October, 2007
Careful Classification Required
October, 2007
Careful Classification Required
If you need workers with a certain expertise or want to increase your staffing levels temporarily, you might consider hiring independent contractors. If you do, proceed with caution. You could face costly tax penalties if the IRS says they should be classified as employees rather than independent contractors.
Control Issues The difference between an independent contractor and an employee is largely a matter of how much control you can exercise over the worker. Generally speaking, if you can direct the work and how it is done, the worker is probably an employee. If you direct only the result of the work, the worker is probably an independent contractor.
To differentiate between the two classifications, the IRS considers factors in three categories.
Taxes and Other Issues Why is proper classification so important? Because you're required to withhold and pay certain federal taxes on wages paid to employees but not on payments to independent contractors. (Independent contractors are subject to self-employment tax.) There are also state and federal laws governing such things as employee benefit plans and overtime pay and apply to employees but not independent contractors.
Worker classification can be a complicated issue. But there is some good news: Should you inadvertently misclassify a worker, you may qualify for tax relief. If you have any questions or concerns, we're here to help.
With higher prices at the pump, taxpayers who drive to and from work are looking for all the financial help they can get. Unfortunately, commuting expenses are considered nondeductible personal expenses. But car and other local transportation costs are deductible in certain situations. Assuming you have the proper records, you can deduct the costs associated with:
We can go over these exceptions with you in more detail to ensure you'll be ready to claim all the deductions you're entitled to on your return.
Are you a business owner who wants to retire someday? Would you like to see the business continue after your departure with younger family members and/or other key employees in charge? Accomplishing the dual goals of retirement and continuity of the business is possible, but it takes planning.
Because every situation is different, your plan should be tailored to achieve the results you desire. That said, you may be interested in an illustration of how a transition plan could be crafted.
Step 1 - Establish a New Entity A new business entity is formed some time before your anticipated retirement date. The new entry - let's assume it is a limited liability company (LLC) called "Computer 2" - is capitalized with contributions from the new owners and a small contribution from you.
Step 2 - Transition Operations Company 2 operates alongside your old company during a buyout period, with you as the managing member. During that period, your old company finishes its existing work and collects its outstanding accounts receivable.
New work is funneled to Company 2 as it comes in. Company 2 rents equipment from your old computer and gradually buys the equipment. Any new equipment that must be acquired during the transition period is purchased by Company 2.
Your old company receives a management fee for your assistance during the transition and is reimbursed for any operating expenses it incurs on Company 2's behalf. You continue to receive a salary from your old company. At a prearranged time and price, the new owners of Company 2 buy out your interest in Company 2.
Step 3 - Liquidate At the end of the transition period, your company sells its remaining equipment to Company 2 and liquidates, distributing its equity to you.
Benefits With this plan, liability for claims that could arise from Company 2's operations during the transition period are shifted away from your old company, helping to ensure that its equity will be available to you for retirement. Meanwhile, Company 2's new owners are in a position to benefit from any future increase in the new company's value.
Note that this is just one of several ideas for implementing a business transition; any plan should be customized to your specific situation.
The future of your business is too important to leave to chance. Why not get ahead of the curve by starting to think about a continuity plan well in advance?
Traditional individual retirement accounts (IRAs) offer savers some attractive tax benefits. One big benefit is that your contributions may be tax deductible. Plus, earnings that accrue in your IRA are not taxed.*
The Taxman Cometh Like all good things, these tax breaks eventually end. When you withdraw money from your traditional IRA, the portion of the distribution that has not been taxed is taxed as ordinary income. (Penalties may apply to early withdrawals.)
But what if you don't need to withdraw any money? Too bad, says the IRS. Once you reach a certain age, you must start taking required minimum distributions (RMDs) from your traditional IRA.** If you don't, there may be stiff penalty: 50% of the amount you were supposed to take but didn't.
Your first RMD will be due by April 1 of the year after the year you reach age 70-1/2. Another RMD will be due by December 31 of the same year and each year thereafter.
Calculating RMDsAs a general rule, you can figure your RMD by dividing the amount in your IRA (or the total of all your IRAs) by the appropriate number from an IRS life expectancy table. You can take your RMD from one - or more than one - IRA, depending on what's best for your financial situation. We can help you decide when the time comes.*
*Tax rule are different for Roth IRAs.
