Managing payroll can be a major challenge for small business owners, especially as state and federal payroll tax regulations continue to evolve. Missteps in this area aren’t just minor hiccups — they can lead to significant financial penalties and operational disruptions. Below are some common payroll compliance pitfalls and ways to avoid them.

Misclassifying Workers

Businesses often prefer to treat workers as independent contractors (rather than employees) to lower costs and administrative burdens. However, the IRS, the U.S. Department of Labor, various state agencies and even workers themselves may challenge worker classifications.

Properly classifying a worker as an independent contractor is beneficial because the business doesn’t have to worry about employment tax issues or provide expensive fringe benefits. However, when a business mistakenly treats an employee as an independent contractor, the employer could owe unpaid employment taxes, penalties and interest. The employer also may be liable for employee benefits, such as health insurance and retirement plan contributions, that should have been provided but weren’t. So, it’s important to get worker classification right.

Beware: IRS and DOL rules can differ from state and local rules. That said, worker classification is generally based on the degree of control the employer has over the person and their work product.

Another misclassification error happens when an employer misinterprets an exemption from overtime pay. Most salaried executives and many other employers are exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA). However, the FLSA includes several key exceptions reflecting earnings thresholds.

Miscalculating Pay

Inaccurate earnings calculations can cause headaches for employers and hardship for workers. For instance, shorted employees may have to scramble to pay their bills. Examples of mistakes involving employee compensation include:

• Overpayment or underpayment,
• Errors relating to new hires and employees on disability or leave,
• Inaccurate retroactive payments, and
• Incorrect deductions for fringe benefits.

If you make a mistake when compensating an employee, resolve the issue immediately and take steps to prevent it from happening again. Being transparent and responsive helps retain valued workers and maintain morale and productivity.  

Tracking Time Improperly

Accurately tracking time for hourly employees can be challenging. Employers may unintentionally overlook compensable time, such as meal or rest breaks, travel to off-site assignments, or participation in company-sponsored events.

Under the FLSA, nonexempt employees — typically paid hourly — must receive overtime pay at 1.5 times their regular rate for any hours worked beyond 40 in a workweek. Improper time tracking can lead to two unfavorable outcomes: 1) underpayment, where employees aren’t properly compensated for overtime, or 2) overpayment, which may require repayment or adjustments to future wages. Either scenario can cause frustration, damage morale, and potentially expose the employer to legal risk.

Failing to Report All Sources of Income

Compensation includes more than just salaries and hourly pay. Examples of alternative pay sources are:

• Overtime,
• Bonuses, and
• Commissions.

Some lesser-known income items may also come into play. For instance, some employers may offer incentive stock options (ISOs) or other rights, gift cards, employee awards, and other fringe benefits, such as the use of company-owned vehicles.

Payroll and income taxes must be paid on these items, too. Failing to include the value of awards, bonuses and fringe benefits (when required) in employees’ taxable incomes can lead to substantial underreporting penalties for employers.

Missing Deadlines

The IRS and state tax agencies expect your business to deposit federal payroll taxes on time. That means your organization must deposit amounts withheld for income tax, Social Security and Medicare taxes (FICA) and Federal Unemployment Tax Act taxes (FUTA) throughout the year. It’s critical to follow the IRS schedule for depositing payroll payments. Deposit frequency depends on your total tax liability. Most small businesses must deposit payroll taxes by the 15^th of the following month. However, some may be required to make semiweekly deposits.

In addition, small businesses must generally report wages and tax withholding quarterly. The due dates for calendar-year businesses’ quarterly reports are as follows:

Note: If a due date falls on a weekend or legal holiday, the deadline moves to the next business day.

When cash is tight, business owners may be tempted to borrow money from withheld payroll taxes. This is never a good idea. Missed deadlines or underpaying the IRS could cost more taxes (plus penalties and interest). Additionally, an officer, business owner and/or other employee responsible for meeting payroll tax obligations on behalf of your organization could be held personally liable for the full amount of the unpaid taxes under Section 6672 of the Internal Revenue Code.

Issuing Inaccurate W-2s

Form W-2, “Wage and Tax Statement,” is the only payroll tax form that goes directly from an employer to its employees. It provides the following tax information:

• Gross income,
• Taxable income, and
• Payroll withholding for fringe benefits and retirement account contributions.

Reporting these items correctly is critical. Mistakes on an employee’s W-2 can have a domino effect throughout the company. It can lead to penalties for errors, extra paperwork and disgruntled employees.

Relying on Manual Recordkeeping

It might be relatively easy for a small business owner to handle payroll matters for a handful of employees. But as your business grows, payroll tasks become more complicated. Reliance on paper processes, manual data entries and spreadsheets to track employees’ hours can lead to miscalculations in pay. For example, manual processes can lead to misplaced worksheets and missed payments.

Furthermore, when the person in charge of processing payroll is out of the office, his or her designated replacement may not be fully prepared for the responsibilities. This situation can cause payroll entries to fall through the cracks or be misrepresented.

