefits for renewable energy or historic preservation investments.
Partner with an Austin CPA Firm: Get expert guidance to maximize state-level benefits.

Mistake #8: DIY Tax Planning

The Problem:

Relying on tax software or personal research can result in missed opportunities for high-income earners with complex financial situations.

Why It Happens:

DIY tools often lack the nuance needed for advanced tax strategies.

The Solution:

Hire an Austin Tax Advisor: Working with a small business CPA in Austin, TX ensures personalized, proactive planning.
Conduct Mid-Year Reviews: Periodic check-ins with an Austin accounting firm help you adjust strategies as income or tax laws change.

Why Choose Insogna CPA?

Avoiding these common tax mistakes is easier with a trusted partner. Insogna CPA, one of the top accounting firms in Texas, offers:

Tailored Tax Strategies: Personalized plans for high-income earners and executives.
Proactive Guidance: From quarterly taxes to stock options, we help you stay ahead.
Comprehensive Support: As a leading Austin accounting service, we handle the details so you can focus on growth.

Take Control of Your Taxes Today

Don’t let avoidable mistakes cost you thousands. Insogna CPA, one of the best CPA firms in Austin, Texas, is here to help you optimize your tax strategy and secure your financial future.

Book a consultation today to partner with a trusted Austin, TX accountant for personalized tax solutions.

From W-2 to 1099: Essential Tax Tips for Your First Year of Self-Employment

Transitioning from a traditional job to self-employment is a rewarding step toward autonomy and financial growth. However, it also introduces a steep learning curve—especially when it comes to managing taxes. As a self-employed professional, you’re not only the boss but also your own payroll and tax manager.

Whether you’re working with an Austin TX accountant or tackling these challenges on your own, understanding the basics is key. This guide offers essential tax tips tailored to freelancers and independent contractors, empowering you to take charge of your finances with confidence.

What’s Different About Self-Employment Taxes?

When you were a W-2 employee, your employer handled income tax withholdings, Social Security, and Medicare contributions. Now, as a self-employed individual, those responsibilities fall to you. Here’s what to expect:

Self-Employment Taxes: You’ll pay 15.3% for Social Security and Medicare, but a portion is deductible on your return.
Quarterly Estimated Taxes: Instead of one annual payment, the IRS requires quarterly tax payments to avoid penalties.

Working with a local tax accountant in Austin can simplify this process and ensure you stay compliant with IRS rules.

1. Mastering Quarterly Tax Payments

Many first-time freelancers are surprised by the need to pay taxes four times a year instead of once. Late or missed payments can result in penalties. Here’s how to manage them effectively:

Estimate Your Payments: Use IRS Form 1040-ES to calculate taxes based on income, deductions, and self-employment tax.
Track Deadlines: Quarterly payments are due in April, June, September, and January. Set reminders to avoid missed deadlines.
Automate Payments: Platforms like the IRS EFTPS or tools recommended by an Austin accounting firmcan streamline the process.

Pro Tip: Work with one of the best CPA firms in Austin Texas to set up a system for estimating and automating your quarterly payments.

2. Maximize Deductible Expenses

One of the perks of self-employment is the opportunity to reduce taxable income through deductions. Common deductions include:

Home Office Deduction: Deduct a portion of rent, utilities, and maintenance if you use a dedicated space for work.
Business Equipment: Computers, phones, and other tools can be written off.
Professional Services: Fees for legal or accounting services, such as those offered by a CPA in Austin Texas, are fully deductible.
Travel and Meals: Business-related travel expenses, including lodging and meals, are deductible.

Pro Tip: Partner with your local Austin accounting service to ensure you’re accurately tracking and claiming all eligible expenses.

3. Stay Financially Organized

Good financial habits make tax preparation easier and help you avoid surprises during tax season. Here’s how to stay organized:

Separate Your Finances: Open a business bank account to keep personal and business finances distinct.
Use Accounting Software: Tools like QuickBooks or Xero simplify expense tracking and invoicing.
Save Consistently: Set aside 25–30% of your income for taxes, so you’re prepared for quarterly payments.

Pro Tip: Consider working with the best accounting firm in Austin to set up bookkeeping systems that save time and improve accuracy.

