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July 30th, 2020 by

Businesses are responsible for paying payroll taxes for Social Security, Medicare, and unemployment for their employees, but not for independent contractors. And when using contract workers, employers avoid related expenses such as workers’ compensation insurance and other benefits. Instead, contractors pay self-employment taxes and cover their own work-related expenses.

For this reason, hiring independent contractors often makes sense for small businesses running on thin margins. However, it’s important to be aware that a complex web of tax and employment laws determines how workers must be classified. And misclassifying workers can be a costly proposition, even if it’s unintentional.

Multiple Tests Apply

Contractors are hired to deliver a certain result; how and when they get the work done is generally up to them. Employees are subject to much more employer control, but they are also eligible for worker protections such as wage and hour laws.

The IRS uses a three-part test based on whether the worker has behavioral and financial control, and the type of relationship with the employer (including the permanence). Under the federal Fair Labor Standards Act (FLSA), worker status is determined by an “economic reality” test that is similar, but not identical. Complicating matters, some states have rules that are stricter than the federal guidelines.

If your business is audited and the IRS or a state agency decides that one or more independent contractors were truly employees under the law, you might have to pay back taxes with interest, fines, and penalties. You also run the risk of being sued by misclassified workers.

Employee or Independent Contractor?

When hiring an independent contractor, there should always be a written agreement that specifies the project scope, payment, and other terms. Unfortunately, having a signed contract that says a worker is a contractor may not be enough, especially if any one of the following distinctions suggests otherwise.

1. Employees work according to a schedule defined by the business. Contractors set their own hours.

2. Employees receive regular paychecks through the payroll process. Contractors submit invoices and are treated as vendors under accounts payable.

3. Businesses provide equipment, supplies, and training for their employees. Contractors rely on their own knowledge and use their own tools.

4. Employees perform core business functions. Contractors typically provide supplemental services.

5. The work relationship between employers and employees is normally considered continuous or permanent. Contractors work on a temporary basis and typically have multiple clients.

Keep in mind that any contractor who works primarily for your business for a long period of time looks a lot like an employee. You shouldn’t hesitate to consult a qualified legal professional if you have questions about worker classification.

July 22nd, 2020 by

Each year, the Employee Benefit Research Institute (EBRI) surveys workers and retirees to assess how confident they are in their ability to live comfortably throughout retirement. In 2019, only 67% of workers reported feeling “very” or “somewhat” confident, compared with 82% of retirees.1

A closer look at the survey results reveals important lessons to be learned from retirees, whether your own retirement is coming soon or a distant goal.

Lesson 1: Don’t count on working longer. 

Almost three out of four workers expect work-related earnings to be at least a minor source of income in retirement, but just one in four retirees has worked for pay.2

Moreover, there is typically a big gap between expected and actual retirement ages. In 2019, workers expected to retire at a median age of 65, whereas retirees actually retired at a median age of 62. More than four in 10 retirees retired earlier than planned, often due to health issues or changes in their work situations.3 Your target retirement age is one area where you may want to hope for the best but prepare for the worst.

Lesson 2: Your income will largely depend on your savings efforts. 

Even though 64% of retirees receive income from a defined benefit plan (traditional pension), an even larger percentage rely on savings and investments, and more than half rely on income from IRAs and/or workplace retirement plans. Current workers are much less likely to have a pension, and more than half expect employer plans to play a “major” role in their retirement funding.4

If you have access to an employer plan, focus on saving as much as possible — and don’t despair if you are close to retirement and far behind your savings goals. You might be surprised by how much progress you could make in a few years. In 2020, you can contribute $19,500 to a 401(k) or 403(b) plan and an additional $6,500 catch-up contribution if you are age 50 or older.

Lesson 3: Health care may cost more than you think. 

More than one out of three retirees said their health-care or dental expenses were higher than they anticipated.5 Be sure to include medical expenses in your retirement savings strategy. According to another annual EBRI report, a 65-year-old couple who retired in 2019 might need about $300,000 to pay health-care expenses in retirement.6

Sources:
1–6) Employee Benefit Research Institute, 2019

July 15th, 2020 by

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019 as part of a larger federal spending package. This long-awaited legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits. At the same time, it restricts a popular estate planning strategy for individuals with significant assets in IRAs and employer-sponsored retirement plans.

Here are some of the changes that may affect your retirement, tax, and estate planning strategies. All of these provisions were effective January 1, 2020, unless otherwise noted.