Consider investing in an automated payroll system integrates with your accounting system and other digital tools, such as customer relationship management platforms, project management tools, cloud storage and communication apps. Potential benefits include simplified payroll processing, improved oversight and fewer payroll errors. 

Get It Right

Payroll-related laws and regulations aren’t written in stone. Payroll practices should take into account any changes applicable to your business and government requirements. For example, some procedures were paused or postponed during the pandemic, and new laws and rulings may require updates to your payroll management system. This requires continuous vigilance.

If you feel overwhelmed by payroll tasks, it may be time to shift payroll management responsibilities to an external payroll provider. Professionals who specialize in payroll processing can help you avoid costly mistakes. Contact your professional advisors for more information.

We are pleased to announce that Ryan Parent, CPA, has been named Managing Partner of Beers, Hamerman, Cohen & Burger, P.C.

Ryan joined BHCB in 2012 after earning his bachelor’s degree in accounting from Quinnipiac University. Since then, he has built a reputation for thoughtful leadership and technical expertise, specializing in accounting and auditing services for multi-employer union benefit plans, senior living communities, and a variety of for-profit organizations, as well as providing tax services to high-net worth individuals.

He earned his master’s degree in accounting and taxation from the University of Hartford and became a licensed CPA in 2017. Ryan is an active member of the Connecticut Society of Certified Public Accountants (CTCPA) and is committed to serving the broader community. He currently serves as a board member and Supervisory Committee member for the New Haven County Credit Union, on the Board of Governors for New Haven Country Club, and is a director of Goodwill of Southern New England.

Outside of work, Ryan enjoys golfing, supporting community initiatives and spending time with his family. We look forward to his continued leadership as he takes on this new role.

We’re excited to welcome Antonio Ferraro to our team as an Audit Intern this summer. Antonio will be working closely with our Audit Department, gaining hands-on experience in audits of employee benefit plans and non-profit organizations. Under the guidance of Supervisor Haley Kaercher, he will also assist across various areas of our practice. We’re thrilled to have him on board and look forward to a productive and educational internship experience!

Graduating from college comes with exciting new beginnings—and some adult responsibilities, too. Among them? Navigating taxes. Whether you’re filing your first return or coordinating with your parents for optimal tax results, here are answers to the most common tax questions new grads face.

Can My Parents Still Claim Me as a Dependent?

Your parents can claim you as a “qualifying child” for 2025 if all of the following apply:

• You’re under age 24 at the end of the year.
• You were a full-time student for at least five months of the year.
• You didn’t provide more than half of your own financial support.
• You lived with your parents for more than half the year (excluding time away at school).

If you don’t meet all those criteria, your parents might still be able to claim you as a “qualifying relative” if:

• Your gross income is less than $5,200, and
• Your parents provided more than half of your support during the year.

If My Parents Claim Me, Do I Still Have to File a Tax Return?

Most dependents still need to file a federal income tax return to report their earnings—even if they owe little or nothing. That’s because:

For 2025, an unmarried dependent can claim a standard deduction equal to the greater of:

• $1,350, or
• Earned income + $450, up to a maximum of $15,000.

For example, if you earn $25,000 and your standard deduction is $15,000, you’d have $10,000 in taxable income. With a 10% tax rate on the first $11,925 of taxable income, your federal tax would be $1,000.

Important: Earned income includes wages, tips, freelance work, and any taxable scholarships or fellowship grants.

Can I Deduct Student Loan Interest?

Yes, if you meet the income limits, you can deduct up to $2,500 of student loan interest paid in the year.

• Single filers: Deduction phases out between $85,000–$100,000 MAGI.
• Married filing jointly: Phaseout range is $170,000–$200,000.

Who Should Claim the Education Tax Credits—Me or My Parents?

There are two main federal tax credits for education:

1. American Opportunity Credit

• Worth up to $2,500 per year, for up to four years of undergraduate study.
• Covers 100% of the first $2,000 of qualified expenses and 25% of the next $2,000.

Qualified expenses include:

• Tuition
• Mandatory enrollment fees
• Course materials

To qualify, you must be enrolled at least half-time in a program leading to a degree. The credit can offset your entire federal tax bill. If any of the credit remains, up to 40% (max $1,000) is refundable.

2. Lifetime Learning Credit

• Worth up to $2,000 per year (20% of up to $10,000 in qualified expenses).
• No limit on the number of years you can claim it.
• No requirement to be enrolled half-time or in a degree program.

Ideal for part-time students, graduate students, or those taking longer to complete undergraduate studies. Room and board and optional fees don’t qualify.

Income Phaseouts for Both Credits in 2025:

• Single filers: $80,000 – $90,000
• Married filing jointly: $160,000 – $180,000

Who Should Claim the Credit?

If your parents’ income is below the threshold, it usually makes sense for them to claim the credit (especially if they’re in a higher tax bracket). If their income is too high and you’re eligible, you should claim the credit yourself.

Example: Percy, age 22, graduates in May 2025 and earns $25,000 that year. His parents provide more than half his support, so he qualifies as their dependent. Percy qualifies for the $2,500 American Opportunity Credit, which eliminates his $1,000 tax bill. He also receives a $600 refundable credit (40% of the remaining $1,500). Alternatively, if his parents qualify for the full credit, it may make more sense for them to claim it instead.