4. Plan for Retirement

Self-employed professionals need to take charge of their own retirement planning. Fortunately, there are several tax-advantaged options available:

SEP-IRA: Contribute up to 25% of your net earnings, with a maximum limit of $66,000 (2023).
Solo 401(k): Allows for higher contribution limits by combining employee and employer contributions.
Traditional or Roth IRAs: Great for additional savings, offering tax-deferred or tax-free growth.

Pro Tip: An experienced tax advisor in Austin can help you determine the best retirement plan for your financial goals.

Example: Amanda’s Journey to Financial Success

Amanda, a former marketing executive, transitioned to freelance consulting but struggled with tax management during her first year. She sought help from one of the top accounting firms in Texas, and here’s what happened:

She automated her quarterly tax payments and eliminated penalties.
With guidance from her Austin TX CPA firm, she identified overlooked deductions like home office expenses and travel.
Amanda opened a SEP-IRA, saving thousands in taxes while investing in her future.

By partnering with an Austin small business accountant, Amanda saved $8,500 in taxes and felt empowered to manage her finances moving forward.

Strategic Insights for Long-Term Success

Know When to Incorporate: Transitioning to an LLC or S-Corp can help reduce self-employment taxes and provide liability protection.
Stay Ahead of Tax Changes: By partnering with a CPA in South Austin, you can remain compliant with evolving tax laws.
Hire Professional Help: A knowledgeable CPA from an Austin accounting firmcan identify savings opportunities and reduce stress.

Why Work with Insogna CPA?

Navigating self-employment taxes is challenging, but you don’t have to do it alone. Insogna CPA is one of the best CPA firms in Austin, offering tailored services to freelancers and small business owners.

Personalized Planning: We create tax strategies that align with your unique needs.
Proactive Support: From quarterly tax payments to retirement planning, we guide you every step of the way.
Expert Guidance: As one of the most trusted accounting firms in Austin Texas, we deliver insights that simplify tax season.

Take Control of Your Finances Today

Your first year of self-employment can be a financial success with the right strategies and support. Let Insogna CPA, one of the top Austin accounting firms, help you build a solid foundation for your business.

Book a consultation with us today and see why we’re the go-to accounting firm in Austin for small business owners and freelancers.

Consultant Tax Tips: Turning Active Income into Smart Savings

As a consultant, your expertise and time are valuable assets. But without the right tax strategies, a significant portion of your income can go toward taxes. Working with a trusted Austin TX accountant can help you maximize deductions, reduce payroll taxes, and secure your long-term financial future.

Here’s how to turn your active income into smart savings with insights from a leading Austin accounting firm specializing in consultant tax strategies.

1️⃣ Maximize Your Business Deductions

Deductions are a consultant’s best friend when it comes to reducing taxable income. Here are key deductions to track:

Home Office Deduction: Deduct a portion of rent, mortgage, and utilities for a dedicated workspace.
Travel and Meals: Document business-related travel expenses, lodging, and meals.
Professional Development: Courses, certifications, and books related to your consulting work are deductible.

Why It Matters: Consultants working with an accounting firm in Austin can ensure all eligible deductions are properly tracked and documented for maximum savings.

2️⃣ Reduce Payroll Taxes with an S-Corporation

For self-employed consultants, structuring your business as an S-Corporation can significantly lower payroll taxes.

How It Works: Split income into a reasonable salary (subject to payroll taxes) and distributions (not subject to payroll taxes).
Example: An annual income of $150,000, split between $80,000 salary and $70,000 distributions, could save over $10,000 in payroll taxes.

Why It Matters: A qualified tax accountant in Austin can guide you through this process to ensure compliance and maximize savings.

3️⃣ Plan for Retirement with Tax-Advantaged Accounts

As a consultant, you have full control over your retirement savings. Take advantage of tax-advantaged accounts like:

SEP-IRA: Contribute up to 25% of net earnings, with a $66,000 limit in 2023.
Solo 401(k): Combine employee and employer contributions for higher limits.
Defined Benefit Plan: Ideal for high-earning consultants who want to maximize retirement contributions.

