Our regularly updated newsletter provides timely articles to help you achieve your financial goals. Please come back and visit often.
This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
Out of all the types of retirement plans available to small business owners, the SIMPLE plan is the easiest to setup and 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:
1. Employee out of salary contribution
The limit on this "elective deferral" is $11,500 in 2009, after which it can rise further with the cost of living.
Catch up. Owner-employees age 50 or over can make a further $2,500 deductible "catch up" contribution as employee in 2009.
2. Employer "matching" contribution
The employer match equals 3% of employee's earnings.
Example: An owner-employee age 50 or over in 2009 with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee plus a further $2,500 employee catch up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $15,200.
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.
Example: If you are under 50 with $50,000 of self-employment earnings in 2009, you could contribute $11,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $13,000. A Keogh 401(k) plan would allow a $25,500 contribution.
With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $35,500 with a 401(k).
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 will in practice have fewer investment options than if you were your own trustee, as you could 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 SEPs. Generally, to make a SIMPLE plan effective for a year it must be set up by October 1st 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 (2009 amount)-$21,500 if catch up contributions are made to the 401(k) by one 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 2009. 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 1st.
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
Keogh SEP SIMPLE
Plan type: Can be defined benefit or defined contribution (profit-sharing or money purchase) Defined contribution only Defined contribution only
Owner may have two or more plans of different types, including a SEP, currently or in the past Owner may have SEP and Keoghs Generally, SIMPLE is the only current plan
Plan must be in existence by the end of the year for which contributions are made Plan can be set up later--if by the due date (with extensions) of the return for the year contributions are made Plan generally must be in existence by October 1st of the year for which contributions are made
Dollar contribution ceiling (for 2009): $49,000 for defined contribution plan; no specific ceiling for defined benefit plan $49,000 $22,000
Percentage limit on contributions: 50% of earnings, for defined contribution plans(100% of earnings after contribution). Elective deferrals in 401(k) not subject to this limit. No percentage limit for defined benefit plan. 50% of earnings (100% of earnings after contribution). Elective deferrals in SEPs formed before 1997 not subject to this limit. 100% of earnings, up to $11,500 (for 2008) for contributions as employee; 3% of earnings, up to $11,500 for contributions as employer
Deduction ceiling: For defined contribution, lesser of $49,000 or 20% of earnings (25% of earnings after contribution). 401(k) elective deferrals not subject to this limit. For defined benefit, net earnings. Lesser of $49,000 or 25% of eligible employee's compensation. Elective deferrals in SEPs formed before 1997 not subject to this limit. Same as percentage ceiling on SIMPLE contribution
Catch up contribution 50 or over: Up to $5,500 in 2009 for 401(k)s Same for SEPs formed before 1997 Half the limit for Keoghs, SEPs (up to $2,750 in 2009)
Prior years' service can count in computing contribution: No
Investments: Wide investment opportunities. Owner may directly control investments. Somewhat narrower range of investments. Less direct control of investments. Same as SEP
Withdrawals: Some limits on withdrawal before retirement age No withdrawal limits No withdrawal limits
Permitted withdrawals before age 59 1/2 may still face 10% penalty Same as Keogh rule Same as Keogh rule except penalty is 25% in SIMPLE's first two years
Spouse's rights: Federal law grants spouse certain rights in owner's plan No federal spousal rights No federal spousal rights
Rollover allowed to another plan (Keogh or corporate), SEP or IRA, but not a SIMPLE. Same as Keogh rule Rollover after 2 years to another SIMPLE and to plans allowed under Keogh rule
Some reporting duties are imposed, depending on plan type and amount of plan assets Few reporting duties Negligible reporting duties
Please contact us if you are interested in exploring retirement plan options, including SIMPLE plans.
Many companies are asking "What to do about an employee's home when he or she is moved to a new job location?" This is an increasing tough and costly question with the real estate market tightening throughout much of the country.
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:
Employer reimburses employee's financial loss. Here the employer has the home appraised and agrees to pay employee the difference between that appraised fair market value and any lesser amount the employee gets on sale. Such reimbursement would cover the employee's costs of sale.
Note: The financial loss here is not the same as a tax loss. The financial loss is the home's value less what the employee collects under "forced sale" conditions. In the current real estate market, the value is not always clearly determined. Relocating employee might think the home is worth more based on an earlier appraisals or market sales. A tax loss is the property's tax basis (cost plus capital investments) less what's collected on sale.
If the employee has a gain on the sale (amount collected on sale exceeds basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). Tax loss on 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. A 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. IRS now says that this fee is not taxable to the employee. Also, the employee's gain on sale to the relocation firm qualifies for the tax exemption under the limits ($250,000 etc.) described above.
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 gain is tax exempt under the above limits.
Tip: Either option works for the employee, letting him or her realize full value on sale of the home (with possibly greater value through Option 2), without an element of taxable pay.
Caution: If the deal is structured so that the relocation firm facilitates a sale from employee to a third party buyer (rather than to the relocation firm), the employer's payment of the relocation firm's fee is taxable to the employee.
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.
Note: Fully deductible, but maybe more costly, before and after taxes, than buying the home for resale through the relocation firm.