Welcome to Adulthood—And Taxes

From determining dependency status to maximizing education tax benefits, taxes can be tricky for new grads. The good news? There are smart ways to save—if you know where to look. For personalized advice tailored to your situation, consider working with a tax professional. It’s one of the best moves you can make as you step into this next chapter of life.

If you own a small business and have children in high school, technical school or college, you might consider asking them to work for you part-time or full-time over the summer. Or you might want to hire your spouse or another relative for an open position. Hiring relatives allows them to earn some extra money and learn about the family business. Plus, there may be tax advantages and savings opportunities that could sweeten the deal. Here’s what you should know.

Payroll Tax Breaks

Owners of certain unincorporated businesses who hire their kids may be eligible for payroll tax breaks. If your children are under age 18, you can hire them for full- or part-time work, and their wages will be exempt from Social Security and Medicare (FICA) taxes and federal unemployment (FUTA) tax. But there’s an important catch — to be exempt, your business must be structured as one of the following entities:

• A sole proprietorship,
• A single-member limited liability company (LLC) that’s treated as a sole proprietorship for tax purposes,
• A spousal partnership, or
• A spousal LLC that’s treated as a partnership for tax purposes.

The FICA tax exemption applies to both:

• The employee’s share of FICA tax that’s withheld from the employee’s paychecks, and
• The employer’s share of FICA tax that your business must pay to Uncle Sam.

Important: The FUTA tax exemption lasts until an employee-child reaches age 21. If your child is 18 or older, his or her wages will be subject to FICA tax, like any other employee.

If you operate your business as an S or C corporation, your child’s wages from the business are subject to FICA and FUTA tax, like any other employee, regardless of the child’s age.

Potential Federal Income Tax Savings

When you hire your child, your business can deduct his or her wages for federal income tax purposes. Deductible wages may also lower your state income tax obligation and self-employment tax, if applicable. Of course, the wages must be reasonable for the work performed to be deductible.   

In addition, thanks to today’s generous standard deduction, child employees — regardless of their ages — won’t owe any federal income tax on wages from your business below the following thresholds for 2025:

• $15,000 if the child files as a single taxpayer,
• $22,500 if the child files as a head of household, and
• $30,000 if the child is married and files jointly.

Important: These thresholds are based on the assumption that the child has no taxable income from other sources. As earned income, your child’s wages also won’t be subject to the so-called “kiddie tax.”

These income tax benefits may also be available if you hire extended family members, such as grandchildren, nieces and nephews, and even your parents. 

Roth Saving Opportunities

Working for the family business teaches kids fiscal responsibility and provides them with extra spending money. However, you might also want to encourage your child to use some or all of the wages for long-term goals, such as saving for college or retirement.

For example, your child’s (or grandchild’s) wages count as earned income that can be contributed to an IRA, with the potential for impressive compounding over time. The only tax-law requirement for your child to make annual IRA contributions is having earned income that at least equals what’s contributed for that year. Age is completely irrelevant. So, if your child earns some cash from a summer job or part-time work after school, he or she can contribute to an IRA for that year.

For the 2025 tax year, people under age 50 can contribute the lesser of:

• His or her earned income, or
• $7,000.

While the same contribution limit applies equally to Roth IRAs and traditional deductible IRAs, the Roth option usually makes more sense for young people. Why? First, kids are usually in a lower tax bracket now than in retirement. Second, your child can withdraw all or part of the annual Roth contributions — without any federal income tax or penalty — to pay for college or for any other reason. However, Roth earnings generally can’t be withdrawn tax-free before age 59½.

In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be included in gross income. Even worse, traditional IRA withdrawals taken before age 59½ may be hit with a 10% early withdrawal penalty tax unless an exception applies. (Several exceptions exist, including to pay for qualified higher-education expenses and up to $10,000 in qualified first-time homebuyer costs.)

Important note: Even though a child can withdraw Roth contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the Roth account balance as possible untouched until retirement (or later) to accumulate a larger federal-income-tax-free sum.

By making Roth contributions for just a few teenage years, your child can potentially accumulate a significant nest egg by retirement age. Realistically, however, most kids might not be willing to contribute the $7,000 annual maximum even when they earn enough to do so. However, as long as they have earned income, you can give them the money to fund an IRA (up to the amount of their earnings).

Small Business, Big Tax Breaks

Hiring relatives can be a tax-smart idea for small business owners. Remember that their wages must be reasonable for the work performed. So, this strategy works best with teenage children or adult family members to whom you can assign meaningful tasks. Keep the same records as you would for any other employee to substantiate hours worked and duties performed (such as timesheets and job descriptions). And, of course, issue your relative a Form W-2, as you would for any other employee.

Encouraging your child or grandchild to make Roth IRA contributions is a great way to introduce the idea of saving money and investing for the future. It’s also never too soon for children to learn about taxes and how to legally minimize or avoid them. Contact your tax advisor for more information.

