Working remotely may broaden your job options and make daily life easier. But working from a different state than your employer — or spending part of the year working from a second home in a different state than where you normally reside — can create state tax issues. Because the rules vary by state, work arrangements that cross state lines warrant a closer look.

Convenience-of-the-employer rule

If your employer is located in a state that applies a convenience-of-the-employer rule and you work remotely from a different state, you may need to file income tax returns in more than one state. Under such a rule, days worked from another state for your own convenience (rather than for the convenience of your employer) may be treated as days worked in your employer’s state.

This might occur if, say, you choose to work from home across the state border from the city where your employer has an office. Your employer doesn’t require you to work remotely, but you prefer to do so to save yourself the time and cost of commuting. So your employer allows you to work from home for your convenience.

A state with an income tax generally can tax all income of its residents and income earned within its borders by nonresidents. So if your employer’s state considers your days worked remotely to be days worked in that state because of the convenience-of-the-employer rule, you could be subject to taxes and filing requirements in both your employer’s state and your own.

Domicile and residency

Your state tax obligations can also be affected if you spend enough time working in two states that both consider you to be a resident. Residency rules vary, but many states consider your domicile, the days you spend in the state and whether you maintain a home there. Your domicile is generally your “true, fixed, permanent home” — the place you intend to return to. Some states also will treat you as a resident if you maintain a home and spend a specified number of days there.

It’s possible to be domiciled in one state and be a resident of another. For example, let’s say you have a permanent home in one state where your job is located and a vacation home in another state. Your employer allows employees to work remotely, so now you spend more than 200 days per year living and working at your vacation home.

The state where your permanent home is located considers you to be domiciled there, but the state where your vacation home is located might view you as a resident. So if both states have an income tax, you may be subject to taxes on the same income in both states. A credit for taxes paid to another state may reduce or eliminate double taxation, depending on the states’ rules. But your tax bill may still increase if, for example, the vacation home state’s income tax rate is higher than your permanent home state’s rate.

Employer obligations

From an employer’s perspective, allowing employees to work remotely may create obligations to withhold and remit income and payroll taxes in multiple states. (These requirements can also affect how much state income tax is withheld from an employee’s pay.)

Plus, having employees in other states may be sufficient to establish “nexus” with those states, potentially triggering liability for their income, franchise, gross receipts or sales and use tax. In addition to the expense of tax reporting in multiple states, this may increase an employer’s overall tax liability. There are other complications as well.

As a result, some employers may not allow remote employees to work for extended periods from other states. They also might prohibit remote employees from moving to a state where the employer doesn’t already have employees or nexus.

Review your arrangement

If you’re a remote employee, before changing where you work, check with your employer to make sure it will allow you to work from that state. Also find out how a move or extended stay could affect your state taxes and withholding. If you’ve already worked from more than one state during 2026, consider addressing the potential tax consequences before year end. Contact us to review your work arrangement and determine whether you may have tax obligations in more than one state.

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Burkett Burkett & Burkett CPAs, P.A. has been nominated as Best Certified Public Accounting Firm in the Columbia Metropolitan Magazine’s 2027 Best of Columbia competition! From September 1st to October 13th, you can vote for us at Columbia Metropolitan’s website. We are grateful to have been nominated and hope you will take the time to vote for us before the October 13th deadline.

Thank you to our amazing team for keeping Burkett Burkett & Burkett CPAs known as one of the region’s top accounting firms!

Vote Here

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From the founding of our firm in September 1976, Burkett Burkett & Burkett CPAs, P.A. has endeavored to deliver exceptional service to our clients. From everyday tax guidance to management of complex financial situations, our firm has been here to guide and assist our clients for five decades. From our founding to the present day, we have continued to grow and improve, and today Burkett Burkett & Burkett proudly serves clients across the state from our West Columbia and Rock Hill locations.

To our clients and team members, old and new, thank you for helping us to achieve this momentous milestone. Here’s to 50 more years of service!

