Insights – Page 3

Don’t loose your home office deduction – set up an accountability plan

Many people have been working from home due to the pandemic, but only certain people will qualify to claim the home office deduction. This deduction allows qualifying you to deduct certain home expenses on their tax return when they file their 2021 tax return next year.

The most important thing to note is that employees are not eligible to claim the home office deduction. This applies to ALL employees (including S corporation owners who also serve as employees of those companies). If you are an owner of an S-Corp read the section on accountability plans below.

The term “home” for purposes of this deduction:

1. Includes a house, apartment, condominium, mobile home, boat or similar property which provide basic living accommodations.

2. Any portion of a home used exclusively as a hotel, motel, inn or similar establishment does NOT qualify as a “home” and, therefore, does not qualify for a home office deduction.

Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction:

1. There must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.

2. The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.

3. A portion of a home that is used exclusively for conducting business on a regular basis but not used as the principal place of business, will qualify for a home office deduction if either patients, clients or customers are met in the home or there is a separate structure that is used exclusively for conducting business on a regular basis.

Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction

1. Using the simplified method consisting of a rate of $5 per square foot for business use of the home which is limited to a maximum size of 300 square feet and a maximum deduction $1,500.

2. Using the regular method whereby deductions for a home office are based on the percentage of the home devoted to business use. Any use a whole room or part of a room for conducting their business will involve figuring out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses include There are certain expenses taxpayers can deduct. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.

The good news for S corporation owner-employees is that, by implementing an “Accountable Plan” a (a reimbursement program which meets certain IRS regulations), S Corporation owner-employees can continue to deduct business expenses that they pay for personally by “passing” them along to the business.

Essentially, an Accountable Plan is an IRS-approved reimbursement program that allows a business to reimburse employees for business expenses they incur as part of their work. The business is then able to deduct those reimbursed amounts as if the business had incurred the initial expense, itself. When using an Accountable Plan, reimbursements for business expenses are not considered compensation to employees thus, don’t increase payroll taxes due on wages or an employee’s income tax liability.

There are three simple guidelines an Accountable Plan must follow to be considered valid:

1. all expenses to be reimbursed through the plan must have a business connection.

2. expenses must be “timely substantiated,” and

3. any excess advances provided to the employee must be “timely repaid.” While the actual definition of “timely” is somewhat ambiguous, the IRS has provided several “safe harbor” options.

Since Accountable Plans are so simple to establish, and since they offer such flexible rules around to whom they can apply, and to which expenses they will cover, there is generally no reason for most S Corporations not to implement them.

Despite their simplicity, though, business owners should understand that if the IRS does not deem their plan in compliance with the Accountable Plan rules, their plan will be treated instead as a “Non-Accountable Plan”. In such instances, any reimbursements will be added the employee’s wages. Even though employee wages reduce gross business revenue, that reduction is offset by the increase in wages. And to top it off, the impact of higher FICA taxes as a result of those wages means that the total tax liability will be higher than if the expense hadn’t been reimbursed in the first place!

+++++++++

Stay current on the latest tax and accounting news by inviting My Fiscal Office into your inbox with our free monthly newsletter. Click here to sign up – https://lp.constantcontactpages.com/su/dwxNQXj

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

Remote Hiring

The pandemic has changed who we hire. In some cases it is about hiring contractors vs employees and in other cases it is about from where employees are located. In this article, we will focus on hiring employees in other states.

The remote boom resulting from the pandemic has opened new and unique opportunities to expand one’s labor pool. However, while there are benefits to doing so, one must be aware of any possible pitfalls and to plan accordingly to avoid unforeseen issues. Here are a few things to keep in mind before you decide to hire remote workers.