Note: Paying the relocation fee only, without buying the home, as in the WARNING above, is also fully deductible, as would be any gross up amount on that fee.
Buying the home. The change in the IRS rule was good news for employees, but 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.
Tip: Where employee relocation is in prospect - and that can include relocating new hires - employee and employer should consult us for the wisest financial and tax course.
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.
Identity thieves get your personal information by many different means, including stealing a wallet or purse or accessing information you provide to an unsecured Internet site. They even look for personal information in your trash. They also pose as someone who needs information through a phone call or e-mail.
The IRS does not initiate contact with a taxpayer by e-mail.
If you receive an e-mail scam, forward it to the IRS at email@example.com.
If you receive a letter from the IRS leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.
Your identity may be stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know.
If your Social Security number is stolen, it may be used by another individual to get a job. That person's employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return.
If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government - issued identification - such as a Social Security card, driver's license, or passport - along with a copy of a police report and/or a completed Form 14039, IRS Identity Theft Affidavit.
Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes. Do not routinely carry your card or other documents that display your SSN.
If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.
For more information about identity theft - including information about how to report identity theft, phishing and related fraudulent activity - visit the IRS Identity Theft Resource Page, which you can find by typing Identity Theft in the search box on the IRS.gov home page.
The vast majority of Americans get a tax refund from the IRS each spring, but what do you do if you are one of those who received a tax bill? Here are eight tips for taxpayers who owe money to the IRS.
If you get a bill this summer for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.
You can also pay the bill with your credit card. To pay by credit card contact either Official Payments Corporation at 800-2PAYTAX (also www.officialpayments.com) or Link2Gov at 888-PAY-1040 (also www.pay1040.com).
The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.
You can also pay the balance owed by electronic funds transfer, check, money order, cashier's check or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or 800-945-8400 or online at www.eftps.gov.
An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.
If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the web-based application called Online Payment Agreement found at IRS.gov.
You can also complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS. The IRS will inform you usually within 30 days whether your request is approved, denied, or if additional information is needed. If the amount you owe is $25,000 or less, provide the monthly amount you wish to pay with your request. At a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement, Form 433, is an amount that will full pay the total balance owed within 60 months.
You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based upon your financial information.
If an agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged, and is automatically figured based on your income.
For more information about installment agreements and other payment options call us or visit the IRS Web site at IRS.gov.
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. A complete list is available in IRS Publication 525, Taxable and Nontaxable Income.
Some common examples of items that are not included in your income are:
Adoption Expense Reimbursements for qualifying expenses
Funding of your Health Savings Account with a one-time direct transfer from your individual retirement plan, health reimbursement account or health flexible spending account.
Child support payments
Gifts, bequests and inheritances
Workers' compensation benefits
Meals and Lodging for the convenience of your employer
Compensatory Damages awarded for physical injury or physical sickness
Cash Rebates from a dealer or manufacturer
Examples of items that may or may not be included in your income are:
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
Scholarship or Fellowship Grant.
If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
These examples are not all-inclusive.nPlease call us for more information about what income is taxable.
If you changed your home or business address, notify the IRS to ensure that you receive any refunds or correspondence. While 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.
On your tax return. You may correct the address legibly on the mailing label that comes with your tax package or write the new address in the appropriate boxes on your tax return when you file.
Form 8822. You may use Form 8822, Change of Address, to submit an address or name change at any time during the year.
Verbal Notification. If an IRS employee contacts you about your account, you may verbally provide a change of address.
Written Notification. To give written notification, write to the IRS center where you file your return and provide your new address. The addresses for the IRS centers are listed in the tax instructions. In order to process an address change, the IRS will need your full name, old and new addresses, and your social security number or employer identification number, and signatures. If you filed a joint return, you should provide the same information for both spouses. If you filed a joint return and have since established separate residences, you each should notify the IRS of your new addresses.
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 2009 that valued at more than $13,000, you must report the total gifts to the Internal Revenue Service and 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:
Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone's benefit
Gifts to your Spouse
Gifts to a Political Organization for its use
Gifts to Charities
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, call us or get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709 or 709-A, United States Gift Tax Return, and Instructions for Form 709.
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.
For recently married taxpayers, the tax scenario begins when the bride says "I do." If she takes her husband's last name, but doesn't tell the SSA about the name change, a complication may result. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the Social Security Number.
After a divorce, a woman who had taken her husband's name and made that change known to the SSA should contact the SSA if she reassumes a previous name.
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 Web site, www.ssa.gov, by calling 1-800-772-1213 and at local offices. The SSA Web site provides the addresses of local offices.
Generally, taxpayers must provide SSNs for each dependent claimed on the tax return. For adopted children without SSNs, the parents can apply for an adoption taxpayer identification number, or ATIN, by filing Form W-7A with the IRS. The ATIN is used in place of the SSN on the tax return.
Employees who work for tips - If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.
Individuals - Make a payment of your 2009 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2009.
Corporations - File a 2008 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. This due date applies only if you timely requested an automatic 6-month extension.
S corporations - File a 2008 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you timely requested an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.
Corporations - Deposit the third installment of estimated income tax for 2009. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.
Employers - Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.
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