Why It Matters: Partnering with an Austin accounting service ensures your retirement plan aligns with your financial goals while minimizing tax liability.

4️⃣ Optimize Quarterly Tax Payments

Avoid penalties by staying ahead of quarterly tax payments. Consultants should:

Estimate Payments Accurately: Use IRS Form 1040-ES and factor in deductions.
Adjust for Variability: Recalculate payments quarterly if income fluctuates.
Automate Payments: Use IRS EFTPS or work with Austin’s accounting services to streamline payments.

Why It Matters: Collaborating with one of the top CPA firms in Austin Texas helps ensure accuracy and avoid surprises.

5️⃣ Leverage Advanced Depreciation for Equipment

Consultants often rely on high-cost tools and technology. Use depreciation strategies to save:

Section 179 Deduction: Deduct the full cost of eligible equipment in the year of purchase.
Bonus Depreciation: Write off 100% of the cost for qualified assets used during the tax year.

Why It Matters: A CPA from a trusted Austin accounting firm can help you make the most of these opportunities.

6️⃣ Use Tax Credits to Lower Your Bill

Tax credits directly reduce your tax liability. Consultants may qualify for:

Lifetime Learning Credit: For continuing education expenses.
Energy-Efficient Home Office Credit: For eco-friendly upgrades.

Why It Matters: An Austin small business accountant can identify overlooked credits that maximize savings.

7️⃣ Work with an Austin Tax Advisor

Managing your taxes as a consultant can be overwhelming, but it doesn’t have to be. A skilled tax advisor can:

Uncover missed deductions.
Recommend tax-saving strategies like S-Corp structuring.
Provide year-round financial insights for smarter decisions.

Why It Matters: Working with one of the top accounting firms in Texas gives you access to tailored guidance, ensuring your tax plan aligns with your goals.

Turn Active Income into Smart Savings 💵

Your consulting income deserves a smarter tax strategy. At Insogna CPA, one of the best CPA firms in Austin Texas, we help consultants:

Maximize deductions.
Reduce payroll taxes.
Plan for long-term financial success.

Don’t leave money on the table. Book a consultation with our Austin accounting service today to turn your active income into savings.`

Invest in Your Business: Tax-Smart Strategies for Scaling as a Freelancer

Freelancers often face a unique challenge: balancing the desire for growth with the need to manage tax burdens effectively. Reinvesting profits wisely can fuel scalability while minimizing tax liabilities, ensuring your business thrives in the long run.

In this blog, we’ll explore strategic investments for freelancers, offer tips on tax-smart decisions, and demonstrate how Insogna CPA can guide you through building a scalable, financially sound business.

Why Reinvesting is Essential for Freelancers

As a freelancer, your income is your business’s lifeline. Reinvesting profits can unlock opportunities for growth, such as attracting higher-paying clients, increasing efficiency, or expanding service offerings. Strategic reinvestment helps you:

✅ Enhance Efficiency: Upgrading technology or automating tasks saves time and effort.
✅ Increase Revenue Potential: Hiring assistance or improving marketing can expand your reach.
✅ Reduce Tax Liabilities: Business expenses lower taxable income, creating a win-win scenario.

Tax-Smart Reinvestment Strategies 💡

1. Invest in Technology and Tools

Freelancers rely heavily on technology to deliver quality work. Tax-deductible expenses in this area include:

📌 High-performance hardware: Laptops, desktops, or tablets.
📌 Software subscriptions: Tools like Adobe Suite, project management platforms, or industry-specific applications.
📌 Automation tools: Save time with scheduling software, invoicing tools, or CRMs.

Pro Tip: Bundling technology upgrades before the year-end can reduce your taxable income while positioning your business for better efficiency.

2. Upgrade Your Workspace

Creating a professional, functional workspace not only improves productivity but also offers tax advantages:

💡 Home office deductions: Deduct a portion of your rent, utilities, or mortgage if you have a dedicated workspace.
💡 Office equipment: Printers, ergonomic chairs, or standing desks can be expensed.

Ensure you maintain clear records of purchases and their use to maximize tax deductions.