Employment Status

Employment status depends of Federal and state rules. Some states may not have any clear-cut rules, or may even have rules that conflict with your company’s home state regarding the classification of workers as an employee versus an independent contractor. On the other hand California has clear rules and regulations dictating who can or cannot be classified as an independent contractor within the state of California. It’s highly advisable to check the laws of the state of the worker’s residence, as well as engage local labor counsel for confirmation before making an offer to a prospective candidate See our posing “Employee or independent contractor and why it matters” for more information on employment status.

State Nexus

With a remote worker outside of your state, you may have created nexus between your business and the state of their residence. This is highly dependent on their employment status (see above) as well as the role that worker plays in the company. If the person is an employee for the company and either solicits sales or takes part in administration, there is a higher likelihood of creating nexus as opposed to if the worker was an independent contractor working on a support role.

Although the Multistate Tax Commission has created rules to add consistency to state definitions regarding which activities create nexus, not all states are in conformity and some states only partially conform. Furthermore, the payroll factor may not be the only apportionment factor affected. Depending on the worker’s status and role in the company, the revenues earned in that state may now be apportioned to that state.

Filing Requirements

The hiring of a remote worker may trigger increased compliance obligations for the company. An out of state independent contractor may only cause a company to issue a 1099 to the contractor, with the payment sourced to the contractor’s state of residence.

On the other hand, if the worker is an employee, the company will be responsible for withholding federal and state payroll taxes for the employee and file quarterly payroll tax forms as well as an IRS Form W2 at year end.

Depending on the worker’s role and the resulting impact on creating nexus where the work is performed, the company may also be obligated to file an income tax return with that state. In addition to income tax considerations for sales, companies also need to consider sales tax nexus. Depending on the good or service provided, sales may be subject to sales tax and require the company to both collect and remit sales tax and file a sales tax return. Depending on the jurisdiction and level of activity, this may be filed on either a monthly, quarterly or annual basis. Although sales tax has been a secondary concern in years past, the ruling on the Wayfair case by the Supreme Court has resulted in sales tax becoming a more significant issue.

+++++++++

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

Employee or independent contractor and why it matters

As states look to replenish depleted unemployment funds, I suspect that more audits around worker classification will be coming.

Many Federal and state agencies deal with worker classification and tend to use one of two approaches to determine the correct classification.

Approach 1 – Common Law

Whether a worker is an independent contractor or an employee depends on the relationship between the worker and the business. Generally, there are three categories that make up what is know as the common law approach used by the IRS and some states:

Behavioral Control − does the company control or have the right to control what the worker does and how the worker does the job?
Financial Control − does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? (Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.)
Relationship of the Parties − are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Approach 2 – ABC Test

The US Department of Labor and 33 states use the ABC test to determine independent contractor status for labor law purposes, including minimum wages, overtime, and workers’ compensation. The burden is on the hiring entity to establish that the worker is not an employee.⁠ A hiring entity can show that a worker is an independent contractor (and thus not an employee) only if all three of the following requirements are met:

Autonomy. The worker must be free from the control and direction of the hiring entity with regard to how the work is performed.⁠
Business Dissimilarity. The worker’s labor or services must fall outside the usual course of the hiring entity’s business.⁠
Custom of the Worker. The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.⁠

Ramifications of Misclassified workers

Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee without a reasonable basis, it could be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.

One way the IRS and the various states find our about misclassified workers is when a worker who believe they have been improperly classified as independent contractors can files IRS Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report their share of uncollected Social Security and Medicare taxes due on their compensation.

Another way to get caught is when a worker files for unemployment. This does not have to be that your company cut back on the contract, it could be that the worker lost their main W2 job and in applying for unemployment has to report all sources of income. In my experience this is the most common way NYS comes calling. And if you lose your case (which under NYS law almost always is the outcome) NYS then opens a second case for unpaid workers compensation and disability insurance. Fines for not having the proper insurance can be as much as $500 a day per misclassified worker. We have helped clients reduce these fines from tens of thousands of dollars to a few hundred dollars by obtaining the insurance and making a case for abatement.

