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A SIMPLE Retirement Plan for the Self-Employed
Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.
These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend time and high administration fees associated with more complex retirement plans.
SIMPLE plans really shine for self-employed business owners. Here's why...
Self-employed business owners contribute both as employee and employer, with both contributions made from self-employment earnings.
SIMPLEs calculate contributions in two steps:
The SIMPLE plan is good for the home-based business and can be ideal for the moonlighter - the full-time employee, or the homemaker, with modest income from a sideline self-employment business.
With living expenses covered by your day job (or your spouse's job), you could be free to put all your sideline earnings, up to the ceiling, into SIMPLE retirement investments.
A Truly Simple Plan
The SIMPLE plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules - in investment options, spousal rights, creditors' rights - don't have a lot new to learn.
Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.
What's Not So Good About SIMPLEs
Other plans can do better than SIMPLE once self-employment earnings become significant.
Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will in practice have fewer investment options than if you were your own trustee, as you would be in a Keogh.
It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.
There's this problem if the SIMPLE is for a sideline business and you're in a 401(k) in another business or as an employee: the total amount you can put into the SIMPLE and the 401(k) combined can't be more than $16,500 (2010 amount) - $21,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.
So someone under age 50 who puts $8,000 in her 401(k) can't put more than $8,500 in her SIMPLE in 2010. The same limit applies if you have a SIMPLE while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).
How to Get Started in a SIMPLE
You can set up a SIMPLE on your own by using IRS Form 5304-SIMPLE or 5305-SIMPLE - but most people turn to financial institutions.
SIMPLES are offered by the same financial institutions that offer IRAs and Keogh master plans.
You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" - the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1.
Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.
Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.
Keoghs, SEPs, and SIMPLES Compared
Please contact us if you are interested in exploring retirement plan options, including SIMPLE plans.
Should You Invest in Life Insurance?
The purpose of life insurance is to provide a source of income, in case of your death, for your children, dependents, or other beneficiaries. (Life insurance can also serve certain estate planning purposes, which we won't go into here.)
Whether you need to buy life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, you probably need life insurance.
Life insurance protects your family in the event of death. Most people do not have the right amount of insurance. It is important to determine the amount that suits your needs.
There are two basic types: term and permanent. Term insurance is simply insurance that covers a specified period. If you die within this time frame, your beneficiary receives the insurance benefit. Term policy premiums usually increase with age.
Permanent insurance, such as universal life, variable life, and whole life, contains a cash value account or an investment element to the insurance.
Rules of Thumb
The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping, etc.). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance for the wage earner.
If your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.
If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.
We can help you determine the proper amount of life insurance. Give us a call and we'll discuss your situation.
Employee Relocation in a Suffering Market
Many companies are asking what to do about an employee's home when he or she is moved to a new job location. With the real estate market in a downturn throughout much of the country, this is a tough and costly question.
Typically, the employer wants to protect the employee against financial loss on a "forced" sale of the home. Here are the most common ways to do that, and their consequences to the employee:
The employer reimburses the employee's financial loss. Here the employer has the home appraised and agrees to pay the employee the difference between that appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee's costs of the sale.
If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). Tax loss on the sale of one's residence is not deductible.
The employer's reimbursement of the employee's financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may "gross-up" the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $14,575 for an employee in the 35% bracket - more where Social Security taxes or state taxes are also grossed-up.
Employer buys the home. Few employers directly buy and sell employees' homes. But many do this indirectly, effectively becoming the homes' owners, through use of relocation firms acting as the employers' agents. An IRS ruling shows how to do this with no tax on the employee:
Option 1. The relocation firm as employer's agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which will cover sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee's gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).
Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm's fee and the gain is tax exempt under the above limits.
The Employer's Side
Reimbursing the employee's loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.
Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers, whose tax treatment wasn't covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.
Are you an employee being relocated this fall? Are you wondering about the sale of your home and the tax implications for you? We can answer your questions. Just give us a call.
10 Things You Should Know About Identity Theft
Criminals use many methods to steal personal information from taxpayers. They can use your information to steal your identity and file a tax return in order to receive a refund. Here are ten things the IRS wants you to know about identity theft so you can avoid becoming the victim of a scam artist.
8 Tips for Taxpayers Who Owe Money to the IRS
The vast majority of Americans get a tax refund from the IRS each spring. But what if you're not one of them? What if you owe money to the IRS?
Here are eight tips for individuals who need to pay taxes.
For more information about installment agreements and other payment options, give our office a call.
What Income Is Nontaxable?
Generally, you are taxed on income that is available to you regardless of whether it is actually in your possession.
But there are some situations when certain types of income are partially taxed or not taxed at all.
Here are some examples of items that are NOT included in your income:
Here are examples of items that may or may not be included in your income:
Please contact us if you'd like more information about what income is nontaxable.
