Federal Tax News for Businesses
1. Tax Credit Helps Employers Who Hire Certain Employees
If your business is looking to hire, you should know about a valuable one-time tax credit. The Work Opportunity Tax Credit (WOTC), which is available through 2025, encourages employers to hire from targeted groups that face employment barriers.
Interested employers should start by contacting their state workforce agency to file a form. Employers must also obtain certification that a new hire is a member of a targeted group. These groups include veterans, qualified recipients of certain aid programs, ex-felons, qualified long-term unemployment recipients and summer youths. For more information about the WOTC, check this IRS list of FAQs or contact us with questions.
In related news, the IRS has updated information about the WOTC pre-screening and certification processes. To satisfy the requirement to pre-screen a job applicant, a pre-screening notice must be completed by the job applicant and the employer on or before the day a job offer is made. This is done on IRS Form 8850. For more information, contact your tax advisor or visit the IRS here.
2. Contributions to 401(k)s and Other Retirement Accounts Going Up in 2023
The IRS announced that the amount employees can contribute to their 401(k) plans in 2023 will increase to $22,500, up from $20,500 for 2022. This will also be the 2023 limit for contributions to a 403(b), plan and most 457 plans. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b) and most 457 plans will increase to $7,500, up from $6,500. Therefore, participants in these plans who are 50 and older can contribute up to $30,000 in 2023. The 2023 limit on IRA contributions will increase to $6,500, up from $6,000. The IRA catch‑up contribution limit for those age 50 and over isn’t subject to an annual cost‑of‑living adjustment and will remain $1,000.
Deferrals to a SIMPLE plan will increase to $15,500 (up from $14,000). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increased to $3,500, up from $3,000.
3. What Are Your Tax Responsibilities for Nonemployees?
Businesses must withhold employment taxes from employees’ wages and report the wages and the taxes withheld to the IRS. But the reporting obligations for workers who aren’t employees can be trickier.
While a business isn’t responsible for withholding employment taxes from nonemployee (or independent contractor) compensation, a business that pays more than $600 to an independent contractor must report that compensation to the IRS using Form 1099-NEC, Nonemployee Compensation. There also may be backup withholding.
Generally, businesses reporting contractor compensation must file 1099-NECs by Jan. 31 of the year following the payments. Contact your tax advisor for more details or visit the IRS here.
4. No Deductions for Political Advertising Expenses
Do you operate a small business? You can deduct the costs involved in bringing in new customers and keeping existing ones, including advertising and marketing expenses. The expenses must be ordinary (common in your industry) and necessary (appropriate for your business).
The IRS reminds business owners that among the expenses you generally can’t deduct are amounts spent to influence legislation, or gifts or contributions to political parties or candidates. This includes advertising in the convention program of a political party or any other publication if the proceeds are for the use of a political party or candidate. Click here for a publication with more information about business expense deductions.
5. Construction Businesses Must Meet Requirements to Claim Credits
Under the recently enacted Inflation Reduction Act (IRA), clean energy construction projects must satisfy several labor requirements to receive full tax credit amounts.
Among the IRA’s statutory requirements is that qualifying energy projects must provide a prevailing wage — or a basic pay floor — during the initial five-year period after a project is placed into service. This applies to work performed by employees and contractors or subcontractors relating to construction, alteration, or repairs.
The law also imposes a minimum threshold for the percentage of such work that must be done by a qualified apprentice. The applicable percentage for 2022 is 10%, increasing to 12.5% the following year, with the phase-in completed at 15% for facility construction in 2024 and beyond.
Penalties for violating these rules may be severe. However, the rules won’t be in force until 60 days after the U.S. Treasury Department issues public guidance, and it isn’t expected until early 2023. Contact your tax advisor about how to proceed in the meantime.