+++++++++

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

What To Know About Tax Deductions For Homeowners In 2021

Homeownership can be expensive and may even feel out of reach for many Americans. The down payment, property taxes, maintenance, and utilities, plus mortgage payments and the cost of ownership can really add up. Throw in a real estate market with sky-high home values; you may be wondering if owning a home is worth it. Luckily, there are a few tax deductions for homeowners that can help make homeownership a bit more affordable.

Keep reading to find out more about the various tax deductions available to home buyers and current homeowners. With record low mortgage rates, some of these deductions may be less valuable than they were in the past, especially when paired with skyrocketing real estate values in much of the country.

The Tax Cut and Jobs Act (TCJA aka Trump Tax Plan) surprisingly reduced the tax benefits of owning a home for millions of Americans. The mortgage deduction, long the darling of tax breaks for homeowners, was made irrelevant to the overwhelming majority of homeowners. First, the TCJA reduced the amount of mortgage debt that would benefit from the mortgage deduction. Second, it restricted tax deductions for home-equity loans. Third, it eliminated the home office deduction for many American workers. This became especially painful during the COVID-19 pandemic as large swaths of the American workforce suddenly were working from home.

To be fair, some tax deductions for homeowners remain. You could potentially still get a write-off for “mortgage interest” on an RV or potentially a boat. There was some loosening of a rule for retirement account withdrawals to buy a home. (This is something I am against, in most circumstances.)

Buying a home can be a financial challenge, hopefully these tax deductions will make home your home

Can I still deduct my mortgage interest?

IFor the past few years, more than 90% of taxpayers have simply taken the “standard deduction.” This doesn’t mean they weren’t eligible for the mortgage deduction, all the same; it does mean their taxes didn’t go down at all for incurring mortgage interest. For 2021, the standard deduction is $25,100 for filers who are married, filing jointly.

Can I deduct my property taxes?

Again, the answer is yes and no. The TCJA instituted a cap on the deduction for state and local taxes (SALT) at just $10,000 per year. This is regardless of if you are married or single (thanks marriage penalty). I was just reviewing the taxes of my high-income clients in Manhattan, and this change alone was costing them more than $200,000, per year, in lost tax deductions. OUCH! Technically, the first $10,000 of their state and local taxes are deductible. Beyond that, they receive no tax benefits at the federal level.

How much mortgage interest can I deduct in 2021?

For mortgages issued after December 15, 2017, taxpayers can only deduct interest on the first $750,000 of mortgage debt. This debt can be held on up to two homes, which is good news for those who purchased a second home during the COVID pandemic.

For homeowners who’ve had their mortgages longer, specifically those issued before December 15, 2017, a “grandfather” provision allows interest deductions on up to $1 million of mortgage debt, again, on up to two homes.

Note that the $750,000 mortgage limit applies per tax return, so homebuyers who are not married could potentially buy a home (or even 2 homes) together and deduct interest on up to $1.5 million of mortgage debt. (They would also get a total of $20,000 in combined SALT deductions).

I’m working from home; can I take the home office deduction?

If you are an employee of a company, you are no longer able to take the home office deduction.

However, if you are self-employed or a business owner (this can be part-time or even a side gig), you may be eligible to deduct home office expenses. To qualify for the home office deduction, space must be used regularly and exclusively for that business. Putting your laptop in the middle of your pandemic home gym likely won’t make that space eligible for the home office deduction. Unless perhaps, you are a fitness influencer on social media, using the space to film content.

Can I use my 401(k) or IRA to buy a house?

Congress has made it easier to get access to your retirement accounts for reasons other than retirement. As part of the pandemic relief, you can potentially withdraw up to $100,000 from your IRAs and maybe even your 401(k) without getting hit with the 10% early withdrawal penalty. Taxes will still be due on the withdrawal, but they can be spread over three years. Think long and hard before you mortgage your retirement security to buy a home. Depending on your retirement saving and age, making a $100,000 withdrawal now could add years and years to the time you need to work to fund a secure retirement.