The U.S. House of Representatives recently passed a sweeping tax and spending measure, dubbed “The One, Big, Beautiful Bill.” It includes significant tax implications for electric vehicle (EV) buyers and homeowners. Specifically, the bill eliminates federal tax credits after December 31, 2025, for clean vehicles and certain energy-efficient home improvements.

If you’ve been considering purchasing an EV or upgrading your home’s energy efficiency, you may want to act soon to take advantage of the current incentives before they potentially disappear. Here are the details of what could change under the proposed legislation, now being considered by the Senate.

Clean Vehicle Tax Credits

The House bill would eliminate the following new and used clean vehicle tax credits after 2025, with a limited exception:

Credits for new clean vehicles (Section 30D). Under the Inflation Reduction Act, buyers of new qualifying clean vehicles can receive up to $7,500 in nonrefundable tax credits, based on specific mineral sourcing and battery component requirements. Vehicles that meet only one of these criteria still qualify for a $3,750 credit. Clean vehicles include EVs, hydrogen fuel cell cars and plug-in hybrids. Under current law, this credit is available through 2032.

Additional eligibility rules include:

• The vehicle must be for personal use (not resale), 
• It must be used primarily in the United States, and
• Final assembly of the vehicle must occur in North America.

The manufacturer suggested retail price (MSRP) can’t exceed $80,000 for vans, sport utility vehicles and pickup trucks, or $55,000 for other vehicles. The MSRP for this purpose isn’t necessarily the price you pay. It includes manufacturer-installed options, accessories and trim but excludes destination fees.

In addition, a taxpayer must meet modified adjusted gross income (MAGI) caps of $300,000 for joint filers, $225,000 for heads of households and $150,000 for all other filers.

Credits for used clean vehicles (Section 25E). Buyers of used clean vehicles may qualify for a credit of 30% of the sale price, up to $4,000. To be eligible for the credit:

• The sale price must be under $25,000, and
• The vehicle must be at least two model years old and meet battery requirements.

There’s also an income limit for used clean vehicles, but it’s lower than the limits for new vehicles. For used vehicles, the MAGI cap is $150,000 for married joint filers, $112,500 for heads of households and $75,000 for others.

Both credits are nonrefundable and can’t be carried forward unless claimed as a general business credit. Taxpayers can transfer the credit to a dealer to reduce the purchase price or claim it when filing their tax returns. Only two dealer transfer elections are allowed per year. IRS Form 8936 is required when either claiming the EV credit or transferring it to a dealer.

Important: The House bill provides an exception for small-volume manufacturers, allowingvehicles from manufacturers that have sold fewer than 200,000 qualifying clean vehicles to retain eligibility for the current credits through 2026.

The Energy Efficient Home Improvement Credit

In addition, the House bill would eliminate energy-efficient home improvement credits for upgrades such as qualified windows and exterior doors after 2025.If these provisions are enacted, 2025 may be your final chance to offset some of the cost of high-efficiency home improvements through tax savings.

Under current law, homeowners can claim the Section 25C Energy Efficient Home Improvement Credit for up to 30% of the cost of eligible improvements each year through 2032. The annual limits are:

• Up to $600 for exterior windows and skylights, and
• Up to $500 total for exterior doors (limited to $250 per door).

These upgrades must meet Energy Star certification requirements.

Key Takeaways

With these credits potentially on the chopping block, it may be a good time to purchase an EV or make energy-efficient home upgrades — especially if you were already planning to make these investments. Be sure to retain purchase receipts and certifications for eligible upgrades.Potential legislative changes add to the complexity of navigating tax credits. Although the House bill retains these green tax credits through year end, the Senate could make changes in its bill (which would then have to pass in the House before being signed into law). Contact your tax advisor to help you understand the eligibility requirements for these credits and claim them while they’re still available. Also visit the IRS website for more information about clean vehicle tax credits and the Energy Efficient Home Improvement Credit.

Many people graduate college with significant amounts of student loan debt. The average amount borrowed by 2022-23 bachelor’s degree recipients who took out loans to pay for college is approximately $29,300, according to the College Board’s “Trends in Student Aid 2024 report.”

The burden of student loan repayment can force young adults to delay major life milestones, such as purchasing a home, starting a family and saving for retirement. In addition, defaulting on student loans can harm a borrower’s credit rating and result in garnishment of wages.

Moreover, the implications of student loan debt often extend to family members. While students may independently qualify for federal student loans without a co-signer, most private loans require a creditworthy co-signer — typically a parent — who becomes equally responsible for repayment. Some lenders offer a co-signer release option after a certain number of on-time payments. However, this isn’t guaranteed. It depends on the lender’s policies and the borrower’s income level and credit score at the time of release.

If your family is struggling to afford higher education costs, you’re not alone. Here are eight tips to help you get a handle on student loans and set your student on the path toward financial independence.

1. Do Your Homework

Decisions made before and during college can significantly affect your final debt tally. When choosing a school, consider it an investment decision, not an emotional one. Compare the total costs of each school on your list, including:

• Tuition and fees,
• Room and board, and
• Books, supplies and equipment.