**RMDs are not required from your Roth IRA's during your lifetime.
What's your preference? Classic black with simple details? Colorful with some frills? Futuristic with special features? No matter what kind of phone (or phones) you use, here are some tips for managing your "phone time" and communicating with callers when you can't take their calls.
Stick to Business Unless you have time on your hands, keep your business conversations "on topic." If you're making the call, having pertinent documents and/or written questions ready. Try limiting outgoing calls to one or two specific times during the day.
Use Your Voice Record a new voice mail greeting every day. Include details that tell callers when you'll be available and what they should do if they can't reach you (e.g. call your assistant or a coworker). And finally: Listen to the recording to make sure the information and tone are right.
What do you think of performance reviews? Are they a necessary evil and an overall waste of time? Or an opportunity to have a meaningful dialog and make improvements? No matter which side of the desk you're on, making the most of a performance review can be to our benefit.
Tips for Employers Every employee you hire is an investment. Look at a performance review as a way to improve your return on those "investments" by giving your employees the feedback they need to perform their jobs better.
Tips for Employees You invest time and effort in your job. Ideally, the best way for you to improve your return on that investment is to help the company be as successful as possible so you can be rewarded. Look at your performance review as an opportunity to find how to achieve that goal.
With two kids in college, the Lanes want to make sure they take full advantage of any available education tax breaks. Unfortunately, the rules on eligibility for such breaks are very confusing.
Sorting out the various education-related tax credits and deductions can be overwhelming for the parents of college students. And changes in the tax law often add to the confusion.
The Hope Scholarship credit and Lifetime Learning credit are probably the most well-known of the education tax breaks. Both can be used for qualified tuition and certain other related expenses. The Hope Scholarship credit is available for expenses during a student's first two years of post-secondary education, while the Lifetime Learning credit applies to subsequent years, including graduate school and job training education. Taxpayers with higher adjusted gross income (AGI) levels may not be eligible for these credits, although students may qualify if they file their own tax returns.
Congress has extended another education tax break - the higher education expense deduction - through the 2007 tax year. It is also subject to AGI limits and may not be used if either the Hope Scholarship credit or Lifetime Learning credit is taken for the student.
Borrowers get a break, too. The interest on qualified student loans is deductible (up to $2,500 in interest a year) until the loan is paid in full. However, the deduction is phased out at certain AIG levels.
The Milliman Medical Index 2007 says the total medical cost for a typical American family of four with employer-provided health insurance is $14,500. That's up 8.4% ($1,118) over 2006, a slight improvement over the 9.3% average annual increase for the period 2003-2007. The portion covered by the family: $5,591.
While they might not be whistling while they work, eight out of 10 employees said they are generally satisfied with their current positions, according to the 2007 Job Satisfaction Survey Report (from the Society for Human Resource Management). The top three reasons? Compensation/pay, benefits, and job security
Retirement savings, part one: The Investment Company Institute recently reported that the amount Americans have in their retirement accounts increased by $1.7 trillion ins 2006 (a jump of 12% from 2005). The total amount of retirement assets in 2006 - $16.4 trillion.
Retirement savings, part two: A survey of more than 3,000 micro-business owners (having 10 or fewer employees) revealed that a large majority (80%) don't have retirement plans for themselves or their employees. Source: The National Association for the Self-Employed (NASE).
Question: I've decided to make a career change that will require me to move a few hundred miles away from where I'm living now. I don't expect to make much profit when I sell my home - in fact, I may lose money on the sale. Would a loss be deductible for federal tax purposes?
Answer: Unfortunately, you cannot deduct a loss on the sale of residential property you've used as a personal residence up to the time of the sale.
Question: As a public school administrator, I'm interested in the newly issued IRS regulations regarding 403(b) tax-sheltered annuities. Going forward, will we need to adopt a written plan for our 403(b) program?
Answer: The final regulations do include the requirement that a 403(b) program be maintained pursuant to a written defined contribution plan that satisfies Section 403(b) of the tax code. The IRS intends to publish model plan provisions that public school employers can use. The requirement will not go into effect until 2009.