Overall, I’m a fan of homeownership. I have seen the benefits over the long term. I have also seen the devastation that rush purchases can wreak on a family’s household finances. While the various tax breaks can make homeownership more appealing, they should never be the only reason you purchase a home.

+++++++++

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

How to Manage Multistate Tax Planning as a Small-Business Owner

The majority of small businesses don’t file taxes outside their home state. This is simply because they are typically local and don’t have physical locations or connections to any other states. But in our current interconnected and virtual world, small businesses have access to employees not only in other states, but also across the globe. Hiring a contractor in a different country can have its own implications, but thankfully none that will affect the business’s U.S. taxes.

Hiring an employee or contractor in a different state can be problematic, as it easily creates a nexus in those states. The recent marketplace sales tax rules have created a hot topic, and small-business owners might not realize that having a contractor in another state can create not just sales tax nexus but income tax nexus too. This means you not only have to collect sales taxes, but also file and pay income taxes. Here’s what business owners can do to manage compliance and tax implications in multiple states.

Register in your home state

Your business has to be registered in the state you live in. Unless you have zero participation in your business, you have nexus in your state of residency. For most small businesses, registering in a different state means more state-registration fees with no tax savings but potentially higher taxation. Registering in a different state only helps in very specialized situations and should only be implemented if you’ve discussed it with your CPA.

Watch out for extra taxes

The additional tax burden for small businesses that operate in multiple states can mean double taxation. Not all states offer a credit for taxes paid to another state. It’s entirely possible to pay tax on the same income in two different states. If you live in a state with no income tax, like Texas or Florida, it can mean having to pay state income tax on part of your income.

Manage filing costs

Small-business owners don’t have the tax preparation budget of large companies. Unfortunately, tax preparation costs for multistate filings can be substantial. Once you determine which state you need to file in, you might find your apportionment rate is zero, so you don’t have taxable income. So you have to decide if you will file or not. If you try to comply with all state laws, which each state expects, you might find that the cost is greater than the potential penalty for not filing the returns.

When in doubt, collect sales taxes

If you might have nexus, then you should collect sales taxes. Keep in mind that sales taxes typically won’t impact your sales. There is no way to go back to your clients and ask them to pay sales tax for past purchases. The government will assume the sales taxes are built in when you don’t collect them. If you have a small margin on what you sell, this can mean the difference between making money or losing it.

Don’t believe the Goggle

Ideas are always floating around the business community about establishing your business in state X versus state Y. For example, some Californians wrongly believe that a Wyoming LLC will save them money on tax. Unless you operate the business itself in WY, this strategy will only cost you extra money in filing fees paid to WY. If you are a California resident, you will pay tax on any income you generate, regardless of the state your company is registered in.

So, are there scenarios where companies can benefit from multistate tax planning? The short answer is yes, but only if your company is taxed as a C corporation with offices and people across different states. For the rest of small-business owners that benefit from flow through taxation, multistate taxes will mean higher administrative costs and potentially more taxes. Pay attention to where you might have nexus and make sure you relay the information to your tax preparer or CPA to ensure you stay compliant.

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

The Basics Of Small Business Money Management

One of the best ways you can ensure your business is financially healthy is understanding a few key accounting rules and terms. The following are the basics of financial management that small business owners should know about:

Don’t Mix Personal and Business Finances

It’s recommended that you separate your personal and business finances. Why is this so? First, separating your personal and business finances is vital for tax and organizational reasons. Keeping both finances separate will make it easier for you to manage your bookkeeping and requirements for business tax. Second, not mixing these finances has legal implications. If you ever face any legal challenges in your small business, your personal finances will be protected, and vice versa.

Understand Business Accounting

You should learn to understand the basics of business accounting. However, this might be intimidating, especially if you have no background in accounting. There are several basic accounting documents and terms that are easy to learn. Knowing these essentials will allow you to better manage how accounting impacts your business.