3. Hire Strategic Help

Scaling often requires delegation. Bringing on subcontractors or virtual assistants allows you to focus on high-value tasks. Tax-deductible expenses include:

✅ Contractor payments: Wages or stipends paid to freelancers or assistants.
✅Professional services: Hiring accountants, marketers, or business coaches.

Pro Tip: Work with Insogna CPA to ensure proper classification of contractors and compliance with IRS regulations, avoiding costly penalties.

4. Boost Your Brand with Marketing

A strong personal brand is critical for freelance success. Tax-deductible marketing expenses include:

💡 Website development and maintenance.
💡 Social media advertising and SEO campaigns.
💡 Professional photography or videography for branding.

Strategic marketing investments can pay dividends by attracting premium clients and increasing your reach.

5. Expand Your Knowledge

Education is a powerful investment in your business. Deductible learning expenses include:

✅ Courses or certifications to improve your skills or expand into new services.
✅ Conferences or seminars to stay updated on industry trends.
✅ Books or online resources that enhance your expertise.

Pro Tip: Keep detailed records of educational expenses to substantiate deductions if audited.

Tax-Planning Tips for Freelancers

1. Plan for Quarterly Taxes

Freelancers are required to pay estimated taxes quarterly. By reinvesting in your business throughout the year, you can reduce taxable income and potentially owe less.

2. Depreciate Large Purchases

Some significant expenses, such as office furniture or high-cost equipment, can be depreciated over time rather than deducted upfront. Insogna CPA can help you decide the best approach based on your income and long-term goals.

3. Set Up a Retirement Plan

Freelancers can save on taxes while preparing for the future with plans like a SEP-IRA or Solo 401(k). Contributions are tax-deductible, offering immediate and long-term financial benefits.

4. Leverage Section 179 Deductions

The Section 179 deduction allows you to write off the full cost of qualifying equipment or software in the year of purchase, rather than depreciating it over time.

Pro Tip: Insogna CPA can ensure you’re optimizing these deductions while staying compliant with IRS rules.

A Strategic Path to Scalability

Reinvesting profits strategically helps freelancers scale without compromising financial health. Here’s a step-by-step guide:

📌 Analyze Your Cash Flow: Determine how much you can reinvest without jeopardizing stability.
📌 Prioritize Investments: Focus on high-impact areas like technology, talent, and marketing.
📌 Monitor ROI: Measure the success of each investment to refine future strategies.
📌 Consult a Tax Advisor: Work with us to ensure your decisions align with tax-smart practices.

Looking to scale your business?

Strategic reinvestment is essential for freelancers looking to scale their businesses while minimizing taxes. Whether it’s upgrading technology, hiring help, or enhancing your brand, every dollar reinvested wisely moves you closer to your goals.

Taxes on gambling winnings?

Gambling takes many forms, including casino games, horse racing, sportsbook betting, lotto tickets, scratchers, bingo, and more. For most, gambling is a fun, recreational activity. However, many gamblers experience losses exceeding their winnings, and since excess losses aren’t deductible, they often skip reporting altogether, which doesn’t align with tax laws.

🚩 Reporting Winnings and Losses

If your gambling winnings hit certain levels, the government mandates that the gambling establishment collect your Social Security number and report your winnings to Uncle Sam on a Form W-2G. Gambling establishments will issue a Form W-2G if you:

✅ Win $1,200 or more on a slot machine or from bingo.
✅ Win $1,500 or more on a keno jackpot.
✅ Win more than $5,000 in a poker tournament.
✅ Win $600 or more from all other games, but only if the payout is at least 300 times your wager.

Reporting Winnings

Many believe they only need to report winnings that result in a Form W-2G. Unfortunately, the IRS disagrees. Even if your gains can be offset by gambling losses, the IRS expects you to report all gambling winnings, even those below the W-2G threshold, which they will scrutinize during an audit.

Gambling Losses

The good news is that you can deduct gambling losses if you itemize deductions, but only up to the amount of your gambling income. This means you can’t have a net gambling loss on your tax return. If you don’t itemize, you’ll owe taxes on the entire amount of your winnings, even if you incurred a net loss.