Many parents experience sticker shock when they add up the full cost of attending college. Fortunately, you probably won’t have to pay sticker price if you work with the college’s financial aid department. After you’re accepted into a school and complete the requisite forms, you should receive a financial assistance package that states the amount and type of financial aid offered. 

Also evaluate each school’s job placement rates and average starting salaries for graduates in the majors you’re mulling. Consider whether the career that corresponds with your preferred major will provide you with enough funds to cover the loan payments that will begin soon after you graduate.

To avoid borrowing more than you need, it’s important to reassess your expenses each semester. Cover as much as possible with federal direct loans before applying for private loans. Also take a fresh look at scholarship and work-study opportunities every semester.

2. Create a Detailed List

It’s important to prepare a spreadsheet that lists all your loans so you can compute the total amount of debt. This schedule should break out the details for each loan, identifying the type (federal or private, subsidized or unsubsidized) and the terms, including:

• Interest rate,
• Monthly payment,
• Current and principal balances,
• Repayment rules, and
• Grace periods.

Compiling this information while your student is still in school helps keep track of loans taken out each semester (or draws on open-ended private loans that allow borrowers to withdraw funds as needed up to a pre-approved credit limit). After graduation, the schedule can be used to formulate a repayment plan and prepare monthly budgets.

3. Explore Repayment Options

Several options are available for repaying your federal direct loans. The Federal Student Aid Loan Simulator  provides a helpful tool for comparing monthly payment alternatives.

If you have federal student loans, you might consider combining some or all of them into a Federal Direct Consolidation Loan. A consolidation loan has a fixed interest rate that’s the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will lock you into a fixed rate. You also may be able to consolidate some private loans into a single private loan at a lower interest rate.

Bear in mind that consolidation has potential downsides. For example, you could end up with a longer repayment period, which translates to paying more interest over the loan term. And you might forfeit certain borrower benefits — such as discounts or rebates — associated with your current loans.

4. Inquire about Loan-Related Employee Benefits

Your employer may provide various types of student loan assistance — which could be significant enough to influence your job choice. For example, through 2025, employers can offer up to $5,250 in student loan repayment benefits per employee per year tax-free under current law.

Additionally, under a provision of SECURE 2.0, employers can make matching retirement plan contributions to cover the qualified student loan payments (QSLPs) made by plan participants during the year. The change went into effect for plan years beginning in 2024. Employees participating in the following plans may be eligible:

• 401(k) plans,
• 403(b) plans,
• SIMPLE-IRAs, and
• Governmental 457(b) plans.

Note that special rules apply to SIMPLE-IRA plans.

In effect, this provision allows employers to make matching contributions to the retirement accounts of employees who aren’t actually contributing to their accounts but who are making student loan payments. This provision helps participants reduce student debt while simultaneously building retirement savings.

5. Take Advantage of the Student Loan Interest Deduction

You may be eligible to write off up to $2,500 of student loan interest as an above-the-line adjustment on your personal return whether you itemize or not. This deduction is available only to the person legally obligated to repay the loan.

However, the deduction is phased out based on modified adjusted gross income (MAGI), and the amounts aren’t that high. For 2024, the phaseout begins at $80,000 for single filers ($165,000 for married couples who file jointly). For 2025, the phaseout begins at $85,000 for single filers ($170,000 for married couples who file jointly). You also may be eligible for state tax deductions.

6. Make Extra Payments to Reduce Your Principal

Paying down the principal on your loans reduces your total interest payments. It can also allow you to pay off your debt faster.

For instance, if you switch from monthly to biweekly payments, you’ll make an extra payment every year. Over 10 years, you could trim a year off your repayment schedule. Alternatively, if you receive a year-end bonus or tax refund, you might consider putting the extra cash toward paying down your student loans.    

Another strategy — known as the “debt avalanche” approach — calls for making an extra monthly payment on your highest interest rate loan. When that loan is paid off, apply the amount you were paying each month for the retired debt toward the loan with the next highest interest rate and so on. This strategy prevents excessive interest accumulation and allows you to tackle principal payments efficiently.

Important: When using the debt avalanche approach, continue making minimum payments on all loans to avoid penalties and keep accounts in good standing. You should also notify the lender that you want to apply the extra payments to the principal balance, not a prepayment of the loan’s next installment.

7. Enroll in Automatic Payment

Federal student loan programs grant a 0.25% discount on the interest rate to borrowers who set up automatic withdrawals from their checking accounts. Many private lenders offer similar discounts for automatic payments.

Aside from the discount, autopayments also ensure that you won’t miss any payments. This may be especially handy for young people who are adjusting to living independently and busy pursuing full-time careers.

8. Take Ownership

Effectively managing student loan debt requires a proactive approach, careful planning and financial discipline. One of the worst mistakes borrowers make is missing loan payments, assuming they’ll catch up later. If you’re having trouble making ends meet, you don’t have to struggle alone. Talk to your lender or another trusted financial advisor to assess your options and devise a realistic debt service plan that works for your situation.

