Category Archives: Payroll

Pension Plans-Some Basic Selections for Smaller Companies

Starting and managing a company has its difficulties, plus in spite of the fact you are devoted to the company, the business cannot run indefinitely.Ultimately, every owner stops working; your employees will stop working and retire too. As a company owner here are some basic options to help plan for the golden years.

§401(k) – Most owners consider a §401(k) plan an option for larger companies, however this kind of retirement plan can be set up for a one owner/employee business. This is known as a Solo §401(k). A lot of clients think the company has to match employee contributions, this is not true. Matching is typical however the plan’s founders can arrange the plan to not match employee contributions. The companies that have enough money to match employee contributions usually see employee morale go higher. Participants usually elect to have a set percentage or dollar amount deducted from their paycheck. The employee limits on contributions to a retirement plan for 2012 is $17,000 for those under 50 years, and $22,500 for those over 50. §401(k)s are available in Traditional and Roth versions. A Roth or Traditional plan version permits the employee to choose between, paying taxes in the beginning or paying taxes when money is withdrawn from the account. Roth §401(k) account owners pay taxes in the beginning. Traditional §401(k) account owners pay taxes when money is withdrawn. 401(k) regulations also permit loans if the plan is setup with that option.

SEP- SEP (Simplified Employee Pensions) IRAs are an easy option for many small companies. These plans are comparatively undemanding to administrate. Participants generally cannot defer salary to the account. The company makes contributions based on a percentage of salary. Some participants in a SEP-IRA plan start additional IRAs to plan for the future. One major benefit to this plan is that a SEP-IRA can be set up after the tax year is closed. The employer contribution can be made as late as the due date (including extensions) of the company’s tax return for that year. IRS regulations do not permit loans, early withdrawals, or catch up contributions.

SIMPLE IRA – means for Savings Incentive Match for Employees. Relative to other kinds of pension plans the name “simple” is true. One downside is that the company is obligated to match employee contributions. Another thing to consider is the max contribution allowed to this type of plan is $11,500. The reporting requirements for this kind of plan are minimal.

The preceding information is not intended to replace the services of a professional. Consult a CPA or an Attorney who can better understand your particular circumstances. Please contact us.

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Filed under Deductions, Payroll, Retirement Planning, Tax Planning

The Choice Between A Regular §401(K) Plan Or A Roth §401(K)

When we meet clients to review their tax information, there often is a frequent question. “Which retirement option is better, the Roth option of my employer’s retirement plan or the traditional option?”

Roth accounts started in 1998.  The key concept of a Roth accounts is sacrifice a current year deduction for a guarantee the distributions taken when you retire are tax free.

From 1998 until 2005, Roth accounts were only available in the form of an IRA account. A lot of middle-income and high-income taxpayers could not contribute to a Roth IRA, because their incomes exceeded the relatively modest limit based on their filing status.  (The Roth IRA limit for 2012 is $125k for single individuals and $183k for married couples.)

Our elected representatives liked the public giving up a current year tax breaks by opting to go with a Roth IRA instead of to a Traditional IRA. In 2005, politicians decided to expand this opportunity to employer plans.

What’s the difference between the Traditional and Roth versions? Traditional employer plans permit the salary deferrals to reduce your taxable income and grow tax deferred.  Income taxes are paid on distributions taken from these accounts when you retire.

Let’s say you earn $200,000, and you max out your salary deferrals for $17,000 during the year.  In this case, your W-2 will report taxable wages of $183k in Box 1.  Assuming you are in the 33% federal tax bracket, the $17k you contribute saves you $6,667 in federal income taxes.  That’s a pretty good tax break.

What happens if you instead decide defer into a Roth version? When you contribute money to a Roth account, you forego a current year tax-break.  Your W-2, therefore, will report the full $200k as taxable wages in Box 1, instead of $183k that would be reported had you gone with the Traditional version.  The benefit of giving up this tax break is the tax-free treatment of the compounded growth on the $17k of salary deferrals. In other words, you won’t owe any federal income taxes on the distributions taken from this account when you retire.

The Max Benefit Factor:

From a general tax perspective, the Roth IRA is the better choice if your tax rate during retirement will be the same or higher than your current tax rate, as the Roth IRA allows you to pay the taxes now, and receive tax-free distributions when your income tax rate is higher. If your tax rate will be lower during retirement, then the traditional IRA may be the better choice if you are eligible to receive a tax deduction now when your tax rate is higher.

Since the savings you accumulate in traditional employer plans will eventually be taxed at ordinary income rates when you withdrawal, high tax rates during retirement could dramatically reduce the after-tax value of those savings.

As a general rule the Roth accounts are better for savers in their 20s and 30s. This is when the option of paying taxes on your contribution now is generally a better deal than getting a tax break today. When people are in a lower tax bracket and should expect to be in the same or higher tax bracket when  they retire.

The core to financial planning is saving. Saving will start to make you a Money Hero. On the way to becoming a hero there will be others to like us, to help improve your financial well-being.

Tax Prep Deerfield Beach

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Hiring a Spouse as an Official Employee

Tax Planning

Tax Planning

This can create benefits. Here are two easy tax advantages for putting a spouse on the payroll of an S Corporation

 Accumulated tax deferred funds for retirement When the employee meets the tax-law requirements your company can deduct

contributions. The spouse has to be an official employee with a business purpose.

Contributions to a qualified retirement can create real savings. The annual contributions limits are quite generous. The easiest plan to set up is either a Solo §401(k) or a SIMPLE IRA. With a Solo §401(k) plan, your spouse can defer up to $17,000 to the plan (plus an extra $5,500 if he or she  is age 50 or older). Your company can match those contributions wholly or partially up to tax-law limits.

Get more tax deductions from business trips Generally, you can’t deduct the travel expenses attributable to your spouse if he or she accompanies you on a business excursion. However, if your spouse is a bona fide company employee and goes for a valid business reason, you may deduct his or her travel costs, including air fare, lodging and 50% of the meal expenses. The benefit also is tax-free to your spouse.

CPA Deerfield Beach

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Filed under Deductions, Payroll, Retirement Planning, Tax Planning