Many startups offer a wide-array of employee benefits, most of which come with tax advantages. However, we find that many employees have no idea how to fully take advantage!
We don’t blame you. All of this should have been taught in high school! But that’s why Visor is here to help.
We’ve put together the following guide on the top tax items you should review. Sign up for Visor if you want to go through this checklist with one of our tax advisors.
1. Have a plan for your retirement savings
We know this is super cliche, but there is no better tax strategy than utilizing your 401(k).
There are two decisions that you’ll need to make each year regarding your 401(k):
- Which variety of the 401(k) is best for you: Traditional (pre-tax) or Roth (after-tax)? If you don’t know the difference, check out this article here. Not every employer offers the Roth, but many do, and we’re big fans of it so make sure you understand the difference and pick the best one for you.
- How much are you going to contribute each year? The personal contribution limit for 2019 is $19,000, up from $18,500 in 2018, but if you can’t put away the maximum then at least contribute as much as necessary to qualify for any employer match (if your employer offers one). If you’re worried about needing money for other big expenses before retirement, such as buying a home or returning to graduate school, there are exceptions for withdrawing money from your 401(k) early.
And, if you want to save even more for retirement, learn how the backdoor Roth IRA contribution strategy can help you set aside up to $6,000 more in retirement savings.
2. Actively Managing Your Payroll Withholding
Too often, employees fill out their Form W-4 on their first day of work and then never think about their payroll withholding again. We think that’s a mistake.
You don’t need to be surprised in April when you file your taxes as to the amount of your refund (or, worse, your additional tax obligation). If we manage your withholding correctly, then your withholding will be about accurate over the course of the year so you won’t have either a refund (aka a 0% loan to the government) or a balance due (aka a painful surprise).
Plus, a lot of factors can impact your withholding throughout the year. For instance, did you know that bonuses are subject to special withholding rules, even though they’re taxed the same as the rest of your income? Or if you get married, have children, or buy a home, then your withholding may no longer be correct?
Make it an annual habit to check on your withholding. A tax service such as Visor can help run a projection for you to get it as accurate as possible. No more April surprises is a good thing.
3. Employer Equity Compensation
If you’re fortunate enough to receive equity from your employer, then you need to be sure to understand the tax implications. Employer equity compensation is taxable, but you have a lot of control over the taxes that you might pay because typically you control the decision to sell. If you’re not factoring in the tax implications, then you are not fully optimizing your take-home compensation on your equity. Here’s what you should look out for:
- Determine what type of equity is being given to you, then check out our guides on Incentive Stock Options (ISOs), Nonqualified Stock Options (NSOs), Restricted Stock Units (RSUs), and Employee Stock Purchase Plans (ESPPs). Not sure what you have? Get in touch and we’ll help you out.
- If you’re an early-stage startup founder/employee/investor, then your stock (or options) might qualify as Qualified Small Business Stock (QSBS). There are big tax savings for QSBS, so don’t let this tax break slip by.
4. HSA and FSA. Both great but not the same things.
There’s nothing like more acronyms to make taxes and employer benefits even more complicated. So let’s start by defining what these are.
An HSA is a health savings account. An HSA can be offered by your employer, but you can also access them outside of your employer, so they are potentially relevant to all employees. However, you can only contribute to an HSA if your health plan (medical insurance) is considered a “high deductible plan.”If you are eligible, an HSA is essentially a long-term savings account for medical expenses. It’s very tax-advantaged, because you get a tax deduction for the contribution, the investments grow tax free, and you can use the funds for certain medical expenses without paying tax upon withdrawal (this is more advantaged than even a 401(k) or IRA). Learn more about HSAs here.
An FSA is a flexible savings account. To utilize an FSA, it must be offered by your employer. The FSA is designed for medical expenses in the current year, as only $500 of excess funds can be rolled over to the following year (any overage is lost). The tax treatment is similar to the HSA, in that any money you set aside in an FSA and use toward qualified medical expenses avoids taxation. So it’s a great way to pay for current year expenses while minimizing your taxes. Learn more about FSAs here.
5. Claiming Commuter Tax Benefits
Where else are there tax benefits for employees? How about your commute!
Many companies offer the opportunity to pay for your commuting expenses, such as a metro pass or monthly parking, through your payroll (or to submit for reimbursement) with pre-tax dollars. The benefit must be provided by employers through a commuter benefit plan. For employees that have this option, the maximum contribution is $260 of eligible expenses per month in 2018.
How do the tax savings work? These expenses are excluded from your taxable income this year. That means if your marginal income tax rate is 30%, and you add in payroll taxes of 7.65%, then $100 of monthly commuter benefits only costs you ~$62 on an after-tax basis since you’ll save $37.65 in taxes per month. Not bad!
One note, the new Tax Law passed in late 2017 removed any commuter tax benefits associated with biking. So if your employer was previously providing funds to you to cycle to work, that payment is no longer tax-free income for you.
For most Americans, the majority of their tax complexity comes from their employment. Freelancers get a lot of attention for all the tax deductions available to them as sole-proprietors.
But traditional employees face plenty of tax complexity themselves, but mostly in relation to their tax-advantaged benefits. Avoid the complexity probably just means you’re leaving money on the table!
So, if any of the above doesn’t make sense to you, get in touch with a Visor tax advisor to review the checklist together.
Anything the article didn’t address? Leave a comment below and we’ll reply ASAP!
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