Resources & Insights

April 2026

GAGAS 2024 Revision: What Federal Agencies Need to Know Before the December 2025 Effective Date

The 2024 Yellow Book revision introduces a new quality management system framework, tightened independence requirements, and explicit professional skepticism standards. Federal agencies and audit organizations need to act before December 15, 2025.

Key Topics: QMS eight-component framework, independence documentation updates, professional skepticism requirements, and an agency readiness checklist.

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December 2025

Understanding OMB A-123: A Practical Guide for Federal Agencies

OMB Circular A-123 establishes the management responsibilities for enterprise risk management and internal control in federal agencies. This comprehensive guide breaks down the key requirements, assessment process, and best practices for successful implementation.

Key Topics: COSO Framework integration, risk assessment methodologies, control testing procedures, and common pitfalls to avoid in A-123 assessments.

November 2025

Maximizing Your 2025 Tax Benefits: What Small Business Owners Need to Know

The 2025 tax landscape offers significant opportunities for small business owners. Learn how to take advantage of the permanent 20% QBI deduction, navigate the new SALT cap of $40,000, and optimize your deductions under current tax law.

Key Topics: Business expense optimization, retirement plan contributions, estimated tax strategies, and year-end tax planning moves.

October 2025

Internal Controls Best Practices: Lessons from 17 Years of Federal Auditing

Effective internal controls are the foundation of financial integrity. Drawing on extensive experience across SBA, VA, State Department, and CBP, this article shares practical insights on designing, implementing, and maintaining robust control environments.

Key Topics: Control environment principles, segregation of duties, documentation requirements, and continuous monitoring strategies.

📋 What Is Federal Withholding — and Why Does It Matter?

Every time you get a paycheck, your employer holds back a portion of your wages and sends it to the IRS. That money is called federal withholding. Think of it as the government collecting your taxes a little at a time throughout the year — instead of waiting for you to write one big check in April.

Here is the key thing to understand: withholding is not the tax itself. It is your best guess at what you will owe. At the end of the year when you file your tax return, the IRS calculates what you actually owe based on your total income, deductions, and credits. Then two things can happen:

• Too much was withheld — you get a refund. The IRS gives back the extra money you paid throughout the year.
• Too little was withheld — you owe money in April. You have to pay the difference between what was withheld and what you actually owe.

So why do some people owe money at tax time? Almost always it comes down to one thing — their W-4 form was set up incorrectly. Here are the most common reasons people end up with a surprise tax bill:

• You have two jobs but your W-4 only accounts for one. Each employer withholds as if that job is your only income. But when your total income is combined at year-end, you are in a higher tax bracket and owe more than either employer withheld. For example, if Job 1 pays $40,000 and Job 2 pays $25,000, your combined income of $65,000 is taxed at a higher rate — but each employer only withheld taxes as if you earned $40,000 or $25,000 alone.
• You got married but did not update your W-4. When two people file jointly, their combined income can push them into a higher bracket. If both spouses still have their W-4 set to "single," not enough is being withheld.
• You claimed too many dependents or deductions on your W-4 that you do not actually qualify for. Every dependent or deduction you claim on the W-4 reduces how much your employer withholds. If you overclaim, too little comes out and you owe at year end.
• You have freelance or self-employment income on the side. No employer is withholding on that income. If you earn $10,000 freelancing on top of your regular job and do not make quarterly tax payments, you will owe that tax — plus possible penalties — all at once in April.
• You received a large bonus, stock payout, or other income your employer did not withhold enough on. Bonuses are often withheld at a flat 22% rate. If your actual tax rate is higher, the difference comes out of your pocket in April.

How does your employer know how much to withhold? You tell them through your Form W-4. The W-4 asks for your filing status, whether you have other jobs or income, how many dependents you have, and whether you want extra money withheld. Your employer feeds that information into IRS withholding tables and calculates how much to take from each check. The IRS also has a free online tool — the Tax Withholding Estimator — that tells you exactly whether you are on track or need to adjust.