Basic Business Accounting Terms

As you continue to explore the world of small business money management, there are buzzwords that you’re likely to encounter over and over again. Following are basic accounting terms you should know:

Gross Revenue

Also called total revenue, gross revenue is the total sum of funds you receive from your customers in exchange for your services or products. Also, gross revenue is the amount before subtracting any expenses or deductions like rent, taxes, and cost of goods sold.

Expenses

Expenses make up the amount of money that stops your gross revenue from going into your pocket. This includes payroll, rent, taxes, utilities, interest on debt, and other essential operating expenses.

Net Profit

Net profit is sometimes called the net income, bottom line, or net earnings. It is what’s left over after you’ve subtracted your expenses from the total revenue. If the net profit is positive, it implies that your revenue is greater than your small business expenses. It also means that your small business is profitable.

Cash Flow

Having enough money on hand can make or break your small business. Even if you consider your business profitable, not having enough cash in your business bank account can be problematic.

Cash flow is considered the difference between the available money your business has at the beginning of the accounting period compared to the available cash at the end of the period. The cash comes in from loan proceeds, sales, sale of assets, and investments. It then goes out to pay for direct and operating expenses, purchase of assets, and principal debt service.

Keep Track Of Your Loans

You should have accurate records of the amount you borrow for your small business needs. When your business makes a profit, you can pay back all of your loans easily.

Make Sure You Have Enough Capital

If you’re new to the business world, this tip is for you. Several small businesses most likely don’t have enough capital to get through the startup phase. To address this, it’s best to have three months of living expenses saved up. This will cover the amount you’re expecting to use for the first three months of your small business expenses.

Pay Your Bills On Time

It’s vital to learn how to pay your bills on time. In fact, you should be consistent in doing so. Loan payment, credit card bills, and utility bills can add up fast. Set up monthly reminders so that you don’t forget any of your payment schedules.

Handle Your Credit Scores

It’s recommended that you maintain a good business credit score. Whether it’s an equipment or a property lease, a small business loan or a business credit card, at some point, your business will need to access credit to run smoothly. Your ability to qualify for small business financing will depend on your business credit status and credit history.

In Summary

Managing business finances can be challenging for most small business owners. However, if you want to have a successful small business, you should learn the basics of small business money management.

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

Questions To Ask Your Accountant This Year

It’s not news that this has been a crazy year. Many small businesses have been negatively impacted by the pandemic. And yet, there are a number of businesses that have continued to operate profitably, some that have even thrived. Millions of government loans were received. Some businesses took advantage of tax credits and payroll tax deferrals.

This is why it’s critical that, if you run a small business, you meet with your accountant right now to discuss what you need to do to make sure you’re minimizing your tax liabilities for 2021. What questions should you ask? To me, these five come to mind.

1. Are my estimated tax payments correct?

Your estimates this year were likely based on what you made last year. But throw that out the door. This year has been an unprecedented year. Maybe you made a lot less. Or maybe you had a better-than-expected year. It’s very possible that the taxes you’re paying in this year do not reflect reality. Which means you could be paying a lot less. Or even a lot more. In the end, you want to be paying exactly what you owe, so when your accountant does your return next year, there are no surprises. So revisit your estimated taxes based on your current situation and make revisions for the last quarter.

2. What’s the impact of the government stimulus on my taxes?

Did you take advantage of the Paycheck Protection Program? Good for you. If your loans get forgiven, you won’t be taxed on that. But here’s some bad news: as of now, the expenses you incurred that are eligible for forgiveness aren’t deductible either, and that can create a huge tax liability. That’s because if your revenues this year were close to last year’s, your income will be higher, and you’re likely not paying in enough estimated taxes to cover that. PPP isn’t the only government stimulus program that will impact your tax situation. If you paid employees for time off under the Families First Coronavirus Relief Act, then you’re entitled to a tax credit after the year is over. Even if you didn’t participate in PPP, you might have taken advantage of the new Employee Retention Tax Credit. If you deferred payroll taxes, you will still owe them next year. All of these things will impact your tax liability and need to be addressed with your accountant.

