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How to Pay Yourself as a Business Owner

As a business owner, how much should I pay myself on a W2 before year end? This is a common question we get from small business owners. How you pay yourself as a business owner largely depends on your business structure, where you are in your business journey, and a few other key factors.

Here are the two most effective ways to pay yourself as a business owner:

1️⃣ Salary
You pay yourself a regular salary, withholding taxes from your paycheck. This is legally required for businesses that are structured as S- or C-corporations or a limited liability company (LLC) taxed as a corporation. The IRS has a “reasonable” compensation requirement, which means your salary should be comparable with what someone else doing the same job in your industry would be paid.

2️⃣ Owner’s Draw
Outside of running W2 payroll, if you are a sole proprietor, S-Corp, or Partnership, all remaining money in your business account can be distributed to the owners, equally per their ownership percentage, at any time. You are taxed on all of your profits annually, so all the remaining cash in your business account is yours to choose what you do with. Just remember you will owe federal tax on your profits when filing your personal 1040 taxes.

So, How Do You Decide?

Your specific business structure dictates whether a salary, an owner’s draw, or a combination of both is the right move for you.

❓ How Much Should You Pay Yourself?
This is one of the most common questions we get. Most people just guess an amount, which usually causes them to over-pay unnecessary payroll taxes, which is a waste of money.

💡 Start with Your Business’ Net Profit

Your reasonable salary should be based on your business’s net profit, which is your business revenue minus all business expenses, and/or using our third-party software to answer a number of questions to determine what your maximum salary amount should be.

💡Avoid Risking an IRS Audit

What you want to avoid is risking an IRS audit because you did not pay yourself a high enough W2 salary, or have any justification for how you came up with your W2 salary amount.

Steer Clear of These W2 Pitfalls

Here are some common mistakes to avoid when setting up your W2 salary:

📌 Mixing personal and business finances
📌 Not budgeting for taxes
📌 Underpaying yourself, risking an IRS audit due to not meeting the reasonable salary rule for S-Corporations.

Your compensation should be part of your overall business plan. Financial projections should include your salary or owner’s draw to give you a clear picture of what your business needs to thrive. If you’re unsure which method is best for you, we’re here to help.

Get Personalized Tax Advice

Looking for more tailored tips on paying yourself as a business owner? We’re here to help you navigate your business structure and compensation strategy with ease. Give us a call today!

Is the inheritance I received taxable?

A frequent question asked is, “Are inheritances taxable?”

This is a common question that often comes with confusion. When someone passes away, their assets may be subject to an inheritance tax before anything is passed on to the beneficiaries.

Sound bleak?

💡 Inheritance Tax - Exemptions

Don’t worry—most estates don’t end up paying inheritance tax. This is because the tax code exempts a substantial portion of the estate from taxation. For example, the federal estate tax typically kicks in for assets over $12.06 million in 2022 and $12.92 million in 2023, with tax rates ranging from 18% to 40%.

Keep in mind, as with all things tax-related, this exemption isn’t always a fixed amount. It can be reduced by prior gifts exceeding the annual gift exemption, or increased for a surviving spouse by using the decedent’s unused exemption amount.

Since the value of an estate is based on the fair market value (FMV) of the assets at the time of death (or an alternative valuation date six months later), beneficiaries usually receive inherited property at this FMV. In practical terms, if a beneficiary sells an inherited asset, they’ll calculate their gain or loss based on the FMV at the time of the decedent’s death.

Inheritance Tax Examples

Example #1: Inherited Stocks

Joe inherits shares of XYZ Corporation from his father. Since XYZ is publicly traded, its FMV can be easily determined by its market price. If the FMV was $40 per share when inherited and the shares are sold later for $50 per share, Joe would have a taxable gain of $10 per share. This gain would be classified as a long-term capital gain because all inherited assets are treated as long-term, regardless of the actual holding period.

On the flip side, if Joe sells the shares for $35 each, he’d incur a loss of $5 per share.

Example #2: Inherited Property

Joe also inherits his father’s home. Unlike stocks, the FMV of the home isn’t as straightforward and requires a professional appraisal. It’s essential to get this right because if the IRS challenges the valuation, it could lead to complications.

