For taxpayers collecting payments through a third-party payment platform such as PayPal, the American Rescue Plan Act of 2021 (which we’ll refer to as “the Act” in this article) established a significant change to tax reporting rules to prevent businesses and contractors from hiding income through the receipt of electronic payments. Form 1099-K is the tax form issued by credit card companies and third-party payment processors to report payments made via debit card, credit card, stored value cards (like gift cards), and payment apps (like Stripe, PayPal, or Venmo). As part of the Act, the reporting threshold for issuing the form was lowered significantly. Although this change was set to take effect starting with the 2022 tax year, the IRS delayed implementation of the new rule – however, it is expected to be required for 2023. 

What Changed?

Existing rules (which are still currently in place for 2022 due to the IRS postponement) require credit card companies and payment processors to file Form 1099-K with the IRS and issue it to payees when: 

• gross earnings are more than $20,000, and
• the number of transactions exceeds 200 for the year

Many lawmakers argued that this “two-step” threshold created a situation where contractors/sellers could easily omit income from their tax returns. As a result, the single “$600 or more” threshold was created, meaning that any recipient with receipts of $600 or more for the year through a particular payment platform will be issued a 1099-K form, regardless of the number of transactions or other factors. Barring any additional action from Congress, this new reporting threshold will be enforced starting with 2023 forms, meaning that a substantially higher number of 1099-K forms will be sent out in early 2024 for the 2023 tax year.

Considerations and Concerns

Even though tax law has always required taxpayers to report ALL income earned/received, regardless of whether associated tax forms are received, this law change has raised concerns about several logistical challenges, including:

• What about personal transactions? For example, will taxpayers who use platforms like Venmo to receive personal payments, such as a birthday gift from a relative or a rent deposit from a roommate, be taxed on those payments? According to IRS, 1099-K forms will only be issued for accounts listed as business or merchant accounts, or for personal accounts where transactions are tagged as “goods and services.” Despite these reassurances, there are still questions about how this will play out as the change is implemented, especially for those who use the same account for business and personal transactions, or casual sellers who are selling used goods for less than what they paid/are not in the business of selling such goods for a profit. 
• What if the 1099-K and 1099-NEC forms report the same payment? Although this should not happen per IRS due to the fact that payment processors are responsible for issuing 1099-K forms and individual clients are responsible for sending 1099-NEC forms, it’s still possible, particularly if clients misunderstand the rules and don’t realize they shouldn’t be issuing 1099s for payments made through credit card or payment apps. This raises concerns about the double-reporting of income and how to account for such errors on a tax return so that the recipient is only taxed once on income.
• How will IRS handle the resulting influx of paperwork they’ll have to sort through? IRS has already been dealing with understaffing and, as a result, processing backlogs and inadequate phone support over the last few years. Many believe this compliance change will increase the burden on the IRS, lead to widespread confusion in the tax system, and produce a rise in IRS correspondence.

For freelancers, contractors, or anyone receiving payments through a third-party platform, make sure to save any 1099-K forms received, which you will need to refer to when you file your tax returns. Consult with your tax professional about any actions you may need to take as a result of these rule changes and if/how your tax situation may be impacted.

One of the most challenging aspects of running a business is figuring out how to pay yourself. It’s not always clear what the rules are, and many entrepreneurs struggle to strike a balance between reinvesting profits into their company and taking home a fair salary.

Entrepreneurs typically have a couple options available when it comes to paying themselves, which are dependent on the structure of a business. One option is to take a draw, which is a withdrawal of funds from the business’s profits. This is used by sole proprietorships and partnerships. The other option is to receive a paycheck, which must be used by incorporated businesses. Paychecks are compensation based on a predetermined salary and are subject to taxes and other deductions.

It’s important for entrepreneurs to understand the differences between these two methods and choose the one that is required for their specific business structure and meets their financial goals. If you have any questions about the best option for you, discuss the matter with your accountant. In this article, however, we’ll focus on some key considerations to keep in mind as you determine how much to compensate yourself for your hard work.

1. Reasonable Compensation

What would your pay be if you were doing the same work for a company that hired you? Are you making at least market equivalent or better? Many times, entrepreneurs remain focused on ONLY this aspect of their compensation, when doing so is actually a big mistake. There are tax implications of paying yourself too little (to avoid payroll taxes if you take a paycheck, for example) or too much. 

2. Retirement plan

When you work for yourself, no one is going to fund your retirement for you. Although the Social Security program helps, it’s up to you to set aside additional money for a livable future when you can’t or don’t want to work anymore. Talk to your accountant and retirement advisor about how much you should be setting aside for your retirement and how you can factor that into your own pay. 

3. Benefits

Employees get paid time off, health insurance, and bonuses–and you should too! These benefits should be part of your compensation package as an entrepreneur, and there are many tax advantages as well

4. Taxes

You need to cover taxes that will be incurred on your pay and your business profits, including:

• Normal withholding for federal income taxes, state and local income taxes, Medicare, and social security. If you receive a paycheck, these will be deducted; however, those deductions may not be sufficient to cover your entire tax obligation since they don’t account for taxes on your profits. If you take a draw, you may not have withholding, but you will need to factor in self-employment taxes at 15.3%
• Taxes on your profits. For sole proprietors, partnerships, LLCs, and S Corps, your taxes will be figured on your business’s profits when you complete your federal income taxes. They will “pass-through” from your business to your personal return. Don’t let this part surprise you!
• State business taxes. If your business does business in multiple states, you must file a tax return for each state. Many states collect taxes based on flat corporate fees, the revenue you earned in that state, state payrolls, and/or the value of property owned in that state.

