How new independent contractor standards affect your business

The Department of Labor (DOL) recently released a 15-page memo describing its standards for determining whether a worker is an employee or an independent contractor.

Worker classification affects whether businesses must provide overtime and other labor benefits, pay state and federal payroll taxes on wages paid to their workers, and offer healthcare under the "Affordable Care Act."

As a result, government agencies, including the DOL and IRS, are increasingly scrutinizing how businesses classify their workers.

What you need to know

Under the DOL’s new guidance, workers will not be treated as independent contractors simply because the business labels or treats the workers as contractors. Instead, the DOL will examine the “economic realities” to determine whether the worker is economically dependent on the employer —meaning the worker is an employee — or is truly in business for him or herself, which means the worker is an independent contractor. The DOL considers some of the following factors in making its determination:

Whether the individual’s work is an integral part of the business.

Whether the worker exercises managerial skills and has the ability to determine his or her profit and loss.

The extent of the worker’s investment in the business activity compared to that of the employer.

Whether the worker has the skills, initiative and judgment to operate an independent business.

The permanence and duration of the relationship.

The employer’s ability to control how the worker performs the job.

In applying these factors, the DOL takes a very broad and expansive view of who qualifies as an employee. Not surprisingly, the DOL concludes that most workers are employees and are entitled to federal labor law protection.

If the DOL audits a business and determines that workers are actually employees, the business may face overtime, back wages and numerous other claims from its workers. In addition, because the DOL shares information with the IRS and state agencies, the employer may be subject to examination by these agencies and incur liability for other past-due benefits, taxes and penalties.

Different standards

While the DOL uses “economic realities” to determine employment status, other government agencies apply different tests. For example, in determining whether an employer must pay federal employment taxes, the IRS focuses on the employer’s right to control or direct the worker.

State agencies often have their own tests for state unemployment and worker’s compensation laws. Because each agency has its own standards for determining who is an employee, it can be difficult and frustrating for a business trying to properly classify its workers and avoid the unfortunate and unpleasant consequences of misclassifying employees as independent contractors.

While many businesses attempt to classify workers as independent contractors in order to lower costs, they may discover that the practice can lead to some very costly results. As government agencies continue to scrutinize how businesses categorize their workers, employers should closely examine their worker classification to ensure that they comply with federal and state laws.

Older Families Can Take Action to Lower Their Tax Bill

There are many tax savings that are available to older families. Such tax breaks can be achieved in several areas, including work, car and home, estate planning, medical expenses and rental property.

In terms of realizing savings at work, a hefty tax refund implies that an excessive amount of tax is being withheld from one’s paycheck. One can correct this by filing a new W-4 form with one’s employer. There are also savings to be had regarding the payment of medical expenses. Some employers offer a medical reimbursement account, or flexible spending account (FSA) that allows employees to contribute part of their salary to an account that they can then use to pay medical bills. In so doing, one can use pre-tax dollars to pay for medical expenses, and thus avoid paying income and Social Security tax on those funds, thereby realizing a savings of 20 to 35 percent.

Taking steps to save money on taxes now will help to ensure that there is more in one’s estate that will be left for one’s beneficiaries.

Working from home also has its tax advantages. Regular and exclusive use of part of the home for one’s business can qualify one to deduct certain costs as home-office expenses. Among these are home maintenance expenses, utility bills and insurance premiums. And in lieu of listing actual expenses, one can now claim the home office deduction by deducting $5 per square foot, up to a limit of 300 square feet, for a total of $1,500.

When creating an estate plan for one's heirs, it is important to make certain that the beneficiary designations in one’s IRAs and 401(k)s are current. It could be very costly if an IRA or 401(k) is left to one’s estate instead of a designated beneficiary.

Another tax savings is one that is associated with an inherited 401(k) plan. The beneficiary can roll over the plan into an IRA and extend payouts as well as their taxes over his or her lifetime. The previous rules provided only a five-year time limit within which to cash out the account and pay all taxes. However, in order to qualify for this 401(k) tax savings, one is required to be designated as the beneficiary. If the plan is left to the owner’s estate and subsequently to the beneficiary, then the prior five-year rule will be applied.