This FMV valuation is often called a step-up in basis, although the FMV can also result in a step-down in some cases. If the decedent was married and lived in a community property state, and if the property was held as community property, the surviving spouse generally receives a 100% basis equal to the FMV, even though they only inherit the deceased spouse’s share.

Not All Inherited Assets Are the Same

Not every asset falls under the FMV rule. If the decedent held assets with deferred untaxed income, those will be taxable to the beneficiary.

Examples of Deferred Untaxed Income:

✅ Traditional IRA Accounts: Taxable to beneficiaries, but with special rules allowing the income to be spread over five years or the beneficiary’s lifetime.
✅ Roth IRAs: Qualified distributions are generally not taxable to the beneficiary.
✅ Compensation: Payments received after the decedent’s death for their services.
✅ Pension Payments: Typically taxable to the beneficiary.
✅ Installment Sales: If the decedent was receiving installment payments, the beneficiary will continue to be taxed on those payments as if the decedent were still alive.

Need More Information on Tax Implications of Inheritances?

If you have questions about the tax consequences of an inheritance—whether you’re planning ahead or dealing with one right now—give us a call. We’re here to help you navigate the complexities and make the most of your inheritance.

Tax Credits for Electric Vehicles in 2024

If you’re considering adding a qualified electric commercial vehicle to your business fleet, timing is everything. Waiting until after December 31, 2022, could help you capitalize on the updated Commercial Electric Vehicle Tax Credit.

As electric vehicles (EVs) become more common in the business world, we receive plenty of questions about how the Commercial Electric Vehicle Federal Tax Credit works. Here are some of the most frequent queries you might be pondering.

Common Questions CPAs Receive About the Commercial Electric Vehicle Tax Credit

❓What is the difference between a Commercial and Non-Commercial Electric Vehicle?

Commercial vehicles differ significantly from non-commercial electric vehicles under Section 30D. Understanding these differences is crucial for claiming the correct tax credit.

❓How much is the Commercial Electric Vehicle tax credit?

The credit is the lesser of:

📌 30% of the cost of a vehicle that isn’t powered by a traditional gasoline or diesel engine, or;
📌 The incremental cost of the vehicle (i.e., the difference in price between your new EV and a comparable conventional vehicle).

Note: Per Internal Revenue Code Section 45W, the credit caps at \$7,500 for vehicles under 14,000 pounds and \$40,000 for heavier vehicles.

❓What qualifies as a Commercial Clean Vehicle?

A “qualified commercial clean vehicle” must:

✅ Meets the requirements of Section 30D(d)(1)(C) and is acquired for use or lease by the taxpayer and not for resale;
✅ Is of a character subject to the allowance for depreciation;
✅ Either meets the requirements of subparagraph (D) of Section 30D(d)(1) and is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails), or is mobile machinery, as defined in Section 4053(8) (including vehicles that are not designed to perform a function of transporting a load over the public highways), or;
✅ Either is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 15 kilowatt hours (or, in the case of a vehicle which has a gross vehicle weight rating of less than 14,000 pounds, 7 kilowatt hours) and is capable of being recharged from an external source of electricity, or is a motor vehicle which satisfies the requirements under subparagraphs (A) and (B) of Section 30B(b)(3).

❓How do I claim the credit?

You must include the vehicle identification number (VIN) on the tax return for the taxable year in which you purchase the vehicle. You can find eligible VIN numbers on the National Highway Traffic Safety Administration’s free VIN Decoder.

If a commercial EV is on your company’s list, do the due diligence ahead of time to avoid disappointment come tax time.

💡 Important Rules to Note

Section 30D Guidelines
Commercial Electric Vehicles must comply with Section 30D guidelines, with a few exceptions for income and retail price limitations.

Tax-Exempt Entities
Vehicles placed in service by tax-exempt entities shall not apply to any vehicle which is not subject to a lease and which is placed in service by that entity.

No Double Dipping
You can’t claim a double benefit—no credit under this section for vehicles already credited under Section 30D.

Need help?

Curious about how much your business could save with the Commercial Electric Vehicle Tax Credit? Let’s chat! The corporate tax specialists at Insogna CPA are ready to guide you through every charge and credit, ensuring you maximize your savings in 2024.

Reach out today—we’re just as excited about driving your business forward as you are.