2026 W-4 updates to make now (OBBBA changes): The One Big Beautiful Bill Act added new deductions that reduce your taxable income. Qualified tip income can now be deducted up to $25,000 (employees and self-employed, 2025-2028). The "half" premium portion of overtime pay can be deducted up to $12,500 ($25,000 joint), phasing out for AGI over $150,000 ($300,000 joint), for tax years 2025-2028. These are deductions, not complete exclusions — they reduce the income your tax is calculated on. If your income includes tips or qualifying overtime, your employer may still withhold taxes on the full amount. Talk to us about updating your W-4 or making estimated payments to account for these new deductions at year-end.

IRS Resources:

• IRS Form W-4 — give this to your employer to update your withholding
• IRS Tax Withholding Estimator — free tool, takes about 10 minutes, tells you if you need to adjust

Bottom line: A refund feels great but it actually means the IRS held your money interest-free all year. Owing money feels terrible but it means you had more in your pocket throughout the year. The goal is to get as close to zero as possible — and that starts with a correctly filled out W-4. Questions about your specific situation? Call us at (540) 412-7255.

💰 Retirement Plans (401k and 403b) — How Saving for Retirement Can Actually Lower Your Tax Bill and Still Get You a Refund

A 401(k) is a retirement savings account offered by private employers. A 403(b) is the same thing but offered by schools, hospitals, nonprofits, and government agencies. Both work the same way for tax purposes — and understanding how they work can save you thousands of dollars a year.

Here is the key concept most people do not fully understand: When you contribute to a traditional 401(k) or 403(b), that money comes out of your paycheck before the IRS gets to count it as income. This is called a pre-tax contribution. It means the government does not tax that money this year — it gets taxed later when you withdraw it in retirement.

What this means for you right now: Every dollar you put into your 401(k) reduces your taxable income by one dollar. Less taxable income means lower taxes. Lower taxes means your employer withholds less from each paycheck. In other words, contributing to retirement actually puts more money in your pocket today — while also building your future savings.

Should you choose maximum retirement contributions or lower your withholding — which is better? This is a great question and the answer depends on your situation. Here is how to think about it:

• Maximize retirement if you can afford to live on the take-home pay after contributions, you want to reduce your taxable income as much as possible this year, or your employer offers a match (free money you should always capture).
• Adjust withholding on your W-4 if you had a life change (marriage, new baby, bought a home) that gives you new deductions, and you want to reflect that immediately in your paycheck rather than waiting for a year-end refund.
• Do both if you can — max your retirement contributions AND update your W-4 to accurately reflect your deductions. This gives you the most take-home pay now while minimizing what you owe at tax time.

2026 Contribution Limits:

• Employee contribution limit: $23,500
• Catch-up contribution if you are age 50 to 59 or 64 and older: additional $7,500
• Super catch-up if you are age 60 to 63 (new under OBBBA): additional $11,250 — higher than the standard catch-up to help those nearing retirement save more
• Total combined limit including employer contributions: $70,000

Traditional vs. Roth — what is the difference? A traditional 401(k) reduces your taxes now but you pay taxes when you withdraw in retirement. A Roth 401(k) does not reduce your taxes now — you contribute after-tax dollars — but withdrawals in retirement are completely tax-free. If you expect to be in a lower tax bracket when you retire, traditional makes more sense. If you expect to be in a higher bracket or just starting your career, Roth may be better. Many people split contributions between both.

One rule that always applies: At minimum, contribute enough to get your employer's full match. If your employer matches 50 cents on every dollar up to 6% of your salary, and you do not contribute at least 6%, you are turning down free money. That match is part of your compensation — not taking it is the same as giving yourself a pay cut.

🧾 Schedule C — How Self-Employed People Report Income and Reduce Their Tax Bill

If you run your own business, do freelance work, or earn money as an independent contractor, you report that income (and your business expenses) on Schedule C, which attaches to your personal Form 1040. The bottom line of Schedule C — your net profit — is what gets taxed, not your gross income.