6 secrets to your best retirement plan

Let's face the facts...most people are not saving enough for their retirement.  If this is you (or someone you know), here are some tips for helping create the best retirement possible with the resources based on the resources you do accumulate:

1. Trifecta Investment Strategy.  At the center of our Trifecta Investment Strategy is post retirement income tax control.  Most people think of retirement planning on a single plane- traditional retirement accounts such as 401ks or IRAs.  After all, you get a tax deduction for your contribution and tax deferred growth on earnings and growth.  But during retirement, you have little control over taxes because all withdrawals are taxed as ordinary income.  With the trifecta investment strategy, you also create a personal investment account and, if possible, a Roth IRA.  With these three accounts in place, we can do trial income tax returns and decide where best to withdraw funds in order to minimize taxes for this and future years. 
2. Downsize your home.  At retirement, if you are not debt free, we often recommend that you downsize your home and use your equity to purchase a smaller home with no debt.  If this is not possible, consider selling your home and renting instead.  A lot of people don't think of renting but it can be a good strategy.  No maintenance, no yard upkeep, no property taxes, much lower insurance costs and reasonably predictable expenses.
3. Home Bonus Strategy.  Assuming at retirement you own your home debt free, consider using a reverse mortgage to create a guaranteed lifetime monthly payment to you.  Once the home is sold, any equity goes to either you or your heirs.  No matter how much you receive in tax free payments, you (and your heirs) can never owe the mortgage company money. 
4. Growth Strategy with a Safety Net®.  This is a portfolio management strategy whereby you divide your investments into two different 'buckets'.  The safety net portion goes into a combination of money market savings, CDs and bonds and is enough money to cover five to ten years or more of annual cash flow needs (what you need to pay your bills).  The remainder is invested in a diversified basket of blue chip dividend-paying stocks.  As your stocks grow over time, be sure to 'replenish' the money in your safety net bucket.
5. Keep making money.  Retirement is overrated!  If you like your work, your best retirement strategy is to not retire.  Often you can negotiate more time off for less pay and your company is happy to retain a seasoned employee.  Another choice is to start a new career.   I've seen lots of people turn a hobby into a money-making venture during retirement.  They are having a blast and making some money to supplement their retirement income.  In retirement, a little extra money can go a long way.
6. Delay Social Security.  If you have good health, delaying Social Security can be a great strategy.  Full retirement age for most retirees today is age sixty-six.  For every year that you delay, you receive an 8% increase in your monthly payments.  This can boost Social Security payments by more than 30% for the rest of your life.  And remember, Social Security payments are periodically adjusted higher for inflation.

If you're still working my best advice is 'save, save, save' (using our trifecta strategy) and pay attention to keeping your debt under control.  If you can, avoid borrowing money to purchase things that will go down in value and set a minimum target of being debt free by your retirement date.  By taking control of your financial destiny, you can help create a great retirement experience.

Estate planning and business transition quite different

Business and asset owners (including farming operations), at some point in their career lives, must ask the eternal question, “What happens when I’m gone?” Answering this question is critical to understanding and planning for the disposition of assets both before and after death.

Two things are discussed often. One is estate planning, and the other is businesses transition. Many times these two processes are thought to be the same. Actually, they are very different.

Estate planning involves the transfer of wealth and assets of an individual, both personal and business related, from one person to another person or entity. It is important to note that estate planning does not need to pass assets to an individual. In some cases, business asset (tangible and intangible) ownership is transferred to a legal entity, such as a corporation, limited liability company, or a trust.

The myth that only old people or rich people need to have an estate plan is short-sighted. You never know when you might become incapacitated or suffer a premature death.

We avoid discussing estate planning because it forces us to consider our own mortality, greatly postponing the process. Even for the young, who might not have acquired much wealth, the planning process considers the disposition of assets and interest they might not know exist, such as being an insurance beneficiary to a living parent, or intended guardians for young children.

If you have anything of value and an intention for the passage of that asset or interest after your death, you need an estate plan.

Business transition involves the transfer of a business asset or entity from an existing owner seeking to exit, to new ownership. The new owner need not be younger than the existing owner to qualify as a business transfer.

Typically, the transfer of a business occurs during the life of the existing owner. When the transfer of a business occurs post-mortem, it typically occurs through an existing or implied estate plan or asset transfer process. The process of business transfer is often dynamic, involving multiple steps, depending on the wishes of the existing owner.

It is possible that the investment and asset transfer can take a short period, or a very long period, depending on the valuation of the business and the resources of the transferee. The transfer of the tangible and intangible assets can take place through cash purchase of individual items, purchase of share interest, and/or purchase of stock or certificates.