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Many individuals invest in real estate to help diversify their portfolio, create an income stream for themselves from rental income and build net worth over time. Often, this is a side activity to a career in another field or running another type of business — not the individual’s primary source of income. Holdings might range from a condo or small house you rent out to a multifamily residential building or even a commercial property.

Whatever type of property you own, investment real estate comes with special tax considerations you need to be aware of. With proper planning, you can maximize your after-tax returns.

Rental activity rules

One important consideration is the tax treatment of income and losses from rental properties. They’re considered passive by definition — unless you’re a real estate professional. Even then, you generally must “materially participate” in a rental activity for it to be treated as nonpassive. Why is this important? Passive income may be subject to the 3.8% net investment income tax (NIIT) on top of any income tax otherwise due, and passive losses are deductible only against passive income, with the excess being carried forward.

For investors who have another primary occupation, qualifying as a real estate professional can be difficult. To qualify, you must annually perform:

• More than 50% of your personal services in real property trades or businesses in which you materially participate, and
• More than 750 hours of service in these businesses during the year.

Each year stands on its own, and there are other nuances to keep in mind.

To materially participate in an activity, generally you must participate more than 500 hours during the year or demonstrate that your involvement constitutes substantially all of the participation in the activity. But there are other ways to meet the material participation test.

Carefully track the time you spend on your real estate activities. If you own rental properties in addition to working in another business or profession, also carefully track the time spent on those non-real-estate activities, so you can see if you spend a small enough portion of your time on them vs. real-estate activities that you can pass the first real estate professional test.

Although your spouse’s hours can’t be counted toward the tests for qualifying as a real estate professional, special rules for spouses may help you meet the material participation test: Generally, your spouse’s participation can be counted when determining whether you materially participate.

Depreciation breaks

Buying an investment property may be only the beginning of your expenditures. If you renovate or improve a property, the tax treatment of those costs can vary depending on the type of property and improvement. Generally, residential real estate, including improvements, must be depreciated over 27.5 years and commercial real estate over 39 years. But three valuable depreciation-related breaks may be available to real estate investors:

1. Qualified improvement property (QIP) deduction. QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the building was initially put into use. So these rules can apply to qualifying improvements to commercial real estate, but not to improvements to a residential rental property. QIP has a 15-year Modified Accelerated Cost Recovery System (MACRS) recovery period and qualifies for bonus depreciation and Section 179 expensing.

However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP. They usually must be depreciated over 39 years.

2. Bonus depreciation. This additional first-year depreciation allowance is available for qualified assets, including QIP. Bonus depreciation is 100% for eligible assets acquired and placed in service after January 19, 2025.

3. Section 179 expensing election. This allows you to currently deduct qualified property, subject to certain limits. This includes QIP, certain depreciable tangible personal property used predominantly to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems For 2026, the maximum Sec. 179 deduction is $2.56 million. The deduction begins to phase out if the cost of qualifying property placed in service during the year exceeds $4.09 million.

Deferring gains

Eventually, you may decide to sell an appreciated rental or other investment property. You might be able to structure the transaction to defer some or all of the taxable gain. Such strategies may even help you keep your income low enough to avoid triggering the 3.8% NIIT and the 20% long-term capital gains rate.

One example is an installment sale. It allows you to defer gains by spreading them over several years as you receive the proceeds. But ordinary gain from certain depreciation recapture is recognized in the year of sale, even if you receive no cash.

Another option is a Section 1031 exchange. Also known as a “like-kind” exchange, this technique allows you to exchange one real estate investment property for another and defer paying tax on any gain until you sell the replacement property. If you receive cash or other non-like-kind property as part of the exchange, however, you generally must recognize gain to that extent.

These tax deferral strategies aren’t without risks. For example, if tax rates go up, you could ultimately end up paying more in taxes. They also have detailed requirements, so it’s important to consider the tax consequences before completing a sale or exchange.

Tax-smart decisions

Taxes can affect the economics of an investment property from the time you buy it through the time you sell it. Decisions about your involvement in rental activities, improvements to the property, and the timing and structure of a sale can all have tax consequences. Contact us to discuss tax planning related to your investment real estate. We can help you identify potential tax-saving opportunities and avoid tax pitfalls.