Check with your tax advisor so that there are no surprises in your tax bill for your business or your personal returns.   

5. Profit

As an entrepreneur, you take on additional risk in owning your own company and should be compensated accordingly. Your capital is tied up in your business and should be earning a good return in addition to your regular salary or draw.

Complete Compensation

It’s normal to take a smaller paycheck in the first few years as your business grows, and you might even feel like you can’t afford to pay yourself an amount that reflects all the above components. In that case, it might be a good idea to evaluate your pricing, your volume of work, or your business model.

Remember to review your salary regularly and adjust as necessary to ensure that you’re meeting your financial goals and building a sustainable business. Determining the right amount to pay yourself as a business owner can be a complex process, but it is a key component of achieving long-term personal and professional success. By following the steps outlined in this article and seeking guidance from trusted financial experts, you can ensure you’re compensating yourself fairly and sustainably. 

We’re just a few days away from the first day of summer and a few weeks from the year’s midpoint. So now is a great time to evaluate the effectiveness of your business strategy for the first half of 2023, plan something enjoyable, and think about what you want to accomplish in the remainder of the year.

Here are five business strategies to help you regroup, reassess, and rejuvenate your business for the second half of 2023.

1. Celebrate Your Accomplishments

Take a moment to acknowledge your accomplishments and congratulate your team on the goals you’ve reached together. The extent of your progress may surprise you! Maybe a recent hire has made your team the largest it’s ever been, you’ve reached record revenue goals, or you solved a complex supply chain problem. Celebrating your wins is one of the best parts of running a business, and it also affords you the opportunity to hop off the hamster wheel and enjoy life.

2. Take a Vacation

Any rest is beneficial, and stepping away from your business, whether for a day or an entire month, gives your mind space to unwind and recalibrate. So plan to take time off when your business is the least busy–or when your customers are the quietest.

Anxious about being away from your business? You’re not alone. Take the time that seems feasible for you. It could be half a day every Friday for the month of August; it could be a remote-work vacation in a location with a better climate. Remember: there is life beyond your business, and you will be a better business owner when you take regular breaks away.

3. Schedule a Mid-Year Review

How has your business fared for the first half of 2023 compared to your goals at the beginning of the year? Are you on track to reach them? Or should you design a course correction? Where do you need to go next?

Set aside time to dive into these questions and think deeply about your answers. You can make this process as formal or informal as you want. For example, some businesses hold retreats, or you may decide you simply need some quiet time on a weekend.

4. Be Selective About the Projects You Start

Are you busy with the things that will take your business to the next level? Or the same old stuff? What are you afraid to say “yes” to? If you’re putting off a project that you know will pay back handsomely, consider how to shelve some other projects and focus your energy on the efforts that will reap the most rewards.

Taking the time to regroup and refresh your business greatly enhances your chances of success in the second part of the year. Use these five tips to create a summer worth dreaming about and use its momentum to reach your business goals.

We’re six days away from the first day of summer, and a few weeks away from the midpoint of the year. It’s the perfect time for taking a strategy check in your business to see how you’re doing for the first half of 2023 as well as to plan something fun and productive for summertime.  

Here are five business strategies to help you regroup, reassess, and rejuvenate your business halfway through 2023.  

• Celebrate Your Accomplishments

Take time to pat yourself on the back and congratulate the people around you for the goals you’ve reached and the efforts your team has made on your behalf. You might be shocked when you think about how far you’ve come. Maybe you’ve hired another team member and your team is the largest it’s ever been; perhaps you’ve reached record revenue goals; possibly you’ve solved a complex supply chain problem.

We all could use more praise and more celebrations in our lives.  Perhaps you can organize a party, or if you are not the partying type, a quiet word individually with your team can go a long way, maybe more than you know.

• Take a Vacation

If you’re feeling quite burned out, the best thing you can do is stop and take a breather. There’s nothing better to rekindle your creative juices than to get away from the business for a while.  Summertime is when most people take a vacation, so if your business is not having its busy season, this might be a good time to go away, even if for a little while.

If you’re anxious about being away from your business, you’re not alone.  In your annual planning process, plan for and block out your vacation way ahead of time.  Book the reservations with no refunds several months in advance so that you won’t chicken out at the last minute.  There is life beyond your business, and you will be a better business owner when you take regular breaks away.  

• Schedule a Mid-Year Review

How has your business fared for the first half of 2023 compared to the goals you set at the beginning of the year? Are you on track to reach your goals? Should you design a course correction or are you on track? Maybe you’re even ahead of plan!

You can make this process as informal or formal as you want. Some businesses hold retreats; you may simply need some quiet time on a weekend when all your family is busy doing something else.   

• Be Selective About the Projects You Start    

Is your plate too full?  Entrepreneurs that wear many hats would probably say “yes” to that question, so the next question is do you have to do it all at once? Ask yourself what you can afford to stop doing that doesn’t make sense. Is there a project or two that can wait? If so, decide to stop stressing about not getting it done and give yourself permission to put it on the back burner for now.

• Play Big

Maybe you’re not playing big enough. You might be busy, but are you busy with the things that will take your business to the next level? Do the thing you’re afraid to say “yes” to; the thing that you know will transform your business and get you closer to your dreams.

If you’re putting off a project that you know will pay back handsomely, then shelve everything you’re working on and start on the one that will reap the most rewards. It could be a new product or service line, a new ad campaign, a new hire, a new joint venture, new financing, or even a new partner, which is very big indeed. You likely know what it is you need to do; your gut has been telling you for a while now. Just get it started, and it will then become easier.  

Summertime is a great time to regroup, re-energize, and refresh your business. Try one of these five tips to spice up your summer as well as your business success.