3. Should I put more away for retirement?

If you’re like many, you’ve probably been spending a lot less on food and consumer goods during the lockdown. If you’ve been building up some savings, it’s a great opportunity to sock some away for the future. Talk to your accountant about making more contributions to your 401(k) or IRA. Then, pass on what you learn to your employees because you want to make sure they’re putting enough away for their retirement, too. You’ll thank yourself a decade from now. So will they.

4. Should I buy capital equipment?

Economic downturns oftentimes turn up deals, and this one is no different. I’ve heard from many of my clients who are using spare cash or taking advantage of this low-interest rate environment to snap up needed equipment, furniture, technology and other capital items at steep discounts. Many of these purchases would qualify for accelerated depreciation under the Section 179 deduction, which means that a full deduction for the expense this year. That’s a huge tax savings. Are you eligible? Ask your accountant and consider investing.

5. What’s the tax impact of working from home?

You may be able to deduct more for your home office. But then again, you may owe more payroll taxes for employees who are working out of state. It’s a confusing environment right now and, depending on the specific makeup of your company and employees, you’ll need to make sure you understand if you’re facing any potential liabilities – or benefits.

Taxes are a huge expense. This year has been a hugely disruptive year. Combine those two facts together, and you’ll agree that in order to make sure you’re not facing a huge liability, you should be talking to your accountant sooner rather than later.

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

Tips For Managing Your Business’s Cash Flow

Tips For Managing Your Business’s Cash Flow

At My Fiscal Office, we know how challenging cash flow can be for our clients. Here are some tips on how to manage your small business’s cash flow.

Know when to use a certain payment method.

Sometimes, it might make sense to pay a fee or bill with one form of payment over another. Checks, for example, can take time to mail and process (sometimes between 10 to 14 days), which may temporarily benefit your cash flow. But if you’re trying to make a payment by a certain date, you’d need to keep this timeline in mind. I’ve found paying by check can also help the recipient feel secure, as they can know they were paid on schedule, even if they haven’t picked up the check yet. For a few days, the money is just in the payer’s bank account; this money serves as an arrangement between the customer and the recipient until they collect and deposit the money.

But sometimes, writing a check isn’t feasible, especially for small businesses that have a suffering cash flow. On these occasions, you might need to pay your vendor with a credit card. Of course, it’s important to keep in mind that credit cards can sometimes charge additional transaction fees. Companies should also ensure they don’t make any delinquent payments and that their vendors accept payment by credit card.

We have been using Melio in Quickbooks online for our clients. Melio allows you to pay each vendor via check or direct deposit AND you can decide to have the funds paid from your checking account or charged to a credit card for a small fee. This allows you to use a credit card to pay vendors who do not accept credit card payments.

Make regular deposits.

Cash management is a vital part of establishing and maintaining a company’s financial security. As “cash” is the prime driver used to pay liabilities (whether you’re an individual or a business), you must handle it effectively to maximize earnings.

The prime objective of cash management is to optimize liquidity while minimizing funding costs, so depositing all of your cash regularly will ensure you still have liquidity in your bank account.

Send invoices as soon as possible.

On a variety of fronts, ensuring invoices get paid on time is critical for any company. The most noticeable benefit is that it can benefit your business’s cash flow, though there are other advantages.

For example, I’ve found delivering invoices right away can help reduce the time it takes to receive payments. In fact one client came to use to help put together a loan package. We found that their invoicing and collection processes needed improvement. After getting them on track with invoicing and collection, there cash flow improved without having to go into debt.

Remember, you are not alone.

When managing your business’s cash flow with these tips, remember what works for your business, and listen to your internal and external business associates. Ask other small-business owners and founders in your network what they’re doing to survive the ongoing economic downturn. In my experience, simply asking a fellow business owner a few questions could help you navigate the challenges you’re facing right now.