Benefits for Retirement Savers

Later RMDs. Individuals born on or after July 1, 1949, can wait until age 72 to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans instead of starting them at age 70½ as required under previous law. This is a boon for individuals who don’t need the withdrawals for living expenses because it postpones payment of income taxes and gives the account a longer time to pursue tax-deferred growth. As under previous law, participants may be able to delay taking withdrawals from their current employer’s plan as long as they are still working.

No traditional IRA age limit. There is no longer a prohibition on contributing to a traditional IRA after age 70½ — taxpayers can make contributions at any age as long as they have earned income. This helps older workers who want to save while reducing their taxable income. But keep in mind that contributions to a traditional IRA only defer taxes. Withdrawals, including any earnings, are taxed as ordinary income, and a larger account balance will increase the RMDs that must start at age 72.

Tax breaks for special situations. For the 2019 and 2020 tax years, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. In addition, withdrawals may be taken from tax-deferred accounts to cover medical expenses that exceed this threshold without owing the 10% penalty that normally applies before age 59½. (The threshold returns to 10% in 2021.) Penalty-free early withdrawals of up to $5,000 are also allowed to pay for expenses related to the birth or adoption of a child. Regular income taxes apply in both situations.

Tweaks to promote saving. To help workers track their retirement savings progress, employers must provide participants in defined contribution plans with annual statements that illustrate the value of their current retirement plan assets, expressed as monthly income received over a lifetime. Some plans with auto-enrollment may now automatically increase participant contributions until they reach 15% of salary, although employees can opt-out. (The previous ceiling was 10%.)

More part-timers gain access to retirement plans. For plan years beginning on or after January 1, 2021, part-time workers age 21 and older who log at least 500 hours annually for three consecutive years generally must be allowed to contribute to qualified retirement plans. (The previous requirement was 1,000 hours and one year of service.) However, employers will not be required to make matching or nonelective contributions on their behalf.

Benefits for Small Businesses

In 2019, only about half of people who worked for small businesses with fewer than 50 employees had access to retirement benefits.1 The SECURE Act includes provisions intended to make it easier and more affordable for small businesses to provide qualified retirement plans.

The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (1) $500 or (2) $250 times the number of non–highly compensated eligible employees or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years.

Effective January 1, 2021, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be related somehow in order to join an MEP.) The legislation also eliminates the “one bad apple” rule, so the failure of one employer in an MEP to meet plan requirements will no longer cause others to be disqualified.

Goodbye Stretch IRA

Under previous law, nonspouse beneficiaries who inherited assets in employer plans and IRAs could “stretch” RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year “clock” will begin when a child reaches the age of majority (18 in most states).

This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.

In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.

If you have questions about how the SECURE Act may impact your finances, this may be a good time to consult your financial, tax, and/or legal professionals.

Sources:
1) U.S. Bureau of Labor Statistics, 2019

July 8th, 2020 by

You may already have insurance to help support your family financially if you should pass away. But could your small business benefit from additional life insurance that would protect your employees, business partners, and their families?

Here are three life insurance strategies that could play a role in your business.

Group Plans

Small businesses have a hard time competing for qualified workers, many of whom may expect group life insurance as part of a standard benefits package. One cost-effective way to recruit and retain top talent is to provide a group term policy that provides a death benefit for the employees’ beneficiaries.

With group policies, the premiums may be employer-paid, employee-paid (voluntary), or a combination of the two. If the company pays some or all of the premiums, it may be possible to deduct the policy costs as a business expense.

Bonus Plans

As an incentive for critical employees, consider funding an executive bonus plan with cash-value life insurance. The business pays the life insurance premiums with bonuses that are tax deductible to the employer but taxable to employees. The company determines the amount of each bonus and when to pay it. A bonus plan may also be designed with vesting requirements that make the life insurance policy more valuable for an employee who remains with the company.

The employee owns the policy and bears the responsibility for keeping it in force. He or she can borrow against, and sometimes withdraw from, the cash value for any purpose; and if the policy is in force at the time of death, the employee’s named beneficiaries will receive the death benefit, minus any outstanding loans. (Loans will reduce the policy’s cash value and death benefit, could increase the chance that the policy will lapse, and might result in a tax liability if the policy terminates before the death of the insured.)

Succession Plans

Business partners often hold life insurance to fund buy-sell agreements. The death benefit can be used to purchase the business interests of the deceased partner from his or her heirs.