Moving Soon? Let the IRS Know
If you changed your home or business address, notify the IRS to ensure that you receive any refunds or correspondence. Although the IRS uses the postal service's change of address files to update taxpayer addresses, notifying the IRS directly is still a good idea.
There are several ways to do this.
It's a good idea to notify your employer of your new address so that you can get your W-2 forms on time.
If you change your address after filing your return, don't forget to notify the post office at your old address so your mail can be forwarded.
You should also notify the IRS if you make estimated tax payments and you change your address during the year. You should mail a completed Form 8822, Change of Address, or write the IRS center where you file your return. You can continue to use your old pre-printed payment vouchers until the IRS sends you new ones. However, do not correct the address on the old voucher.
If you gave any one person gifts in 2010 that were valued at more than $13,000, you must report the total gifts to the Internal Revenue Service. You may have to pay tax on the gifts.
The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.
Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.
There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:
If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift.
For more information, contact our office.
Tips for Recently Married or Divorced Taxpayers
Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration. A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.
It's easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency's website, www.ssa.gov, by calling 1-800-772-1213, and at local offices. The SSA Web site provides the addresses of local offices.
If you have any questions related to your requirements to the IRS after getting married or divorced, or you'd like help changing your name with the SSA, give us a call. We're happy to help.
Take Charge This Fall: Use QuickBooks's Budgeting Tools
If you took a break from budgeting this summer and are now ready to get back on track, QuickBooks can help. The software's budgeting tools are easy to use and very powerful when improving your financial profile.
Using a budget, you can determine how your real income and expenses compare to what you anticipated. It can also be a jumping-off point for discussions about long-term planning.
A Good Benchmark
Budgets. Many people make them, but few stay on top of them. QuickBooks simplifies this process, making it easy to track your progress.
Note: Before you take on this task, consult your accounting professional. This greatly increases the odds of creating a successful financial blueprint.
To get started, click on the Company menu. Select Planning & Budgeting, and then Set Up Budgets. If you've already set up a budget, that one will appear. You'll be able to edit it or create a new one. If you haven't created a budget, the window shown in Figure 1 opens.
Figure 1: You'll start working on your budget by selecting its year and content.
Select Profit and Loss to include all of the previous year's activity and click Next.
On the next screen, you'll also be able to include the criteria Customer:Job or Class so you can budget for individual customers/jobs or classes instead of by account only. Leave this box unchecked for now. Click Next.
Determining the Content
Next, you'll indicate whether you want to start from scratch with your own figures or let QuickBooks pre-populate your budget with last year's numbers. Select Create budget from scratch. Click Finish. A window similar to the one shown in Figure 2 opens.
Figure 2: Budgets in QuickBooks are account-based, so yours will be set up that way.
As an example - click on Rent Expense and enter 3,500 in the January column. Hit Tab. You'll notice that the Annual Total column changes to reflect that entry. If you expect that number to fluctuate over the year, continue to enter those figures in the month columns. If it will remain the same, click Copy Across in the lower left corner. Every column (except for Annual Total) now displays 3,500.
When you're satisfied with your budget, click Save. You can easily access and edit it anytime from the Company menu.
More Budgeting Tools
QuickBooks's budget flexibility doesn't end there. Let's say that your major office supply vendor has just lowered its bulk prices by 5%, halfway through the year. It's easy to make this change to your existing budget. Click the Office Supplies row, and then click on Adjust Row Amounts at the bottom of the screen. The window shown in Figure 3 opens.
Figure 3: Need to make a global dollar amount or percentage change to a row? QuickBooks makes this easy.
At the top of the window, you can choose to have the change begin at the first month of your budget or at the currently selected month. Check one of the two buttons below that to indicate whether you want an increase or decrease, and then enter the numerical value in the box.
Tip: Want to start over? Click on the Clear button in the lower right corner. This deletes all of the data in the current page of the budget.
To switch back and forth among budgets, click the arrow under Budget in the upper left corner of the window. A list of your budgets drops down. To build a new one, click on the Create New Budget button in the upper right corner.
Seeing the Fruits of Your Labor
Keep in mind that you can only create one budget per fiscal year for each combination of accounts, customers and jobs, and classes, as shown in Figure 4. This still gives you a lot of budgeting power. You can create budgets for individual customers, for example, and use some of the same accounts found in your overall company budget.
Figure 4: You can create one budget per fiscal year for each unique combination of accounts, customers and jobs, and classes.
Of course, the real power of QuickBooks budgets lies in its budget reports. Using these, you can get an instant, insightful look at how your income and expenses are performing. Go to Reports | Budgets and Forecasts to find them. They include Budget Overview, Budget vs. Actual, and Profit & Loss Budget Performance.
These reports tell you precisely what you may be doing wrong - and right.
If you're doing more of the former than the latter, share a copy of your budgets and corresponding reports with us. We'll evaluate your history and offer advice for strengthening your financial health.
Create a Living Will
Update Your Will
Review Budget vs. Actuals
Tax Due Dates for September 2010
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