As separate legal entities, estates and nongrantor trusts must file their own federal tax returns, just like individual taxpayers. Unlike individuals, however, these entities may distribute income to beneficiaries, which can shift tax liability. Beneficiaries, heirs, trustees, executors and those devising plans to transfer their assets need to understand how different types of distributions are taxed.

Principal vs. Income Distributions

The type of distribution — principal or income — is critical in determining the federal tax implications for the beneficiaries in most cases. However, no distribution from a revocable trust is taxable to the beneficiary. That’s because all taxable income is reported on the tax return of the trust creator (also known as a grantor or settlor). This treatment also applies to irrevocable grantor trusts, such as grantor-retained annuity trusts or intentionally defective grantor trusts.

Distributions from an estate generally aren’t taxable to heirs. Rather, they’re subject to the estate tax if the estate is large enough to trigger it. For 2025, the federal lifetime gift and estate tax exemption is $13.99 million ($27.98 million for a married couple).

Important: In 2026, the unified federal exemption is scheduled to fall to the pre-2018 level with a cumulative inflation adjustment for 2018 through 2025. If that happens, the exemption is estimated to be roughly $8 million for 2026. However, Congress is expected to extend the current exemption (or possibly make it permanent) as part of a comprehensive future tax bill. Contact your tax advisor for the latest developments.

When it comes to distributions from irrevocable nongrantor trusts, the recipient’s tax liability generally turns on the distribution’s origin. It depends on whether the distribution comes from the trust’s principal (meaning the assets originally contributed to the trust and any subsequent deposits) or the income that the principal has generated (for example, dividends, interest or rental income). Distributions from principal aren’t taxable to the recipient because the trust creator presumably already paid taxes on the principal.

Distributions from income are taxable for the recipients, usually at ordinary income tax rates. Tax-exempt income is an exception, though. Distributed income retains the character it had when the trust earned it. Thus, income that was tax-exempt for the trust is also tax-exempt upon distribution.

The IRS treats trust distributions as coming from current-year income. If a distribution exceeds the current-year income, the excess is attributed to principal and, therefore, not taxable for the recipient. Notably, a beneficiary could receive a distribution that combines both principal and income.

Say, for example, that a beneficiary receives a $20,000 distribution. If the trust had no current-year income, the distribution would be treated as a nontaxable principal distribution. If the trust earned $10,000 in dividend income, though, the distribution would be split equally between income (taxable) and principal (nontaxable).

But what if the trust had $10,000 in dividend income and a $10,000 capital gain? The distribution would still be split between income and principal. That’s because capital gains are generally added to principal rather than treated as income for trust accounting purposes (see below for more information on capital gains).

Fortunately, the beneficiary needn’t figure this out. The trust will issue a Schedule K-1 that indicates the character of amounts distributed and the amount the beneficiary should claim as taxable income.

The Role of DNI

The IRS defines distributed net income (DNI) as the income available for distribution from a decedent’s estate or trust. DNI limits the deduction an estate or trust can claim for amounts distributed to beneficiaries. Specifically, an estate or trust can deduct the lesser of:

• The trust income that’s required to be distributed plus other amounts “properly paid or credited or required to be distributed,” or
• DNI.

DNI is also the maximum taxable amount that can be distributed to a trust’s beneficiaries. Any excess distribution is tax-free to the beneficiaries.

To compute DNI, start with the estate or trust’s taxable income before the distribution deduction. Next, add the values of the applicable tax exemption and any tax-exempt interest, and subtract net capital gains. Trusts are allowed $100 or $300 exemptions, and estates can claim $600 exemptions.

Capital Gains

For estates and trusts, gains on assets held for 12 months or less are taxed as ordinary income. Long-term assets held for more than 12 months are subject to the applicable long-term capital gains tax rate (15% or 20%). Simple trusts, which are required to distribute all income every year and can’t distribute principal, pay the taxes on capital gains, which are added to principal.

Suppose a trust is permitted to allocate capital gains to income or distribute capital gains (in which case they’re included in DNI). In that situation, the beneficiaries typically will pay taxes on the gains. Trust beneficiaries also may incur capital gains tax on distributed assets that appreciate after being transferred to the trust (for example, shares of stock or real estate) if those assets are subsequently sold.

Minimizing Tax Obligations

Income tax rates for trusts and estates are the same as for individual taxpayers, but the taxable income brackets are narrower. As a result, trusts and estates reach the highest rate with a much smaller amount of taxable income than individuals do. For 2025, the 37% top marginal tax rate for single filers begins after $626,350 of ordinary income. A trust or estate is subject to that rate after reaching only $15,650 of income for 2025.

The same goes for long-term capital gains rates. For 2025, the top 20% rate doesn’t kick in for single filers until their taxable income exceeds $533,400. That rate applies to trusts and estates with adjusted capital gains above $15,900 for 2025.

That means many beneficiaries will be taxed at lower rates than the trust. Distributing income or capital gains to such beneficiaries can help minimize the trust’s overall tax bill. Not only will the distribution be taxed at a lower rate, but the trust may also be able to deduct the distribution. This approach is especially wise for trusts that generate significant income.