📉 Documenting Losses

How do you document gambling losses if audited? Discarded tickets aren’t acceptable documentation. The IRS suggests maintaining a detailed diary of your gambling activities, supplemented by verifiable documentation, including:

1️⃣ Date and type of wager
2️⃣ Name and location of the gambling establishment
3️⃣ Names of people present with you
4️⃣ Amounts won or lost

Save all relevant documentation, including losing tickets, checks, casino credit slips, hotel bills, plane tickets, and entry tickets. Slot clubs may provide records of electronic play, and affidavits from gambling officials can also help. Specific wagering transactions can be supported by:

✅ Keno: Copies of validated tickets.
✅ Slot Machines: Record of winnings by date and time.
✅ Table Games: Table number and casino credit card data.
✅ Bingo: Number of games played, cost, and amounts collected.
✅ Racing: Race details, wagers, and winnings/losses.
✅ Lotteries: Purchase dates, winnings, and losses.

Other Tax Side Effects of Gambling
Gambling income is fully reported as income while losses are itemized deductions, increasing your AGI, which can negatively impact your taxes.

Social Security Income
For those receiving Social Security, whether benefits are taxable depends on your AGI. If your AGI exceeds certain thresholds, up to 85% of Social Security benefits can be taxable.

💊 Health Insurance Subsidies

Under the Affordable Care Act, health insurance subsidies are based on AGI. Gambling winnings can reduce these subsidies, requiring you to pay more for health insurance.

Medicare B and D Premiums
Medicare premiums are based on AGI. High AGI can triple Medicare B premiums and add surcharges to Part D premiums.

Other Limitations
Other tax rules limit benefits based on AGI, such as medical deductions, child and dependent care credits, and the earned income tax credit.

🎯 GAMBLING GOTCHA #1 - Full Winnings Impact AGI

Since you can’t net winnings and losses, the full amount of your winnings adds to your adjusted gross income (AGI), which is used to determine eligibility for other tax benefits. A higher AGI can limit these benefits.

🎯 GAMBLING GOTCHA #2 - Itemizing Deductions

If you don’t itemize deductions, you can’t deduct losses, meaning you’ll pay taxes on all winnings, even if you had a net loss. Recent tax reforms increased standard deductions and limited other itemized deductions, so fewer taxpayers will itemize and more will pay taxes on their winnings.

🎯GAMBLING GOTCHA #3 - Social Security Benefits

If your gambling winnings push your AGI over the threshold, some of your Social Security benefits may become taxable.

🎯GAMBLING GOTCHA #3 - Social Security Benefits

If your gambling winnings push your AGI over the threshold, some of your Social Security benefits may become taxable.

🎯GAMBLING GOTCHA #4 - Insurance Subsidies

Adding gambling income to your AGI can significantly reduce health insurance subsidies, increasing your costs.

🎯GAMBLING GOTCHA #5 - Online Gambling Accounts with Foreign Companies

If your online gambling account exceeds \$10,000 at any time during the year and it’s with a foreign company, you must report it to the Treasury or face penalties.

🎯GAMBLING GOTCHA #6 - Reporting Foreign Accounts

Regardless of winnings or losses, foreign online gambling accounts over $10,000 require filing a FinCEN Form 114 (FBAR). Penalties for non-compliance are severe.

Have questions about gambling and taxes?

Reach out to us for personalized advice and make sure you’re on the right side of the law. Let’s keep those winnings as joyful as they were when you won them!

Are elder care or caregiver expenses tax deductible?

Because people are living longer now than ever before, many individuals are serving as caregivers for loved ones (such as parents or spouses) who cannot live independently. These individuals often have questions regarding the tax ramifications associated with the cost of such care. For them, the cost of such care may be deductible as a medical expense.

❓ Is the Caregiver an Employee?

💡 Incapable of Self-Care

For the cost of caring for another person to qualify as a deductible medical expense, the person being cared for must be incapable of self-care. A person is considered incapable of self-care if, as a result of a physical or mental defect, that person is incapable of fulfilling their own hygiene or nutritional needs or requires full-time care to ensure their own safety or the safety of others.