What JLo and Ben Affleck’s Divorce Teaches Us About Estate Planning and Taxes in 2024

In the spotlight or not, life changes, like an impending divorce, can flip your financial world upside down. Just ask JLo and Ben Affleck. While their split may be dominating the headlines, there’s a critical lesson here that applies to anyone: proper estate planning isn’t just for the rich and famous—it’s for everyone who wants to avoid a tax nightmare when life takes an unexpected turn.

Divorce and death can have significant income tax consequences. From changes in filing status and division of assets in a divorce, to avoiding your heirs paying estate tax upon your death. Without a well-thought-out estate plan, you (or your heirs) might find yourselves facing unexpected tax bills or legal challenges that could have been avoided.

Here’s what you can learn from JLo and Ben’s situation:

Review and Update Your Estate Plan

Life changes like divorce mean your estate plan should change too. Make sure your will, trusts, and beneficiary designations are updated to reflect your current wishes.

Understand the Tax Implications

Dividing assets isn’t just about who gets what; it’s also about how much you’ll owe Uncle Sam. Working with a Tax Strategist CPA can help you navigate the complex tax landscape that comes with divorce.

Plan for the Future

Life doesn’t stop after divorce, and neither should your financial planning. Consider how your long-term goals might shift and plan accordingly.

We're here for you!

At Insogna CPA, we’re not just filing taxes. We are tax strategists helping our clients maximize their wealth. Our amazing team helps you make sense of these changes and ensure that your tax plan is rock solid. Whether you’re going through a divorce or just want to be prepared for whatever life throws your way, we’ve got your back.

Life happens, and when it does, you’ll want a Tax Strategist CPA who’s seen it all. Let’s chat about how our amazing team can help you navigate tax changes with confidence. Reach out today!

Filing Taxes After a Divorce in 2024: Navigating Alimony and Child Support Tax Rules

In the U.S., alimony—also known as spousal support—is considered taxable income for the recipient and a tax deduction for the payer. In simple terms, the person receiving alimony reports it as income and pays taxes on it, while the payer can deduct these payments on their tax return. However, the rules around alimony tax deductions can be complex, so it’s always wise to consult a tax professional or refer to the latest IRS guidelines.

Tax Treatment of Alimony

Alimony refers to payments made to a separated or ex-spouse under a divorce or separation agreement.

To qualify as alimony for tax purposes, the payments:

📌 Must be in cash and paid to or on behalf of a spouse or ex-spouse.
📌 Must be required by a divorce decree, written separation agreement, or support decree.
📌 Cannot be labeled as child support.
📌 Are only valid if the spouses live separately after the agreement is signed—sharing a household disqualifies the alimony deduction, even if living in separate parts of the home.
📌 Must end upon the death of the recipient.
📌 Cannot be dependent on the status of a child (e.g., payments that stop when a child turns 18 do not qualify as alimony).

These payments can cover more than just support; they can include property rights, as long as they meet these criteria. Payments don’t have to be periodic, but be mindful of rules about front-loading, which can trigger “recapture” provisions. Even if the payments meet all alimony requirements, the couple can agree that the payments aren’t alimony, and this agreement will be honored for tax purposes.

💡 Divorce Agreements Completed Before the End of 2018

For divorces finalized before 2019, the recipient of alimony must report it as income, and the payer can deduct it. The recipient can also treat the alimony as earned income for IRA contributions. To ensure accuracy, the IRS requires the payer to include the recipient’s Social Security number on the tax return, allowing the IRS to match the amounts reported by both parties.

💡 Divorce Agreements Completed After 2018

For divorces finalized after 2018, alimony is no longer deductible by the payer nor taxable for the recipient. As a result, the recipient cannot treat alimony as earned income for IRA contributions. This rule also applies to any divorce or separation agreements executed before January 1, 2019, but modified after 2018, provided the modification specifies that the new tax rules apply.

Still Wondering How This Affects You?

Navigating alimony, child support, and divorce-related tax issues can be tricky, especially with the evolving tax laws. If you’re dealing with a divorce and unsure how these changes might impact your tax situation, reach out to us. We’re here to help you get the most out of your financial future.