Proceed with Caution The taxation of distributions can be complicated — even without addressing any state tax laws that might apply. Contact your tax advisor to help you achieve your estate and trust goals while keeping a lid on the resulting taxes.

Perhaps because they know seniors remember a time when technologies were simpler, criminals increasingly prey upon them. But with age comes wisdom, and many older people are fast to remind would-be criminals that they weren’t born yesterday. Increasingly, they know how to spot possible fraud but law enforcement warns they should pay closer attention.

Here are some tips and considerations to help protect yourself.

At the Front Door

Sometimes trouble really does come knocking at your front door, but it’s also your side door you have to watch. Talking to someone at your front door can give an accomplice valuable time to run around back and break in. So, if the front doorbell rings, first check the other doors.

Frequently, people at the front door misrepresent themselves asdelivery persons, or the cable company or an electrician. Does the person have a real identification card that matches his or her driver’s license? Is there a truck to go with the uniform? If not, don’t open the door — your biggest piece of security equipment.

Carry your cell phone to the door with you, so you can speed dial 911 just in case of a problem — or use your pendant if you have central-station security. If you have a car with a remote “panic” button, you can hold that just in case. Any noise behind you, especially the other doors, and you can sound the alarm. A honking car alarm is annoying but may cause neighbors to check on you. Even if they don’t respond, thieves depend on not attracting attention, so the noise alone may be enough to scare them off or at least buy you some time to alert the authorities.

On the Telephone

The telephone lets people enter your home without a door. But, are callers who they say they are? If someone sounds suspicious, hang up. Charities need our help, but you never know who’s calling. Don’t give out personal information or do business with a stranger without first checking them out.

One common scam says the caller is from “The Help Desk” or “IT Department.” He has detected a problem with your computer and tries to sell you software to fix a problem that doesn’t really exist. Someone may call claiming to be from the IRS or the police department or your bank. Then, the caller asks you for your account information. The federal government will only notify you of a problem by mail, and other organizations will give you a real phone number where you can check them out. If you get these kinds of calls, they are probably scams.

Even caller ID is not always a safe bet. Scam artists make “spoof calls,” where they are able to put anything on your caller ID in the hope you will trust them as they steal your identity.

If a call seems to be from the police, call information and ask for the business number of your local police department (don’t tie up 911 with business calls), and then call them and ask them to check out if the caller was real. They never ask for account information.

If a caller says he or she is from your bank, the individual should already know your account number. You can phone the bank’s main number to check on the validity of the call. Or ask at your local branch where you know the bank employees and they know you.

Tax Scams

The IRS warns that scammers attempt to mislead taxpayers about tax refunds, credits and payments. They may pressure you for personal, financial or employment information. In some cases, they threaten victims with arrest or deportation if they don’t make a payment for a fake tax bill. Click here for more about the types of tax scams the IRS has identified.

Vendor Calls (live and phone)

When having work done on your home, get at least three solid bids. Seek bids from known vendors who have done good work for an acquaintance of yours. If someone comes to you unsolicited, be suspicious. Check the person out with the local town hall. See if he or she is licensed for the type of work you want done, and check with the local Better Business Bureau. Has anyone complained about the person online? Use a search engine to check it out.

Never give a partial payment to anyone before checking references. Speak to previous customers in your neighborhood. If the vendor has no references you can check, say no. Too many people have given someone a $5,000 deposit for a $100,000 contract — and never heard from these so-called vendors again. You may wonder why anyone would enter such a deal in the first place. Generally, the vendor presents a price that is too good to pass up. For example, he may look for a house with a roof that is badly in need of repair. He knocks on your door, tells you he’s replacing a roof on the next block and happened to pass by your house on his way home. He just happens to have materials left over and will do your roof for a fraction of the price if you can give him a deposit. Say no. Even if he is legitimate, he shouldn’t be asking for money up front.

Email and “Phishing”

Never respond to an email with money. If your credit card or bank tells you there’s a problem, don’t click on the email. Call the bank directly. Their number is on your last statement. There are just too many scammers asking you to do something right from the email. In fact, don’t even open an email until you know who sent it, because it could contain dangerous software or “malware.”

Another email scam is a new spin on the “confidence game,” where a con artist sends you a check, and in response you wire him much less cash. Often, it’s someone from Nigeria looking for the heirs of a wealthy industrialist who just died. The check always turns out to bounce after a recipient sends in a few thousand dollars of his or her money. If it sounds too good to be true, it probably is.

One heinous fraud comes when an emailer first hacks personal information about a relative. Then, the criminal positions the email as if he or she is the relative, stranded in an airport, unable to get home safely, without access to a phone, and must get $1,000 wired to a certain address immediately.

Under the pressure of a simulated threat to a relative, many will panic and send money. In reality, the relative has no knowledge this is even going on, and a simple phone call might prove that. Sometimes it comes as a phone call but be suspicious of any such situation.