💡 Assisted-Living Facilities

Generally, the entire cost of care at a nursing home, home for the aged, or assisted-living facility is deductible as a medical expense, provided that the person who lives at the facility is primarily there for medical care or is incapable of self-care. This includes the entire cost of meals and lodging at the facility. On the other hand, if the person is living at the facility primarily for personal reasons, then only the expenses directly related to medical care are deductible; the cost of meals and lodging is not a deductible medical expense.

💡 Home Care

A common alternative to nursing homes is in-home care, where day helpers or live-in caregivers provide care within the home. The services these caregivers provide must be allocated into (nondeductible) household chores and (deductible) nursing services. These nursing services do not need to be provided by a nurse; they simply must be the same services that a nurse would normally provide (e.g., administering medication, bathing, feeding, and dressing). If the caregivers also provide general housekeeping services, then the portion of their pay that is attributable to household chores is not deductible.

The emotional and financial aspects of caring for a loved one can be overwhelming, and as a result, caregivers often overlook their burdensome tax and labor-law obligations. Sadly, these laws provide no special relief from these tasks.

❓Is the in-home caregiver an employee?

Because of the way that labor laws are written, it is important to determine if an in-home caregiver is an employee. The answer to this question can be very subjective. Caregivers’ services can be obtained in a number of ways:

✅ Agency-provided caregivers are employees of the agency, which handles all the responsibilities of an employer. Thus, loved ones do not have any employment-tax or payroll-reporting responsibilities; however, such caregivers generally come at a substantially higher cost than others.
✅ Self-employed caregivers pay all their expenses, are responsible for their own income reporting and taxes, and are not considered employees under federal or state law. The IRS lists 20 factors that it uses to determine whether an individual is an employee; the main factors are financial control, behavioral control, and the relationship between the parties. Household workers are typically classified as employees.
✅ Household employees are subject to Social Security and Medicare taxes. The employer is thus responsible for withholding the employee’s share of these taxes and paying the employer’s share of payroll taxes. Fortunately for these employers, the special rules for household employees greatly simplify the payroll-withholding and income-reporting requirements. Any resulting federal payroll taxes are paid annually in conjunction with the employer’s individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to do so. However, the employer is still required to issue a W-2 to the employee and to file that form with the federal government. The employer also must obtain federal and state employer ID numbers for reporting purposes. Some states have special provisions for the annual reporting and payment of state payroll taxes; these may be similar to the federal requirements. The employer’s portion of all employment taxes (Social Security, Medicare, and both federal and state unemployment taxes) related to deductible medical expenses are also deductible as a medical expense.

💵 Paying in cash to avoid W-2s

You may be thinking, “Wait a minute – the household employers I know pay in cash and do not pay payroll taxes or issue W-2s to their household employees.” This observation may be accurate, but such behavior is illegal, and it is not right to ignore the law. Think about what could happen if one of your household employees is injured on your property or if you dismiss such an employee under less-than-amicable circumstances. In such circumstances, the household employee will often be eager to report you to the state labor board or to file for unemployment compensation.

Note, however, that gardeners, pool cleaners, and repair people generally work on their own schedules, invest in their own equipment, have special skills, manage their own businesses, and bear the responsibility for any profit or loss. Such workers are not considered household

🚩 Other Issues to Consider

💡 Overtime

Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in a given week. However, live-in employees are an exception to this rule in most states.

💡 Hourly Pay or Salary

It is illegal to treat nonexempt employees as if they are salaried.

💡 Separate Payrolls

Business owners may be tempted to include their household employees on their companies’ payrolls. However, any payments to household employees are personal expenses and thus are not allowable as business deductions. Thus, business owners must maintain separate payrolls for household employees; in other words, personal funds (not business funds) must be used to pay household workers.

💡 Eligibility to Work in the U.S.

It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When a household employee is hired to work on a regular basis, the employer and employee each must complete Form I-9 (Employment Eligibility Verification). The employer must carefully examine the employee’s documents to establish his or her identity and employment eligibility.

Still have questions?

Don’t let the stress of these details add to your caregiving responsibilities. Reach out to us today for a personalized consultation and ensure you’re maximizing your tax deductions while staying compliant. Contact our office now and let us help you make sense of it all.