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Navigating a Changing Tax Environment: Timely Strategies for Today

For decades, the United States had a top marginal tax rate as high as 50%, 70%, and even 90%. As a matter of fact, for the past 50 years there have only been five years, 1988 to 1992, when the top marginal tax rate was less than the current 35% tax rate. Considering the cost of the stimulus plan, soaring U.S. government debt, a $3.72 trillion federal budget, a projected record-breaking $1.6 trillion deficit, expiration of tax cuts that were passed in 2001 and 2003, and proposed tax legislation, income tax rates are sure to increase. As a result, every taxpayer will need to consult with their financial and tax advisers to implement investment and tax strategies that may benefit from a rising tax environment.


Top marginal tax rates for the past 50 years


At the end of 2010, certain federal income tax-reducing measures passed in 2001 and 2003 are set to expire. If these tax cuts are not extended, the two top tax rates of 33% and 35% will rise to 36% and 39.6%, respectively. Additional measures proposed in the President’s budget include limiting the value of certain itemized deductions, such as mortgage interest and charitable contributions; capping the value of deductions by limiting the tax rate for filers who take itemized deductions to 28% instead of 39.6%; raising taxes on capital gains and qualified dividends to 20% from 15% (if the tax cuts are not


extended); and reinstating the 45% estate tax for estates worth more than $3.5 million, versus reverting back to a rate of 55% as we saw in 2001.






Could the tax rates continue to rise beyond 2011? Factoring in the cost of the stimulus, the proposed 2010 and 2011 budgets, and a record federal deficit, many believe tax rates will have to continue to increase.


Accordingly, every investor should consider tax-reducing strategies. Below are potential strategies clients should address with their financial adviser and tax professional.






1. Income Planning Strategies


Accelerate income/postpone deductions. A common income planning strategy in the past was to defer income to later years and take deductions as soon as possible. However, with the expectation that income tax rates will rise, some may want to actually accelerate income so it is earned in 2010 and taxed at historically low rates as opposed to deferring the income to later years when the tax rates could be considerably higher. Conversely, it may make sense to defer certain deductible payments, such as charitable contributions, to a time when they may be worth more when the higher income tax rates take effect.






Tax-loss harvesting. A changing tax environment appears to be following on the heels of a major recession. As a result, taxpayers should spend time trying to identify valuable tax-loss harvesting strategies. For instance, many small businesses incurred a net operating loss in recent years. That loss can be passed down and used to offset the business owner’s income on their personal tax return. The loss can also be carried forward to reduce income in future years. Generally, the value of these losses will be determined by the tax bracket of the owner in the year that he or she is using to offset income. In a rising tax environment, this loss becomes more valuable when income is subject to a higher tax rate.






Take capital gains now. This may be a good time to conduct a thorough “capital review.” Review all capital assets, and estimate the unrealized gains or losses of those investments. With capital gains rates scheduled to increase to 20% if the tax cuts are not extended, it may make sense to take gains now while they would still be taxed at 15%. Conversely, consider deferring capital losses to offset capital gains in a year when they could be worth more due to the increase in capital gain tax. Review other capital assets such as real estate, personal assets and certain business assets that are not depreciable or held for sale (inventory). Also, review certain retirement assets. Although distributions from qualified retirement plans are taxed as ordinary income, there is an exception to employer securities held in an employer-sponsored retirement plan. The appreciation of employer stock held in the plan will be taxed as a capital gain, and not as ordinary income, as long as the appreciated stock is distributed in-kind pursuant to a lump sum distribution.






Some taxpayers could avoid capital gain tax altogether. Married taxpayers with taxable income under $68,000 ($34,000 for single filers) pay no tax on capital gains in tax year 2009 or 2010. After adding in a standard deduction of $11,400 and a personal exemption of $7,300 ($3,650 for each), a married couple could have as much as $86,700 of taxable income but pay no tax on capital gains (capital gains recognized will count toward the income limitation).






2. Investment Strategies






Municipal bonds. The tax-equivalent yield of municipal bonds will increase as the income tax rates do. For someone in the current top tax rate of 35%, a municipal bond paying 3% will have a tax-equivalent yield of 4.6%. If the top tax rate increases next year, as it is now scheduled to do, the tax-equivalent yield of that same bond will increase also.