Keep Your Guard Up

The scams described above are only some of the ways that thieves steal from honest people. New scams are being introduced all the time. We’re blessed to live in a golden era of technology. But where there’s gold, there will likely be criminals looking for people who will let down their guard. This is where wisdom and experience become invaluable.

If you’re self-employed, run your own small business, or have rental or investment income, there’s a good chance you must make quarterly estimated tax payments. These payments include income tax and, if applicable, self-employment tax. Failing to make them — or miscalculating how much you owe — can result in penalties and interest.

Who Needs to Pay Quarterly Estimated Taxes?

Anyone who receives income that isn’t subject to withholding may be required to make estimated tax payments. This typically includes:

• Independent contractors, such as freelancers, consultants and gig workers,
• Sole proprietors and small business owners,
• Partners in a partnership,
• S corporation shareholders,
• Landlords with rental income, and
• Investors with capital gains or dividend income.

Generally, you must make estimated payments if you expect to owe at least $1,000 in federal tax for the year after subtracting any withholding and refundable credits. This includes income tax and, to the extent applicable, self-employment tax (Social Security and Medicare).

When Are Quarterly Tax Payments Due?

The IRS divides the year into the following four payment periods, but the deadlines don’t align exactly with calendar quarters:

Estimated Tax Payment Schedule

If a due date falls on a weekend or holiday, it’s extended to the next business day. For example, June 15, 2025, falls on a Sunday, so the deadline is Monday, June 16, 2025.

How Are Estimated Taxes Calculated?

Calculating estimated taxes requires projecting total income, deductions, credits and withholding for the year. Specifically, here are six steps for the calculation:

1. Estimate total annual income from all sources.
2. Subtract deductions, such as above-the-line deductions (e.g., retirement plan contributions, self-employment deductions), the standard deduction or projected itemized deductions, and eligible business expenses.
3. Apply the appropriate federal income tax rate to determine your income tax.
4. Add self-employment tax, if applicable, which is 15.3% on net earnings from self-employment up to $176,100 for 2025 and 2.9% on net self-employment earnings over that amount.
5. Subtract any expected tax credits and withholding.
6. Divide the total by four to determine each quarterly payment.

Some quarters cover more months than others. For example, the June deadline covers just two months, while the January deadline covers four. Even so, the IRS generally expects equal payments throughout the year.

However, if your income is seasonal or fluctuates significantly, you may qualify for the annualized income installment method. Under this method, your payment amounts are adjusted based on when income was actually earned. This approach can help prevent penalties, but it’s more complex.

As you can see, properly estimating your income and deductible expenses and determining whether to use the annualized installment method is no small undertaking. Your tax advisor can help you with income and expense projections and the proper tax calculations.

What Happens If You Don’t Pay Enough?

Underpaying your estimated taxes can result in IRS penalties — even if you end up getting a refund when you file your return. Penalties are based on the underpayment amount, the length of the delay and the current IRS interest rate.

Common situations that trigger penalties are:

• Missing a payment,
• Paying after the due date, and
• Underestimating income and paying too little.

Safe harbor rules can help you avoid penalties. You’re generally in the clear if, through estimated taxes and withholding, you pay at least:

• 90% of your current year’s tax liability, or
• 100% of your previous year’s tax liability (110% if your adjusted gross income was over $150,000, or, if married filing separately, over $75,000).

If you have any income from which taxes are withheld, increasing your withholding might help you avoid penalties — and provide other benefits. See “An Alternative: Increase Withholding If You Also Have W-2 Income” below.

Tips for Staying on Top of Quarterly Tax Payments

Managing quarterly tax payments doesn’t have to be daunting. With some organization and a few smart habits, you can build a system that minimizes both the risk of penalties and your stress.

First, regularly set aside money for taxes. Consider opening a dedicated savings account to keep funds for taxes separate and automating regular transfers to the account if your income is steady.

How much should you save? A common rule of thumb is 25% to 30% of net income. But, depending on your marginal tax bracket, you may need to set aside more. If you have enough cash on hand, consider putting aside 5% to 10% beyond your estimates to cover unexpected income spikes or tax law changes.

How can you ensure you’re accurately estimating your taxes? Accountingtools or apps, such as QuickBooks, Xero and FreshBooks, can automatically track income and calculate estimated taxes. But these tools are only as good as the data you enter into them. If you aren’t properly recording all income and expenses, these solutions won’t provide accurate tax estimates.

It’s also critical to reassess your income and estimates every quarter and adjust your payments accordingly. Otherwise, you could end up underpaying taxes and owing penalties and interest — or overpaying taxes and giving the federal government an interest-free loan. 

If keeping track of deadlines isn’t your strong suit, you may want to automate your quarterly payments. You can use the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay to set up automatic payments. This will ensure you make quarterly payments on time, but you still risk underpaying.

Easing the Compliance Burden

Estimating quarterly taxes may sound straightforward. However, it can be challenging to remember payment deadlines, project income and eligible deductions, and make any adjustments needed due to tax law changes. That’s why partnering with a knowledgeable tax professional isn’t just helpful — it’s smart business. Contact your tax advisor to stay compliant and avoid costly missteps.