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Teachers and other educators often spend their own money on books, supplies, equipment and other classroom needs. For 2026, eligible educators may have two ways to deduct qualifying unreimbursed expenses. One deduction is available whether or not they itemize, and a new deduction under the One Big Beautiful Bill Act (OBBBA) is available to itemizers.

The long-time deduction for nonitemizers and itemizers

Eligible educators can deduct some of their unreimbursed out-of-pocket classroom costs under the educator expense deduction. This is an “above-the-line” deduction, which means you don’t have to itemize to claim it and it reduces your adjusted gross income (AGI), which has an added benefit: AGI-based limits affect a variety of tax breaks, so lowering your AGI might help you maximize your tax breaks overall.

To be eligible, taxpayers must be kindergarten through grade 12 teachers, instructors, counselors, principals or aides. Also, they must work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

For 2026, up to $350 of qualified expenses paid during the year that weren’t reimbursed can be deducted. (The deduction limit is $700 for married couples filing a joint return if both spouses are eligible educators, but they can’t deduct more than $350 each.) The limit is annually indexed for inflation and was $300 for 2025. But it typically doesn’t go up every year.

Examples of qualified expenses include books, classroom supplies, computer equipment (including software), other materials used in the classroom, and professional development courses. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.

The new deduction for itemizers

The OBBBA made permanent the Tax Cut and Jobs Act’s (TCJA’s) suspension of miscellaneous itemized deductions subject to the 2% of AGI floor. This had included unreimbursed employee business expenses such as teachers’ out-of-pocket classroom expenses. The suspension had been in place since 2018.

But the OBBBA created a new miscellaneous itemized deduction for educator expenses. And this deduction isn’t subject to the 2% of AGI floor or a specific dollar limit. The new deduction is available for eligible expenses incurred after December 31, 2025.

This is in addition to the $350 above-the-line deduction. So educators eligible for both deductions can first claim the above-the-line deduction and reap the benefits of reducing their AGI and, if they have eligible expenses in excess of $350, claim the itemized deduction for those excess expenses. (Educators can’t claim both deductions for the same expenses.)

Who is eligible and what expenses qualify are a little broader for the itemized deduction than for the above-the-line deduction. For example, interscholastic sports administrators and coaches are also eligible. And, for courses in health and physical education, the supplies don’t have to be related to athletics.

Before deciding to claim the itemized deduction, you need to determine whether itemizing makes sense for you overall. Taxpayers can choose to itemize this and certain other deductions (such as mortgage interest, property tax and charitable donations) or to take the standard deduction based on their filing status.

Itemizing deductions saves tax only when the total is greater than the standard deduction. The OBBBA made the nearly doubled standard deductions under the TCJA permanent, so fewer taxpayers benefit from itemizing. For 2026, the standard deduction is $16,100 for singles and married taxpayers filing separately, $24,150 for heads of household and $32,200 for married couples filing jointly.

Keeping good records

Do you expect to qualify for one or both of these deductions? Be sure to track your qualifying expenses carefully. Save your receipts to document the date and amount of each purchase, and note the purpose. Good records are especially important now that there are two educator deductions with differing rules. Contact us to discuss which educator expenses you can deduct and how the deductions may affect your 2026 taxes and planning strategies.

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Contributing as much as possible to tax-deferred retirement accounts such as traditional 401(k)s and IRAs is a common recommendation. Contributions generally are pretax or deductible, and the power of tax-deferred compounding can help turbocharge growth. But some taxpayers can reach a point where maximizing tax deferral may become counterproductive.

Potential downsides of tax-deferred saving

After you’re retired, you’ll no longer be earning a salary or full-time wages. So the assumption generally is that taxpayers will be in a lower federal income tax bracket and pay tax at a lower rate when taking withdrawals during retirement than when making contributions during their working years.

