It’s never too early to think ahead, so now—the beginning of the fourth quarter of 2022—is a great time to begin year-end planning. The goal of this tax planning is to minimize 2022 taxes by taking advantage of tax breaks applicable to your situation as well as positioning your business for 2023 and the new tax rules that go into effect at the start of the year. As I’ve said before, the sooner you get a jump on things, the more options you’ll have and the less stressed you’ll be. The following is Part 1 of year-end planning ideas you can use. Part 1 is focused ideas related to your employees and payroll. Part 2 has ideas for your operations and strategic planning.
Ideas related to your employees and payroll:
Decide on year-end bonuses
If your business has had a good year, at least so far, you may want to share your good fortune with your staff by giving year-end bonuses.
- Decide what you can afford.
- Factor in the employment tax cost of the added compensation.
- Determine if additional contributions to retirement plans are needed due to the added compensation.
- Factor in the additional W-2 wages in your qualified business income deduction if you’re an owner of a pass-through entity.
Line up your health coverage for 2023
Decide now how you plan to handle health coverage for your staff in 2023.
- Determine if you’re an ALE? If you have 50 or more full-time and full-time equivalent employees, your business is an applicable large employer (ALE) that must provide minimum essential health coverage or pay a penalty. The determination of being an ALE for 2023 is based on 2022 payroll. Also, knowing the size your staff impacts whether you’re in the large group market or small group market for health coverage; premiums differ in these markets.
- Will you buy group coverage? This can be done through a private insurer (large or small group market) or an agent with the Small Business Health Options Program [SHOP] (assuming you have no more than 50 employees)? Begin shopping for group coverage now.
- Will you reimburse employees for their individually-obtained health coverage through a QSEHRA or an ICHRA?
Decide on a retirement plan for the coming year
If you don’t already have a retirement plan, now’s the time to decide on which type of retirement plan to use for your business in 2023. Technically, you have until the extended due date of your 2023 return to set up and fund a plan. But if you want to use a plan in which employees contribute from their salaries, you need to act now in order to give required notice to them. For example, if you want to have a SIMPLE IRA, act soon so that you can give required notice to employees by November 2. The IRS has a comparison of retirement plans for small businesses.
You may qualify for one or two federal tax credits for implementing a retirement plan. Even if the plan goes into effect in 2023, you may choose to claim a credit in 2022.
If you don’t have a retirement plan and don’t plan to set one up for 2023, you may have to enroll employees in your state-sponsored retirement plan for the private sector. You don’t make contributions; employees do. But you must set up payroll withholding and remit the funds to the state plan. ADP lists the states with such plans, many of which begin in 2023.
Select other employee benefits
Health coverage and retirement plans aren’t the only benefits you may want to offer to your staff. Consider, for example, helping employees with their dependent care costs by having a dependent care FSA. This is funded with employee pre-tax contributions. Find a list of various employee benefits in IRS Publication 15-B (this publication has information for 2022, so check on the changes for 2023).
Consider other no-cost benefits that your employees may value:
- Continuing remote work arrangements
- Allowing flex time
- Offering pet insurance (you get a group rate and withhold the premiums from the paychecks of employees who want this benefit)
Why did I put employee benefits in Part 1 of year-end planning? Because you need to put your employees first when making decisions about your business. Employees are your most important asset. Be sure to think about what your offerings mean to them in the coming year. Look for "Part 2 of Start Your Year-End Tax Planning Now" for ideas on what to do in the final quarter of 2022 with respect to your operations and strategic planning.