Archive for the ‘Tax Articles’ Category

FICA stands for the Federal Insurance Contributions Act.  It is a federal employment tax paid by both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, the disabled, and children of deceased workers.

Social Security benefits include old-age, survivors, and disability insurance. Medicare provides hospital insurance benefits. The amount that a person pays in taxes throughout that person’s working career is indirectly tied to the social security benefits annuity received as a retiree.

Unless the worker is an independent contractor, the answer is always!

There are specific criteria to determine if a worker is an employee or an independent contractor. The key word in that sentence is “independent.”  The most important factor is who is in control.  This is covered in more detail in our March 2010 article Employee or Independent Contractor?

But there are several other issues that can also trip you up.

Do you hate paperwork? Almost everyone does, but when it come to dealing with the Internal Revenue Service, you need to have all the proper paperwork and have all the i’s dotted and the t’s crossed.

When you operate as a corporation, the corporation is a separate legal entity from you, so you should have a corporate paper trail that clearly reflects intent and action. One area that can really be a minefield is accounting for monies paid to corporate officers, other than payroll.

Is it a Loan or a Dividend?

In one scenario, William H. Bruecher III paid more than $27,000 in taxes on money his corporation supposedly loaned to him. Instead of receiving a salary, the corporation paid his personal expenses, classifying the payments as advances.

In an audit, the IRS will check to see if such advances are loans or dividends. If repayment by the owner and collection by the corporation seem assured, the advance is a loan.

To decide whether there is intent to repay, the following are factors:

• Is there a promissory notes or other written promises to repay the advance?
• Is the interest charged on the advance?
• Is there collateral to ensure repayment?
• Is there a history of repayment?

Neither Mr. Bruecher nor his corporation could produce documentation of any of these factors; therefore, the advances were taxable dividends.

If you are a small business owner there could be many financial benefits to hiring your child. If your business is a sole proprietorship, you pay no payroll taxes on your child’s wages if that child is under age 18.  Your child could pay no payroll taxes and no federal income taxes if wages do not exceed the 2010 standard deduction of $5,700 for a single taxpayer.

Record keeping is crucial. You need accurate records showing hours works and tasks performed.  The wages must be reasonable – what would you pay someone else? Keep records showing the wages were actually paid to your child.

Be sure to check with your CPA before hiring your child to understand the implications for all federal and state taxes you and your child may incur. Other rules govern corporations, partnerships and limited liability companies (LLCs).

Recent tax law changes have made it possible to convert your traditional IRA to a Roth IRA. As of January 1, 2010, the income requirement for conversions or rollovers of traditional IRAs to Roth IRAs has been eliminated.

But just because you can do something does not mean you should do it. There are always pros and cons. There are also many factors to consider when making this decision. How old are you? What is the amount of the investment and how is it invested? Will the funds be needed for retirement income or will they be part of the estate? How would the conversion affect your tax situation and retirement and estate planning.

You should always discuss decisions like these with your CPA and financial planner.