That’s likely the case for many, if not most, taxpayers if tax rates stay the same (or go down). But, currently, federal income tax rates may have bottomed out and could be more likely to increase in the future. If this happens, you might pay higher tax rates on withdrawals from traditional accounts during your retirement years, even if you’re in a lower tax bracket.

Also, retirement plan distributions are subject to your ordinary income tax rate and don’t benefit from the lower long-term capital gains rates that normally apply to realized gains from assets held more than one year and qualified dividends. So you pay a higher tax rate on dividends and growth in a tax-deferred account than you would if the investments were held in a taxable account.

Something else to remember is that with traditional retirement accounts, most withdrawals before age 59½ will be subject to a 10% early withdrawal penalty (though there are some exceptions for IRAs). If you need to make a withdrawal before that age, you may owe the penalty on top of any applicable income tax.

Traditional accounts also come with required minimum distributions (RMDs). You could be subject to a 25% penalty for failing to take RMDs each year after you reach age 73 (or 75 if you’ll turn 73 after December 31, 2032). (Roth accounts set up in your name aren’t subject to RMD rules during your life and will never be subject to federal income taxes as long as you take out only qualified withdrawals after reaching age 59½.)

You can avoid the penalty by taking your RMDs each year. But RMDs generally will be included in your taxable income and, depending on the size of the RMD and your other income, this could push you into a higher tax bracket, affect deductions or credits with income-based limits, or cause some of your Social Security payments to become taxable.

For these reasons, some taxpayers may be better off moving from a strategy primarily focused on tax-deferred traditional accounts to one that puts a greater emphasis on Roth and taxable accounts — even though it may mean paying more taxes now.

Shifting your retirement strategy

Whether your tax-deferred retirement savings are excessive, insufficient or just about right depends on variables such as your current marginal income tax rate, your expectations about future tax rates and the type of income or gains earned in your retirement accounts. Each person’s situation is different, and there’s not always a clear-cut answer.

If you conclude you have too much in tax-deferred accounts, one or more of these strategies can help address the situation:

1. Start making at least some of your annual retirement savings contributions to Roth accounts if possible. Contributions to these plans don’t reduce your current-year taxable income, but distributions are tax-free — including distributions attributable to growth in the account. And Roth accounts aren’t subject to RMDs during the original owner’s lifetime. However, the ability to contribute to a Roth IRA is phased out if a taxpayer’s income exceeds certain amounts. No such limit applies to employer-sponsored Roth accounts, such as Roth 401(k)s.

2. Put some money into taxable accounts. If Roth savings opportunities aren’t available to you or you’ve already maxed them out, think about putting some of the money you’re saving for retirement into taxable investment accounts. You’ll be eligible for the lower long-term capital gains rate on long-term gains and qualified dividends, and you won’t be subject to the various rules and restrictions that apply to IRAs, 401(k)s and other employer-sponsored retirement accounts.

3. Convert some or all of your traditional IRA balance into a Roth IRA. A conversion can let you turn tax-deferred future growth into tax-free growth and avoid being subject to RMDs. There’s no income-based limit on who can convert. But the converted amount is taxable in the year of the conversion. So consider your current tax rate and whether a conversion could push you into a higher tax bracket or trigger other negative tax consequences.

4. If you’re age 59½ or older, withdraw money from your traditional retirement accounts sooner and faster than required. You won’t owe early withdrawal penalties, and you pay tax now at a rate that might be lower than what you’d have to pay in the future. You can reinvest the after-tax proceeds in taxable accounts where future long-term gains and qualified dividends will be taxed at your lower long-term capital gains rate. But as with Roth conversions, you need to consider your current tax rate and whether the retirement plan distribution could push you into a higher tax bracket or trigger other negative tax consequences.

Tax-smart wealth accumulation

As you can see, there are many considerations to evaluate when assessing whether you’re investing too much in tax-deferred retirement accounts and, if so, how to address the situation. We can help you determine the best course of action for wealth accumulation using traditional tax-deferred retirement accounts, Roth accounts and taxable accounts.