There are a number of similarities between estate plans and transition plans; however, the greatest difference is timing of the transfer. Estate plans consider the transfer of tangible and intangible assets and interests beyond the life of the owner, while the business transfer plan considers transfers during the life of the owner. Neither functions in a vacuum, nor is intended to be a replacement for the other. Instead, they work together, often in tandem, to fulfill the wishes of the business owner.

Retirement Planning: 3 ways to outsmart Uncle Sam

FROM BANKRATE.COM

Creating retirement security isn't easy -- even for 61-year-old financial planning expert David Littell, retirement income program director at The American College.

Littell is looking forward to a long life. His father is 103 and was recently kicked out of Medicare's hospice program because he recovered from an ailment and Medicare considered him too healthy to qualify for hospice care.

"I have a lot of anxiety about retirement planning because I know a lot. I know that I have no idea what my retirement is going to cost. Will I spend 10 years in a nursing home or will I die at 70? That is what creates anxiety for me," Littell says.

Littell's hedge: Manage money well and keep the IRS at bay. He shares three tax tricks that you don't have to be a multi-millionaire to appreciate.

Understand thoroughly the value of your Social Security. 

Social Security is probably your most valuable asset, even if you have significant savings and a pension. Littell illustrates the value of Social Security by calculating its present value. For instance, the average Social Security benefit is $1,200 a month, which makes the average present value -- monthly benefit multiplied by an estimated average life span -- roughly $288,000. Littell points out this is more than double what most people have saved. (He doesn't discount for inflation because of the built-in cost of living adjustment).

This makes waiting to collect Social Security a financially wise decision. Littell calculates that, "Working two years longer has more impact on retirement security than saving 3 percent more in the five years prior to retirement." In sum, he points out that Social Security benefits are worth 76 percent more at age 70 than they are at age 62, and this inflation-adjusted annuity pays for as long as you live. Plus your spouse will get the higher of the two annuities for as long as he or she lives. You can't get a deal like that anywhere else.

While you wait, spend savings.
If you want to retire before you are able to maximize your Social Security, Littell says it often makes good tax sense to spend your savings first -- particularly if you have a tax-advantaged account like an IRA or a 401(k). This isn't an intuitive decision, he admits. It makes a lot of people nervous to spend up their savings. But it works, he says, because only up to 85 percent of Social Security income is subject to federal taxes. If you spend your taxable savings before you begin collecting Social Security, you'll pay taxes at a lower rate than you would if you wait and pile taxable income on top of Social Security. Then by the time you take Social Security, you can withdraw less from your taxable accounts, so you will pay fewer taxes on the combination of income, and that will help preserve what remains of your nest egg. Overall, Uncle Sam will get less and you'll keep more, Littell says.

Take advantage of low-tax years to convert to a Roth.

 If you have a year when you didn't make much money -- because you left work for part of the year, you started a new business or you made considerable charitable contributions -- that's the time to convert some of your pre-tax retirement savings to a Roth IRA. Converting when your tax rates are low will result in a tax-free stream of money as you age. As Littell points out, "The Roth IRA  makes a great contingency account." If you need to withdraw money in an emergency situation, it won't drive up your taxes. There are no required minimum distributions during the life of the account owner, and if you don't need the money during your lifetime, it is a tax-efficient way to leave money to heirs.

The bottom line for smart retirement planners, Littell says: "Figure out how to get as much money as you can out of your tax-deferred plan at a lower than normal rate."

Smart tax moves to make now

 No one wants to think about taxes, but thinking about it now, rather than next April can save you money.

Mid-year Financial Assessment

Consider any income events this year that could benefit from planning before year-end. A bonus or new job with higher pay, investment gains or Roth IRA conversion, for example, could potentially push you into a higher marginal tax bracket. Joint filers with an adjusted gross income exceeding $250,000 could also find themselves subject to the additional 3.8 percent net investment income tax and 0.9 percent Medicare tax.

Deductible retirement contributions.

