If you discovered while preparing your 2021 tax returns that you actually owe federal income taxes, your employer’s benefits program can help reduce your taxable income and improve your quality of life. . And if you have a side gig and you have to pay FICA (Social Security and Medicare) taxes, we have some tips for you, too.
Here are five tax reduction options your business can offer.
1. Contributions to the pension plan
There’s no better way to reduce taxes today while saving for the future than by maximizing contributions to your employer’s retirement plan, whether it’s a 401(k) ), 403(b) or 457.
In 2022, you can contribute up to $20,500 to your account, or $27,000 if you’re 50 or older. Every penny you contribute before tax reduces your taxable income, year after year. And if your business matches some of your contributions, you’ll get an extra boost to build your dream nest egg.
2. Health savings accounts
If you’re enrolled in a high-deductible health plan (HDHP) at work, chances are your employer also offers a Health Savings Account (HSA) option.
HSAs are funded by pre-tax contributions from your salary, up to a maximum of $3,650 per individual ($7,300 per family) with an additional $1,000 in “catch-up” contributions per person if you are 55 and more.
Your HSA grows tax-free, and you can receive tax-free distributions to pay for eligible health care expenses, including over-the-counter drugs, medical equipment, dental, physical therapy, and even acupuncture and aromatherapy.
If you change jobs, you can take your HSA to your next company or transfer your balances to an HSA offered by a financial services company.
3. Flexible savings accounts
Companies that do not have an HSA often offer Flexible Savings Accounts (FSA) as an alternative.
You can fund your FSA with pre-tax contributions of up to $2,850 per year. As with HSAs, your FSA assets grow tax-free and you can take tax-free deductions to pay for eligible healthcare expenses.
The main difference between FSAs and HSAs is that you generally have to spend all of your FSA money by the end of the plan year. However, your employer may give you up to 2.5 months after the end of your plan year to use the remaining money or allow you to carry over up to $570 to be used in the new plan year.
Unlike HSAs, you cannot transfer your FSA. If you change employers, you must either use the money from your FSA before you leave or forfeit the balance.
4. FSA for dependent care
If you have children in daycare, or if they attend preschool or summer day camp or participate in before or after school programs, a Dependent FSA (DCFSA) can help pay for these expenses. You can also use it to pay for certain adult child care expenses.
Like health care FSAs, you can fund your DCFSA with pre-tax contributions and receive tax-free distributions to pay for dependent care. You can contribute up to $2,500 per year if you file an individual return or $5,000 if you are married and file a joint return.
As with healthcare FSAs, you must use up all of your DCFSA contributions by the end of the plan year, unless your employer offers a grace period or rollover option. And, like FSAs, DCFSAs cannot be transferred to another employer.
5. Life insurance
If you’re considering term life insurance to provide financial protection for your family, take a look at what your employer offers.
Many companies offer group term life insurance that employees can pay for through pre-tax contributions.
But be careful. If you pay for more than $50,000 of life insurance coverage, the excess will be subject to FICA and federal income tax. If you want more extensive coverage, consider supplementing the insurance you pay for at work with another policy you purchase yourself.
What about side gig revenue?
If you earn additional income from your own business or receive 1099 income as an independent contractor, you will generally have to pay FICA and federal taxes on that income. Most people with this extra income make estimated quarterly tax payments. If you wait to file your returns to pay these taxes, you risk being penalized for late payment.
The good news is that you may be able to reduce your tax burden by deducting many of your own business-related expenses. These may include vehicle expenses, business-related cell phone and internet services, meals with clients or prospects, and some of your home office expenses.
Keep in mind that you should keep detailed records of all these expenses in case you are the unlucky recipient of an IRS audit.
Want more tax relief? Turn to the professionals
In addition to helping you decide what tax breaks you can take advantage of at work, your accountant or financial advisor can also help you identify other ways to help you reduce or perhaps even zero your annual federal tax bills and state.
This material has been provided for general information purposes only and does not constitute tax or legal advice. Although we strive to ensure that our information is accurate and useful, we recommend that you consult a tax preparer or professional tax and financial advisor.
Financial Advisor, Canby Financial Advisors
David Jaeger, CFP®, is a financial advisor at Canby Financial Advisors in Framingham, MA. David enjoys learning about each client’s unique situation and specific goals so he can work with them to bring clarity and relieve stress. He earned his bachelor’s degree in history from Loyola University in Maryland.
Securities and advisory services offered by Commonwealth Financial Network®, Member FINRA/SIPC, a registered investment adviser. The financial planning services offered by Canby Financial Advisors are separate and unrelated to Commonwealth.