The post Sometimes How Much Is in Tax-Deferred Retirement Accounts May Be Too Much first appeared on Burkett Burkett & Burkett Certified Public Accountants, P.A..

Trading items or services — without exchanging cash — has long been common among small businesses. Today, some use online barter exchanges to facilitate trades. In addition to preserving cash flow, these types of transactions may expand your purchasing power, help you move overstocked inventory and increase your business’s exposure to new markets. But bartering isn’t tax free. For tax purposes, bartering is treated the same as being paid in cash.

How it works

The fair market value (FMV) of goods you receive in business barter transactions must be reported as taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties. You must report barter income the same way you report comparable income from regular cash transactions. For instance, a sole proprietor generally reports barter income on Schedule C, and this income may also be subject to self-employment tax.

Depending on what you receive in the exchange, you may be entitled to a business expense deduction or obtain tax basis in property. So, although bartering generates taxable income, it doesn’t necessarily increase taxable profit by the full value of the transaction.

Let’s say a veterinarian agrees to exchange services with a marketing consultant. In this situation, both parties must report the FMV of the services received as income. So the veterinarian would report the FMV of the marketing services received, and the marketing consultant would report the FMV of the veterinary services received. This generally is the amount that would normally be charged for these services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.

Business expense deductions may also be available with barter transactions. For instance, if a plumber installs a new toilet at a local computer repair shop in exchange for fixing a broken laptop, the plumber would report the FMV of the computer repair services as income. But he or she may also deduct certain expenses:

• If the laptop is used in the plumber’s business and the repair would have been deductible had it been paid for in cash, the plumber can still claim a business expense deduction for the repair, subject to the usual deduction rules.
• The plumber can also deduct qualifying business expenses associated with the plumbing work, such as materials, supplies and any wages paid to employees.

Income also must be reported if services are exchanged for property. For example, if an HVAC contractor does work for a retail business in exchange for unsold inventory, he or she will have to report income equal to the fair market value of the inventory. Or if an architect does work for a corporation in exchange for shares of the company’s stock, he or she must report income equal to the fair market value of those shares.

Barter exchanges

Some businesses join online barter exchanges (sometimes referred to as barter clubs) that facilitate these transactions. Barter exchanges generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

In general, bartering is taxable in the year it occurs. But if you participate in a barter exchange, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year and that each unit is redeemable for $3 in goods and services. In that year, you’ll have $7,500 of income. If you redeem the units the next year, you won’t pay additional tax because you’ve already been taxed on that income.

If you join a barter exchange, you’ll generally be asked to provide your taxpayer identification number — such as your Social Security number or Employer Identification Number — and complete Form W-9 or a similar certification. In certain circumstances, including failure to provide or properly certify a taxpayer identification number, barter income may be subject to 24% backup withholding.

The IRS generally treats barter exchanges as brokers. If the reporting requirements apply, a barter exchange will send participants a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” by February 15 of the following calendar year. This form shows the value of cash, property, services and credits that you received through the exchange during the previous year. This information will also be reported to the IRS.

No tax-free trade

Bartering may be more common than you think: According to the National Association of Trade Exchanges, more than 400,000 U.S. businesses used some form of barter in 2022, the latest available statistics. Regardless of how you make a trade — directly with another business or through a barter exchange — remember your federal and state tax obligations. We can help you estimate the fair market value of items and services exchanged, identify potential deductions, and maintain the records needed to report these transactions properly. Contact us to learn more.

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On August 11, 2026, the US. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule that permanently removes the requirement for U.S. companies and persons to report beneficial ownership information to FinCEN under the Corporate Transparency Act. FinCEN also announced that it will delete information previously reported by U.S. persons–now exempt from the reporting requirements–from the beneficial ownership information database.

Under the final rule, foreign entities that are reporting companies will still be required to report beneficial ownership information for foreign individuals.

Frequently Asked Questions

The following questions and answers were published by FinCEN here. Below are the first few entries.