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

Why You Might Not Want to Roll Over Your 401(k)

Why You Might Not Want to Roll Over Your 401(k)

If you were one of the people who took advantage of a new opportunity, you might wonder what to do with the 401(k) you had with your former employer. Should you jump on a rollover? Should you try to put your old 401(k) into the new 401(k) with your new employer? You might not want to do either of these things and let’s find out why.

What is a 401(k) Rollover?

A 401(k) rollover involves transferring the money in your 401(k) plan to a new 401(k) plan or IRA. You can roll it over to another plan or IRA within 60 days from the date you receive a personal distribution.

Whatever You Do, Don’t Cash it Out!

Do not take the lump sum and spend it all. You’ll have to pay withdrawal penalties and you’ll miss out on the miracle of compounding.

You can avoid the temptation to go on a spending spree by having it sent directly to your new IRA plan administrator. If you have it sent to you and don’t get it rolled over before the 60-day deadline disappears, your distribution will count as a withdrawal and you’ll owe ordinary income tax and a 10% early withdrawal penalty if you’re not 55 or older.

Reasons You Might Want to Skip the Rollover

You may want to keep your 401(k) savings in your existing plan after you leave your job, and your employer might let you! If you opt to keep money in a former employer’s plan, you will not be able to make additional contributions to your balance. However, it will still experience tax-deferred compounding.

Reason 1: You may like your former employer’s investing options.

You may like the investment lineup in your former employer’s retirement plan, so why move it out? If you like your plan portfolio, you can keep the money there. On the other hand, if you think it charges too many fees or doesn’t offer a lot of investment options, you may want to move your money out.

Reason 2: Your former employer offers unique investments.

Your former employer may offer the opportunity to invest in unique investments. For example, let’s say you really like a particular combination of environmental, social and governance (ESG) investments. Or maybe you have access to items like stable-value funds that you can only get through a 401(k) from your employer.

Reason 3: You find that your former plan has lower fees.

Many employer-sponsored retirement plans give you access to low-cost index funds or cheaper institutional share fund classes. If you’ve done your research and realized you can’t find these same lower costs in an IRA, you may want to keep your money in your former employer’s plan.

Reason 4: You’re protected from lawsuits.

Employer-sponsored retirement plans get better creditor protection under federal law compared to IRAs. Federal law provides protection for individual retirement accounts to help prevent creditors from raiding your IRA. They are protected from creditor judgments, including bankruptcy. IRAs, including Roth IRAs, don’t have precisely the same protection. However, under a 2005 law, the Bankruptcy Abuse Prevention and Consumer Protection Act, you can shield up to $1 million in an IRA.

Reason 5: You own company stock in your old 401(k).

Rolling company stock from a 401(k) into an IRA might not be a wise choice. The tax code allows you to benefit from special tax treatment under “net unrealized appreciation” rules, which will save you a lot of money. You can no longer use the NUA rules if you roll your money to an IRA. In this case, check with a financial and/or tax advisor for more information.

Reason 6: You want your money earlier.

Usually, you have to wait until at least age 59 ½ to start accessing funds in an IRA. Not so if you quit, retire or get fired at age 55 or just thereafter. You can take the money out at that point if you want, rather than keeping your money tied up for another 4 ½ years.

Contact

Facebook

Linkedin

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012

Schedule A Call

4 Ways For The Self-Employed To Save For Retirement And Minimize Taxes

4 Ways For The Self-Employed To Save For Retirement And Minimize Taxes

Running your own business, being self-employed or even having a side hustle is a great way to move towards financial freedom. There are multiple options available when it comes to choosing a retirement plan. Which plan is the best will depend on your business, how much you need to be saving for retirement, and your overall household income. Current tax rates and policy also play a role in which retirement plan you utilize from year to year.