Moving to Austin, Texas? The Tax Tips You Need to Know

If you’re eyeing Austin, Texas, as your next home—whether for retirement, a job relocation, or just a change in scenery—here’s the lowdown on what to expect tax-wise in 2024.

According to the U.S. Census Bureau, “Austin outpaced every other metro area in the nation from 2010 through 2019, and in 2020 (the latest figures), was the fastest-growing metropolitan area.” On average, the city gains 168 new residents daily, largely due to relocations. That trend shows no signs of slowing down.

❓ What are Taxes Like?

Even though you won’t pay personal state income tax (a huge bonus for people moving from states with high tax rates such as California and New York). The current total sales tax in Austin is 8.25 percent. While the county doesn’t currently impose a sales tax, the state charges a state sales tax of 6.25 percent. Austin adds to that a city sales tax of 2 percent. One percent of the city’s sales tax goes towards the improvement of its public transportation system.

While Texas doesn’t have a state income tax, it makes up for it in property taxes. According to Tax-Rates.org, the median property tax in Austin is \$1,903 per year for a home that is worth approximately \$150,000. Currently, the average median listing home price in the city is $579,000. Based on those figures, if you move to Austin, expect to pay at least \$6,000 annually in property taxes for a home slightly below the median home price.

For people moving from historically expensive cities such as Los Angeles, San Francisco, or New York (where many of Austin’s recent transplants have come from), it still works out to a lower cost of living. But for folks moving from smaller Texas towns or mid-sized cities, it’ll feel like more of a squeeze.

❓ Why Are Businesses Moving to Austin?

Austin-based economist Jon Hockenyos told national attendees of a 2021 forecasting event that Austin will be “one of the great global cities of the 21st century.”

It’s worth noting that along with a lower comparable cost of living, businesses that move or expand to Austin will also get exceptional business incentives and be privy to some of the lowest tax rates in the country.

The state of Texas has neither corporate or personal income tax — a boon for businesses and their employees. Business incentives range from sales tax and franchise tax exemptions for qualified businesses. Additionally, the state offers waived permit fees, property tax abatements, grants, and local funding for relocating or expanding businesses.

Additionally, the city of Austin has a Business Expansion Incentive Program that rewards qualifying businesses that perform in certain target areas with tax reimbursements and wage reimbursements.

Real estate opportunities are still readily available, especially for expanding businesses or manufacturing companies that require larger warehouse spaces. With a median salary of $93,000, the economy is strong, and businesses will have access to a talent pool full of smart professionals.

💡Additional Business Relocation Costs to Consider

Before you pack up, make sure you’ve accounted for all the potential costs:

✅ Deposits and/or lease fees for new office space
✅ Business registration fees or any fees tied to dissolving, reforming, merging, relocating, or converting your business
✅ Potential loss of productivity and revenue during the move
Employee relocation costs
✅ Marketing costs to inform clients about your new location
✅ Insurance costs for the move and for relocating employees
✅ One-time setup costs for the new office and employees: utilities, IT, furniture, cleaning, etc.

For a full list of Austin’s economic incentives, visit the Austin Chamber of Commerce website.

❓What is Austin’s Cost of Living?

Austin’s cost of living is higher than the national average, with a living index of 109—9 percent above the norm. Housing is a significant factor, but you’ll also pay more for healthcare, goods, and services in Austin.

❓What is Austin’s Real Estate Market Like?

The median listing home price in Austin is $579,000, with an average of $320 per square foot—much higher than the national median of $374,900. Depending on the neighborhood, you might pay even more. Areas like Circle C, Bee Cave, Westlake, and East Austin are known for their steep prices.

Homeownership is at 44 percent in Austin, meaning more than half of the city’s residents rent. A significant portion of renters (35 percent) pay between $1,501 and $2,000 monthly, while 20 percent pay more than $2,000.

❓Does Austin, Texas, Pay You to Move There?

While you won’t get paid to move to Austin, the city is part of a guaranteed income program that redistributes local taxes to lower-income families.

Ready to Move? We’ve Got Your Back.

We help business owners navigate the complex world of taxes, ensuring you stay compliant while minimizing your tax liabilities. Planning a move to Austin? Let us help you calculate your tax bite and make sure you’re maximizing your deductions when tax season rolls around. Reach out today, and let’s turn your big move into a smart move.