1. What are the key changes between the interim final rule (IFR) and the final rule?

The final rule adopts all of the changes made on an interim basis by the IFR as permanent changes to the beneficial ownership information (BOI) reporting requirements. Most notably, the final rule permanently removes the requirement for U.S. companies and U.S. persons to report BOI to FinCEN.

In addition, the final rule makes two substantive changes that expand on the relief the IFR extended relating to U.S. persons.

• It exempts foreign companies from the requirement to report U.S. person “company applicants” (i.e., the individuals who helped those foreign companies register to do business in the United States).
• It exempts U.S. persons who have applied for FinCEN identifiers (FinCEN IDs) from having to update or correct the information they provided to FinCEN when they applied.

2. What is beneficial ownership information?

Beneficial ownership information (BOI) refers to identifying information about the individuals who directly or indirectly own or control a company.

3. Who is still required to report BOI under the final rule?

“Reporting companies” under the revised reporting requirements include only those entities that are formed under the law of a foreign country and have registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office.

There are multiple types of entities that are exempt from the reporting requirements. Foreign entities potentially falling under the definition of “reporting company” should carefully review the qualifying criteria before concluding whether the foreign company must report BOI.

If you have any questions about this new final rule from FinCEN, please contact us. Further resources on this topic are linked below.

Treasury Press Release
Final Rule
Frequently Asked Questions

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Many small businesses start out as sole proprietorships. This structure is simple and inexpensive to establish and maintain — and it gives the owner direct access to profits without having to take formal distributions. But it also makes your taxes more complicated than when you were a W-2 employee. Here are some federal tax issues to consider if your business operates as a sole proprietorship.

Reporting income and expenses

You’ll report income and expenses from your business activities on Schedule C of your personal return (Form 1040). The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income, not as itemized deductions. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, “excess” business losses incurred by noncorporate taxpayers, passive activity losses and losses from activities in which you weren’t “at risk.”

Sole proprietors may be eligible for certain deductions that generally aren’t available to other individual taxpayers. For instance, you may qualify for an above-the-line self-employed health insurance deduction for premiums paid for medical, dental and qualifying long-term care coverage, subject to certain limitations. This means your deduction for medical insurance won’t be subject to the rule that limits itemized deductions for medical expenses.

In addition, you may be entitled to deduct home office expenses if:

• A home office is your principal place of business (including when you perform management or administrative tasks there and have no other fixed place to perform them),
• You use your home as a place to meet or deal with customers, clients or patients in the normal course of business, or
• You store inventory or product samples at home.

In general, to qualify, the area must be used regularly and exclusively for business purposes.

The home office deduction may include an allocable part of mortgage interest or rent, insurance, utilities, repairs, maintenance and, if you own the home, depreciation. Alternatively, you can use a simplified method based on the square footage of the qualifying space. You may also be able to deduct travel expenses from your home office to another work location.

Be sure to keep complete records of your income and expenses. Proper documentation is needed to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.

Claiming the QBI deduction

Another special tax break that you might qualify for as a sole proprietor is the Section 199A qualified business income (QBI) deduction. It generally equals 20% of QBI, not to exceed 20% of taxable income. QBI generally is defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items or reasonable compensation paid to an owner for services rendered to the business.

This deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the QBI deduction even if you don’t itemize deductions and instead claim the standard deduction.

One word of caution: The QBI deduction is subject to additional limits at higher income levels. For 2026, these limitations generally begin to apply when taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for married couples filing jointly). For 2026, these limitations are fully phased in once taxable income exceeds $276,750 ($553,500 for joint filers). Contact us to learn more about the limitations that apply to your situation.

The One Big Beautiful Bill Act (OBBBA) made the QBI deduction permanent. Starting in 2026, the OBBBA also expands the income ranges over which the limitations phase in, potentially allowing larger deductions for some taxpayers. And it provides a new minimum deduction of $400 for taxpayers who materially participate in an active trade or business if they have at least $1,000 of QBI from it. The minimum deduction will be annually adjusted for inflation after 2026.