What expenses can you deduct on Schedule C? Any ordinary and necessary business expense qualifies. Common deductions include:

• Home office: If you use part of your home exclusively and regularly for business, you can deduct a portion of rent/mortgage, utilities, and insurance (Form 8829). The simplified method allows $5 per square foot up to 300 sq ft.
• Vehicle: Business miles at the 2026 IRS standard mileage rate (check IRS.gov for current rate), or actual vehicle expenses allocated to business use. Keep a mileage log.
• Equipment and technology: Computers, phones, software subscriptions, and tools used for business. May be fully deducted in year of purchase under Section 179 or bonus depreciation.
• Professional services: Legal fees, accounting fees, and business consulting costs.
• Marketing and advertising: Website costs, business cards, ads, and promotional materials.
• Business insurance: Liability insurance and other business-related policies.
• Health insurance premiums: Self-employed individuals can deduct 100% of health insurance premiums paid for themselves and their family as an above-the-line deduction.
• Retirement contributions: SEP-IRA (up to 25% of net self-employment income, max $70,000), Solo 401(k), or SIMPLE IRA contributions.

The 20% QBI Deduction (Section 199A — made permanent under OBBBA): Eligible self-employed individuals can deduct up to 20% of their qualified business income before calculating their tax. This is one of the most valuable deductions available to sole proprietors and is now permanent law under the One Big Beautiful Bill Act. Income thresholds and phase-outs apply for certain service businesses.

Pro tip: Good recordkeeping throughout the year is the difference between maximizing Schedule C deductions and leaving money on the table. Keep a separate business bank account and credit card — this alone makes bookkeeping dramatically easier and your deductions more defensible in an audit.

⚠️ Self-Employment Tax — What It Is and Why Independent Contractors Pay More

When you work for an employer, your Social Security and Medicare taxes are split between you (7.65%) and your employer (7.65%), for a combined 15.3%. When you're self-employed, you pay both sides — the full 15.3% on your net self-employment income. This is called self-employment tax, and it's calculated on Schedule SE.

The breakdown:

• Social Security: 12.4% on net earnings up to $176,100 (2026 wage base)
• Medicare: 2.9% on all net earnings (no cap)
• Additional Medicare surtax: 0.9% on net earnings above $200,000 (single) or $250,000 (married filing jointly)

The deduction that softens the blow: You can deduct half of your self-employment tax (the "employer" portion) as an above-the-line deduction on your Form 1040. This reduces your adjusted gross income and therefore your income tax — though not the SE tax itself.

OBBBA and self-employment: The new qualified tip deduction (up to $25,000) is available to both W-2 employees AND self-employed individuals who work in occupations that customarily receive tips — so Schedule C filers in qualifying tip occupations can also claim this deduction. However, all self-employment income including tips remains subject to self-employment tax (Social Security and Medicare). The overtime deduction applies only to FLSA-required overtime for employees, not to self-employed individuals.

Important: Many first-time freelancers are shocked by their first tax bill because no employer was withholding anything all year. If you earn $50,000 in self-employment income, your combined income tax and SE tax could easily be $12,000–$15,000 or more — due all at once if you didn't pay quarterly estimates. See the section below on estimated taxes.

📅 Estimated Quarterly Taxes — How to Avoid a Surprise Tax Bill (and Penalties)

If you're self-employed, a freelancer, an independent contractor, or you have significant income that isn't subject to withholding (investments, rental income, side business), the IRS expects you to pay taxes as you earn — not just at year-end. These are called estimated quarterly tax payments.

Who needs to pay? Generally, if you expect to owe at least $1,000 in federal tax after subtracting withholding and credits, you should be making quarterly payments.

2026 Estimated Tax Due Dates:

• Q1 (January 1 – March 31): due April 15, 2026
• Q2 (April 1 – May 31): due June 16, 2026
• Q3 (June 1 – August 31): due September 15, 2026
• Q4 (September 1 – December 31): due January 15, 2027

How much should you pay? The safest approach is the safe harbor rule: pay at least 100% of last year's tax liability (or 110% if your prior year AGI was over $150,000), divided into four equal payments. This protects you from underpayment penalties even if your income is higher this year.

How to pay: The IRS Direct Pay system at IRS.gov/payments/direct-pay allows free bank account payments. You can also pay by debit/credit card (processing fee applies) or by mail using Form 1040-ES.