It's an easy first resort to reduce taxable income. For 2015, you can contribute up to $18,000 into a 401(k) or 403(b) plan, with an extra $6,000 in catch-up contributions possible for people are 50 and older. Traditional IRA contributions may also be deductible, depending on your modified adjusted gross income and whether you (or your spouse) are covered by a retirement plan at work. For 2015, those contributions max out at $5,500, plus an extra $1,000 for people age 50 or older. Small business owners may evaluate various retirement plan vehicles depending on their business structure and goals. A SEP IRA retirement plan account that can be funded for 2015 up until their tax filing deadline (including extensions). Simple IRA retirement plans must be established by October 1st for the current year. Fund a Health Savings Account (if applicable) A Health Savings Account (HSA) combines High Deductible Health Plan (HDHP) insurance with a tax-favored savings account similar to a medical flex spending account but with advantages. If you are eligible, an HSA may allow for lump-sum deposits or increased contributions up to the maximum $6,650 in 2015 for families, plus an extra $1,000 for people age 55 and older. Contributions reduce taxable income and allow tax-free withdrawals for eligible medical expenses.

Realizing a Tax Loss

Review your non-retirement investment holdings and consider realizing (selling) investments that are currently at a loss. Taxpayers can use this strategy to offset / reduce their capital gains. Even if you don't have realized gains for the year, you can deduct up to $3,000 in capital losses against other income and carry forward any remaining losses into future years. Note -- Be aware of wash-sale rules that restrict repurchasing the same investment within 30 days to be eligible for the tax deduction.

Charitable Contributions

Helping others and reducing your taxes is a true win – win. If you itemize deductions on your tax return, charitable contributions can directly reduce your taxable income (subject to certain limits). To benefit even further, consider gifting appreciated investments held longer than 12 months that you can gift to your 501(c)3 non-profit and avoid the capital gains tax that would normally have been paid while taking the full market value of the security as the donation. Donor-advised funds may be another appealing option, letting you take a deduction this year and decide in future years how that donation will be distributed.

Withdrawing From a 401(k)

You contributed to a 401(k) retirement plan for years and your employer added some matching funds. Now that you’re ready to retire it’s time to think about how to withdraw your money.

Two sets of rules govern your 401(k). Both the Internal Revenue Service and yourplan administrator (probably your employer) oversee what you can do with the account. The IRS controls how your choices affect your taxes, the administrator how you invest and can withdraw assets.

If you’re 59½ or older, you can withdraw funds from your 401(k) without paying a tax penalty (generally 10% of what you take out). Under some circumstancesinvolved in leaving a job, you can also withdraw a lump sum penalty-free if you’re older than 55.

Note: You avoid penalties, not ordinary income taxes. Some retirees delay taking withdrawals as long as possible, often to help savings compound safe from taxes.

Beginning the year you turn 70½, you must begin taking annual required minimum distribution (RMD) withdrawals. The amount is related to your life expectancy. To estimate your RMD, divide one by the number of years of your life expectancy, according to the IRS, and multiply that by the value of the assets in your 401(k).

Most financial advisors recommend that you take your money out of the 401(k) once you retire, either as a one-time distribution or as a rollover (a penalty-free transfer) into an individual retirement account. You avoid plan fees and gain greater flexibility in investing your funds.

If you decide to keep your money in the 401(k), you must adhere to the rules affecting both your options for distribution and your investment choices. Check with your plan administrator to find out how to take out your money; most will allow you to make periodic or regularly scheduled withdrawals. Other rules may also cover your RMDs or when and how often you can change your distribution options.

Again, withdrawals will be added to your taxable income unless you roll them over into a qualifying IRA. (Check the IRS chart to see how to safely transfer money from one kind of retirement account to another.)

Rolling into an IRA may well be your best choice: You have lower fees, more investment choices and similar distribution rules but can still let your money compound tax-free.

If you plan to take your distribution in cash, do some tax planning. Taking a regular distribution will allow you to spread the taxes and keep you in the lower tax brackets. Taking a lump-sum distribution might throw you into a higher bracket designed for the wealthy; your distribution will also incur a 20% withholding that you can apply to your next year’s tax bill.

A popular option is to take part or all of your distributed funds and buy an annuityto provide steady retirement income. Annuities come in various types. Retirees tend to prefer ones that provide guaranteed lifetime payouts.

Proponents point out that with an annuity you can’t outlive your money. You need to realize, though, that not all annuities are indexed for inflation (currently less than 1%). Your monthly guarantee might look good today yet buy much less in 20 years if prices rise.

You face the culmination of years of saving, and your moves will affect your finances for the rest of your life. You must think about many variables: how much you saved; your investment philosophy; your income needs, expected longevity and tax situation. Even your children’s financial situation can sway your decision.

No one choice suits everyone.