Monday, October 15, 2007

401 K’s are available for the one person business (Sole Proprietor, Corporation or LLC) and should be considered

This article was written by Dick Ginnaty, CPA

Since 2002 the big corporation benefit of the 401 K contribution has been available to the one person sole proprietorship, or single employee corporation, or single member LLC. For 2007, the maximum contribution to the plans including the Company’s portion (up to 25% of compensation) for those earning $50,000 is $24,794 for the self employed, and $28,000 for corporate owner/employees. If the person is over 50 then another $5,000 can be contributed. That’s a big contribution in anybodies language.

The plans have to be established before year end to qualify (employee contributions have to be deducted from their pay) but the employer contribution can be deferred until filing of the entity’s tax return.

Be aware that there are some administrative expenses which should be investigated before committing to the plan but they should be fairly nominal. Specifically, once the plan assets exceed $250,000 the plan has to file a tax return (a form 5500).

A couple of additional features of the 401K plan make it more appealing than some of the other retirement plan options (IRAs, or Simple IRAs). As a 401 K plan, you can rollover balances from other retirement plans to the 401 K and you can set up a “loan” option on the 401 K balance. Under the loan option, you can borrow up to $50,000 from your 401 K plan (limited to 50% of the balance in the plan).

Also, if you employ your spouse, further contributions can be made on their behalf.

The plan works for partnerships or multiple member LLCs or multiple shareholder corporations as long as all the “employees’ of the entity are the owners or owner’s spouses.

401K’s can be a big help in reducing your current tax bite, so keep them in mind.

Good luck and here’s hoping it “all adds up” for you.

(If there is any area in accounting or tax that you think needs to be addressed in this newsletter please e-mail Dick at Ginnatycpa@aol.com and if it is of general interest, he will address it in future articles).

Test Drive Your New Employees

This article was written by Bern Lefson, SCORE Orange County Management Counselor

Wouldn’t it be wonderful to check out new hires just as would a new car by taking them out for a test drive? Well, it can be done.

In California, employees are presumed to be “at will” which means that employees may be terminated for any reason, so long as it is not illegal. Unless of course, you have employees that work under an employment contract who can then only be terminated for reasons specified in the contract. So, you will generally want to make sure that you do not agree verbally or in writing to limit in some way your power to terminate “at will.” And, you could benefit from including in any employment offer letters a statement that makes it clear that the employment relationship is “at will”.

To enable “new hires” to become as productive as quickly as possible, the initial weeks of their employment can be an important time for managers to ensure that they fully understand their work expectations and the organizational norms. Also, during this time, both the employer and employee have a chance to evaluate each other to determine if this is a good fit for both.

For the employer this is a superb time to evaluate the new hire. To garner the most and best out of this period make certain you do the following:

  • Set out the roadmap. It is important to set expectations for new employees during their first weeks on the job. Expectations can be set by creating goals and objectives that establish direction for the new employee. Plan small wins along the way to help them succeed.
  • Pay attention to the stop signs. Immediately address any wrong behaviors and help educate the new employee on expected company behaviors. Organizational culture is sometimes tricky to learn.
  • Take advantage of the straight lanes. Everyone has strengths. Once a new employee's strengths are discovered, it is important to plug those strengths into organization opportunities. By having a conversation about the person's strengths and observing them in action, you will have a much clearer understanding of how the new assets can be best leveraged.
  • Getting to know you. As you get to know the new employee and they get to know you and the organization, the goal is that both sides will get more comfortable with one another. Take the time to invite the new employee to organizational social events to get to know them outside of work.
  • Drive defensively. There will be times during thisthese early weeks that you will uncover development needs. Make a list and have a conversation with the new employee to discover learning and development opportunities.
  • Use the brakes. New employees may find it hard to learn the organizational nuances and culture, thus leading them down the wrong road. Take time out to check in with the new employee on a consistent basis to see how they feel about how things are going. Communicate, communicate—and then communicate some more.
  • Looking ahead. By looking ahead to future organizational needs, you will be able to determine which role is best for new employees, based on an understanding of their strengths and weaknesses.

Join the Online World – A Message for Small Business Owners

This article was written by Vicki Reynolds, SBA

Social Security’s employer website is your first stop for information on W-2s, electronic filing, verifying Social Security numbers, free software, technical specifications and much more. You can register to use Business Services Online (BSO) at any time at www.socialsecurity.gov/employer.

Through BSO, you can stop doing those paper forms for your wage reports (Forms W-2 and W-3) and start doing them online. You also can file the correction forms (W-2c and W-3c) online. All you need is something you probably already have: a computer and an Internet connection. So save yourself some time and effort, turn your entire wage reporting paperwork processes into just a few keyboard clicks.

Independent Contractor or Employee? Choose Wisely.

Article complements of Dawn D. Fleming, ESQ. of Pre-paid Legal Services at 714-606-3520 or visit www.protectandgrowyourbiz.com.

A letter from the IRS arrives informing you that your business has been selected for a tax examination to determine whether or not your workers have been rightfully treated as independent contractors. At stake is the possibility that your business will owe large sums of money in interest, penalties and back taxes for failure to remit employment tax withholdings to the IRS that you should have deducted from your workers’ paychecks but failed to. Add to these sums the cost of accounting and legal defense fees to protect your interests during the IRS examination. The result could be financially devastating to you and your business. If the business is a corporation and you think the liability limitation will protect you, think again. If the business files for bankruptcy protection the debt is not dischargeable, the IRS debt will haunt you personally. There are ways to prevent this nightmare scenario.

There is no single fact, but rather three categories of inquiry that the IRS reviews to determine the status of a worker. They are (i) behavioral control, (ii) financial control, and (iii) the relationship between the parties. Behavioral control is determined by whether the business has the right to direct and control the work. IRS looks to see the level of instruction and training a worker receives. Does the company dictate how, when or where the work is to be done? What tools and equipment are to be used? Where to purchase supplies? Financial control looks at factors like expense reimbursement, opportunity for profits or losses and whether there is a significant investment by the worker.

The last category may be the most important: the relationship between the parties. Here the inquiry is: how do the business and the worker view each other? If the worker receives employee benefits such as vacation, insurance and retirement, the implication is the worker is an employee. Conversely, however, just because no benefits are received does not mean the worker is an independent contractor. It is important to note that if a written contract between the parties exists, it allows them to demonstrate the intent of the parties to the IRS. The existence of this document alone could save a business from the scenario above by expressly spelling out that a worker is an independent contractor. A well-drafted Independent Contractor Agreement will also incorporate all the factors listed above to cement the position taken by the parties.

Additionally, a safe harbor for businesses exists, called “relief”. A business will not be liable for back taxes, interests and penalties even if the worker is later determined to be an employee as a result of the tax examination. Businesses are eligible for relief from having to pay these back sums if three requirements are met: (i) reasonable basis (ii) substantive consistency; and (iii) reporting consistency. Essentially, if you relied on the tax advice of an accountant or attorney, a Federal Tax court case, an IRS ruling or industry custom as the reason for treating a worker as an independent contractor, then the reasonable basis requirement is met. Substantive consistency means that similarly situated workers are all treated the same. You can’t pick and choose treating some workers as employees and some as independent contractors if they do the same work. You must file a 1099-MISC for each worker unless they earned less than $600. If you file 1099-MISC for some workers, but not others, relief is only available for workers to whom these forms were issued. To make it easier on employers, a business may complete and submit Form SS-8, which requests the IRS to make a determination of the proper classification of a worker. Visit www.irs.gov for more information on this subject.