Keep reading as we outline the four most common retirement plans for self-employed individuals. These retirement plans permit contributions ranging from $6,000 to nearly $300,000, per year!

Traditional and Roth IRA Rules

The Roth IRA and traditional IRA are best for those looking to save a modest amount of money each year. These accounts can also be funded in addition to one of the other retirement plans listed below.

For 2021, the maximum contribution to a Roth IRA or traditional IRA is $6,000 or $7,000 for those who are 50 years or older. There are income limitations when contributing to a Roth IRA, so those with higher incomes may be ineligible. Income limits apply to traditional IRAs only if someone in the household has access to a retirement plan at work. For example, if your spouse has a 401(k) at his or her job.

You can contribute to an IRA (traditional or Roth) up to the tax-filing deadline for the prior year.

SEP-IRA

The SEP-IRA is one of the most popular retirement plans for small business owners. Your maximum contribution in 2021 is $58,000, and your actual contribution is based on 25% of employee pay or 25% of your net earnings from self-employment income. The SEP-IRA works best when you have few to no employees.

Setting up a SEP-IRA is easy and with minimal paperwork. Contributions can be made by October 15th of the following year. So, I’ve seen many small business owners set up SEP-IRAs when they received surprisingly large tax estimates for the prior year.

Individual or Solo 401(k)

The Solo 401(k) (or Individual 401(k) plan) is quickly becoming the best option for many business owners. The cost complexity of implementing a Solo 401(k) has come down dramatically over the past few years. The Solo 401(k) offers the opportunity to make the largest contributions, as well as the widest array of tax-planning opportunities for high-earning couples.

On paper, the maximum contribution limit to the Solo 401(k) is similar to a SEP-IRA, but it is easier to be allowed to make the max contribution. As a business employee, you can contribute $19,500 in 2021, plus an additional $6,500 catch-up contribution for those 50 and older. The employee contribution can be 100% of your salary compared to the 25% contribution limit on the SEP-IRA. From there, the business can make a profit-sharing contribution equal to 25% of your salary, for a grand total of $58,000 in 2021 ($64,500 if you are at least 50 years old.

The Solo 401(k) can also be set up as a Roth 401(k). However, only the employee contribution will go into the Roth bucket; the employer contribution will still be made pre-tax.

Defined-Benefit Plan

The Defined Benefit Plan is essentially a way to both lower your current taxes and create your own personal pension.

The Defined Benefit Plan is typically combined with a 401(k) plan, allowing for a maximum contribution of $294,500 between the two plans. You are able to get more benefit from a combined 401k and defined benefit plan the more income you have and the higher your tax brackets are.

These plans work the best for firms when the income is skewed toward the business owners (and their families). Solid cash flow, and the ability to save more than $100,000 towards retirement accounts, are essential to starting this personal pension plan. Below this amount, one could get similar benefits with the Solo 401(k) and other tax-efficient investment strategies). While this may seem like a huge number, keep in mind it is a pre-tax number. In a high tax state, this might only cost $50,000 to put $100,000 into your retirement accounts.

Setting up a defined benefit plan is more costly and complex than the other retirement accounts mentioned in this post and should be set up with a financial planner, actuary, and guidance from your accountant. The plan can be designed to maximize contributions and benefits to you and your most valued employees. The ongoing contributions will need to be made to the plan but can be frozen if the business hits an iceberg, as many did during the COVID recession.

Hopefully, you are already contributing to some type of retirement account. First do what you can do to increase contributions or max out those accounts. Once you reach that level, work with your accountant to see what is next on your tax-minimizing strategy to help you keep more of your hard-earned money. The consensus is that tax will be going up in the future, and part of my job is to help my clients pay the least amount of taxes legally possible.

Share this post!

If you have any friends or family who own a business and could use our help. Please have them get in contact with us.

My Fiscal Office LLC

77 Bleecker Street

Suite C2-21

New York, NY 10012