Paying self-employment taxes

One downside of owning your own business is that you must pay self-employment taxes. These taxes are the equivalent of federal payroll taxes for employees, but self-employed people must pay both the employer’s and employee’s share of them. They’re imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

For 2026, you must pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $184,500, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint filers, $125,000 for married taxpayers filing separate returns and $200,000 in all other cases. The additional Medicare tax threshold isn’t adjusted for inflation.

Establishing a tax-advantaged retirement plan

You might also want to consider setting up a qualified retirement plan. The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t subject to income tax until they’re withdrawn.

One option is a Simplified Employee Pension (SEP) plan, which requires minimal paperwork. You generally can set up a SEP and make deductible contributions for the tax year as late as the due date of your income tax return for the year, including extensions. The contribution amounts are discretionary, and the annual limits are high. But, if you have employees, they generally must be included in the plan, provided they work enough hours and meet other qualification requirements.

If you don’t establish a qualified retirement plan, you may still be able to contribute to a traditional IRA. But your annual contribution limit will generally be significantly lower.

Making quarterly estimated payments

The U.S. tax system is considered “pay as you go.” So, you’ll probably have to make estimated tax payments each quarter. Estimates should include both federal income tax and self-employment taxes. Estimated payments are generally calculated using Form 1040-ES.

Quarterly payments are generally due on April 15, June 15 and September 15 of the current year and January 15 of the following year. If a due date falls on a weekend or legal holiday, the deadline generally moves to the next business day. Paying enough by each deadline is critical; if you fall behind, you’ll likely owe interest and penalties.

Applying for an EIN

Sole proprietors don’t automatically need an employer identification number (EIN). You can generally use your Social Security number for federal tax purposes — unless you hire employees. You might also need an EIN if your business:

• Owes employment or excise taxes,
• Withholds certain taxes on payments to a nonresident alien,
• Establishes certain retirement plans, or
• Changes its legal structure, such as incorporating or forming a partnership.

Additionally, you might consider obtaining an EIN voluntarily for banking or administrative purposes. An EIN is available at no cost through the IRS website. To apply, you’ll need to provide identifying information, including a valid Social Security number or other taxpayer identification number, and details about the business. Eligible U.S. applicants generally receive the EIN immediately after completing the online application. You can also submit Form SS-4 by fax or mail.

We can help

Even though your business may be small, tax compliance and planning are a big deal. These are just highlights of federal income tax issues sole proprietors face. State and local income, sales, payroll, and other tax requirements may also apply. Contact us if you’d like additional information regarding the tax aspects of your business, or if you have questions about the reporting or recordkeeping requirements.

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A higher education is expensive, and many parents spend years saving up. Others haven’t had the financial bandwidth to save or have hit unexpected financial roadblocks along the way. Regardless of your situation, current tax breaks may be available to you (or to your children or even their grandparents) once your child begins attending college or other post-secondary school. Here are some tax tips.

Claim tax credits

If you have one or more children in college — or graduate school — you might be eligible for valuable tax credits. Remember, credits reduce your tax liability dollar-for-dollar, so they’re more valuable than deductions of the same amount, which only reduce the amount of income subject to tax. So it’s important to see if you’re eligible for one or both of these credits:

American Opportunity Tax Credit (AOTC)

You may be able to take this credit of up to $2,500 for the first four years of postsecondary education in pursuit of a degree or recognized credential — a 100% credit for the first $2,000 in tuition, fees and books, and a 25% credit for the second $2,000. The AOTC is 40% refundable, meaning you can get a refund if the credit amount is greater than your tax liability.

The credit is available on a per-student basis. For example, if you have a child who’s a freshman and another who’s a fourth-year senior, you can claim a credit of up to $2,500 for each child — as long as you otherwise qualify.

Lifetime Learning Credit (LLC)

If your child is beyond the first four years of college or in graduate school, you may be able to take the LLC. It can be up to $2,000 for every additional year of college or graduate school — a 20% credit for up to $10,000 in tuition and fees.