What happens if you don't pay? The IRS charges an underpayment penalty calculated daily at the current federal short-term interest rate plus 3%. For 2026 this is roughly 7–8% annualized — not catastrophic, but avoidable.

Pro tip: Set aside 25–30% of every self-employment payment you receive into a separate savings account. Pay your quarterly estimates from that account. What's left at year-end after your return is filed is yours to keep. This simple habit eliminates the #1 source of financial stress for self-employed people.

🔄 Independent Contractor vs. Employee — What's the Difference and Why It Matters for Your Taxes

Whether you're classified as an employee or an independent contractor dramatically changes how your taxes work — and it's not always your choice to make.

Employee: Your employer withholds income tax, Social Security, and Medicare from your paycheck. You receive a W-2 at year-end. Your employer pays half of your Social Security and Medicare taxes.

Independent Contractor: No withholding. You receive a 1099-NEC if paid $600 or more by a client. You are responsible for the full 15.3% self-employment tax plus income tax on your net earnings. You must make quarterly estimated payments if you'll owe $1,000 or more.

What determines your classification? The IRS uses a behavioral control, financial control, and type-of-relationship test. Key factors include: does the company control how and when you work? Does it provide your tools and equipment? Is this a permanent arrangement? Misclassification — where a company treats employees as contractors to avoid payroll taxes — is a major IRS enforcement priority. If you believe you've been misclassified, you can file IRS Form SS-8 to request a determination.

The tax math difference: On $60,000 of income, an employee pays roughly $4,590 in FICA taxes (half is paid by employer). An independent contractor on $60,000 net pays roughly $8,478 in self-employment tax — nearly double — plus income tax on top. Understanding this difference helps you negotiate rates as a contractor that reflect your true cost.

IRS Resources: IRS: Independent Contractor or Employee?

🔔 One Big Beautiful Bill Act (OBBBA) — 2025/2026 Tax Law Changes That Affect You

The One Big Beautiful Bill Act made several significant changes to federal tax law that are now in effect for the 2025 tax year (filed in 2026). Here's what individual taxpayers need to know:

• Standard deduction increased: $15,750 for single filers / $31,500 for married filing jointly. If your itemized deductions don't exceed these amounts, you take the standard deduction.
• New deduction for qualified tips (2025-2028): Employees and self-employed individuals in tip-qualifying occupations can deduct up to $25,000 of qualified tip income from federal taxable income. Tips are still subject to Social Security and Medicare taxes. This is a temporary deduction, not a permanent exclusion.
• New deduction for qualified overtime (2025-2028): W-2 employees can deduct the extra "half" premium portion of FLSA-required overtime pay — up to $12,500 ($25,000 for joint filers). Phases out for AGI above $150,000 ($300,000 joint). This applies to the overtime premium only, not total overtime wages, and is temporary through 2028.
• $6,000 senior bonus deduction (2025-2028): Taxpayers age 65 or older receive an additional $6,000 deduction ($12,000 for a couple where both qualify). Phases out for MAGI above $75,000 (single) or $150,000 (joint). Available to both itemizers and non-itemizers. Temporary through 2028.
• SALT cap raised to $40,000 (2025-2029): The state and local tax deduction cap increased from $10,000 to $40,000 for taxpayers with AGI under $500,000, with a 1% annual increase through 2029. Phases out for income above $500,000 ($250,000 for married filing separately). This is temporary — the cap reverts to $10,000 after 2029.
• 20% QBI deduction made permanent: The Section 199A deduction for qualified business income from pass-through entities (sole proprietors, S-Corps, partnerships) is now a permanent part of the tax code — no longer subject to expiration.
• Super catch-up for ages 60–63: Retirement plan participants ages 60–63 can now contribute an additional $11,250 to 401(k)/403(b) plans instead of the standard $7,500 catch-up amount.
• Auto loan interest deduction: Interest paid on loans for vehicles assembled in the United States is now deductible as an itemized deduction, subject to income limits.

Note: Tax law is complex and individual situations vary. This summary is for general education only. Contact Valley Financial Advisors at (540) 412-7255 to discuss how these changes apply specifically to your return.