However, only one LLC is available per tax return. If, say, you have one child in the fifth year of college finishing up his or her bachelor’s degree and another child in grad school, you can claim only one LLC of up to $2,000. But if the first child instead is in his or her first four years of college, you can potentially claim the AOTC for that child and the LLC for your child in graduate school, as long as you otherwise qualify for both credits.

Speaking of qualifying, both credits are phased out for married couples filing jointly with modified adjusted gross income (MAGI) between $160,000 and $180,000, and for singles and heads of household with MAGI between $80,000 and $90,000. (Married taxpayers filing separately can’t claim either credit.) If your income is too high for you to qualify, your child might be able to qualify on his or her own tax return.

Finally, only one education credit can be claimed for the same student in any given tax year. For instance, if your child graduated from college (in four years) in May of 2026 and starts graduate school in September of 2026, you can’t claim both the AOTC for the last semester of your child’s undergraduate education and the LLC for his or her first semester of graduate education. Other rules also apply to these credits.

Take advantage of tax-free 529 plan and ESA distributions

Does your child have a tax-advantaged education account, such as a Section 529 plan or Coverdell Education Savings Account (ESA)? Tax-free withdrawals can be taken to pay qualified expenses.

Section 529 plan distributions used to pay most postsecondary school expenses are income-tax-free for federal purposes and potentially for state purposes as well. Qualified expenses include tuition, mandatory fees, books, supplies, computer equipment, software, internet, and, for students enrolled at least half-time, room and board.

The postsecondary expenses that qualify for tax-free 529 plan distributions generally also qualify for tax-free ESA distributions. However, you can’t take tax-free distributions from both accounts for the same expenses. Also, expenses paid with tax-free distributions from a 529 plan or ESA can’t be used to claim education credits.

(If you have younger children and are deciding whether to contribute to a 529 plan or an ESA, keep in mind that there are other important differences to consider, such as the rules for using the funds for K-12 expenses, age-related limits for beneficiaries, and contribution limits — including income-based limits. Contact us to learn more.)

Think twice before tapping your retirement accounts

You can take money out of your traditional IRA or Roth IRA to pay college costs without incurring the 10% early withdrawal penalty that usually applies to distributions before age 59½. However, the distributions are subject to tax to the extent otherwise applicable.

You also may be able to borrow against your employer retirement plan, such as a 401(k) plan, or take withdrawals from it to pay for college. But before you do so, make sure you understand the tax implications, including any penalties you may incur.

And any time you make a withdrawal or take a loan from a retirement account, you’re sacrificing the tax-deferred (or tax-free in the case of a Roth account) potential growth on that money. So first think carefully about the future impact on your retirement security.

Be aware of scholarship tax treatment

Has your child been awarded a scholarship? Congratulations! But it’s also important to understand the tax impact.

Scholarships are exempt from income tax if certain conditions are satisfied. The three most significant are that, generally, the scholarship:

1. Must be for a student who is a degree candidate at an eligible educational institution,
2. Can’t be compensation for services, and
3. Must be used for tuition, fees, books and supplies (not for room and board).

Also, a tax-free scholarship reduces the amount of expenses that may be taken into account in computing the AOTC and LLC and may reduce or eliminate those credits.

Advise grandparents and others to pay tuition directly

If someone gives you or your child money to pay some or all of your child’s college expenses, it’s generally treated as a taxable gift to the extent the payments exceed the gift tax annual exclusion of $19,000 per recipient for 2026. Married couples who split gifts may exclude gifts of up to $38,000 for 2026. (Gift tax generally applies to the giver, not the recipient.)

However, if the person (say, a grandparent) pays your child’s tuition directly to an educational institution, it won’t be treated as a taxable gift regardless of the amount. This applies only to payments of direct tuition costs (not room and board, books, supplies, etc.).

Consider your specific situation

Additional rules apply to many of these tax breaks, and there are other tax consequences to consider when it comes to your children and their post-secondary education. Contact us for more information about these breaks and to discuss your specific situation. We can help you take advantage of all the breaks available to you and your family and avoid tax pitfalls.

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