Tax-efficient mutual funds. Tax-efficient mutual funds with a buy and hold strategy may become more attractive in a rising tax environment. Each year, mutual funds pass short-term gains (taxed at ordinary income rates) and long-term gains (currently taxed as capital gains) on to the mutual fund investors. With the tax rates increasing for ordinary income and capital gains, mutual fund owners may likely pay more in taxes. Managers of tax-efficient mutual funds will look to help reduce short-term gains by potentially minimizing the turnover of the funds’ underlying investments, investing in stocks that pay qualifying dividends, delaying recognition of gains and taking advantage of other tax-hedging strategies.






Growth-oriented stock and mutual funds. For the past several years, dividend-paying stocks have looked attractive because qualifying dividends were taxed at the same 15% rate as capital gains. If the tax cuts passed in 2001 and 2003 expire, dividends will be taxed at the higher ordinary income tax rates in effect at that time. As a result, we could see a shift from dividend-paying stocks and mutual funds to growth-oriented stocks and mutual funds.






Life insurance and variable annuities. For taxpayers who would like to pass an inheritance on to their beneficiaries, life insurance has always been a valuable tool. Since life insurance proceeds payable at death are not subject to an income tax, the value of those proceeds will increase as tax rates rise. If taxpayers are looking for an investment that could benefit themselves instead, annuities would be more attractive. Annuities grow tax-deferred but when the gains are distributed, they will be taxed as ordinary income. However, when capital gain and ordinary income taxes both begin to rise, the tax deferral component of an annuity becomes increasingly more valuable.






3. Retirement Planning Strategies






Maximize retirement plan/IRA contributions. A key benefit to IRAs, 401(k) plans, and other qualified retirement plans is that they grow tax deferred. This benefit becomes more apparent as income taxes increase. Furthermore, the value of ongoing tax-deductible contributions into these plans may increase in a rising tax environment. For someone already in the 35% tax bracket, a $10,000 contribution will save the taxpayer $3,500 in income taxes. Next year, when the top tax rate is 39.6%, that contribution will save the taxpayer $460 more. If tax rates increase, the same contribution may be worth even more. An obvious strategy in an environment of higher taxes would be to increase tax-deductible contributions to IRAs and qualified retirement plans.


Tax Rate Contribution Amount Tax Savings


Roth IRA conversions. A Roth IRA conversion in 2010 may be a good way to hedge against the risk of rising income tax rates. Convert a taxable retirement account to a Roth IRA now and pay taxes while the tax rates are relatively low and while the taxable value of the retirement account may be depressed due to the recent recession. A Roth IRA conversion can also help tax diversify a retirement portfolio. Retirees will have an account that will grow tax-free and will be immune to whatever tax environment they retire into. The Roth IRA distributions are also tax exempt. By being able to supplement retirement income with tax-exempt income, retirees could increase the likelihood of keeping themselves in a lower income tax bracket.






4. Gifting and Estate Planning Strategies






Conduct an estate review. Anticipated changes in the estate tax environment make it imperative to conduct an estate plan review. Effective January 1, 2010, both the estate tax and generation skipping tax were repealed. Both taxes are scheduled to return in 2011 but at more unfavorable rates than in 2009, with estates worth more than $1 million being subject to a 55% estate tax. However, most believe that legislation will be passed this year, retroactive to January 1, 2010, reinstating a $3.5 million estate tax exemption, a 45% estate tax rate, and the “step up” in cost basis. However, the current uncertainty of estate taxes would suggest that wealthy families take an inventory of their estate, determine whether assets are titled properly, and review all estate planning documents, including wills, trusts, and beneficiary designation forms.






Intra-family transfers. Since the tax increases are more likely to affect those in the higher tax brackets, the transfer of assets to family members in a lower tax bracket could become a compelling strategy. The spread between the tax rates of family members will be wider than before, and such a transfer will also reduce the transferor’s taxable estate.






In 2010, an individual can gift $13,000 per person, per year without incurring a federal gift tax. That means a married couple with two children could transfer $52,000 a year to the children without paying a gift tax.






Considering real estate, stocks, mutual funds and other assets have decreased in value in recent years, a wealthy taxpayer may actually be able to transfer a larger portion of their taxable estate to their beneficiaries without paying a gift tax. Furthermore, any subsequent recovery of the loss in value of those transferred assets will be taxed at the beneficiaries’ potentially lower income tax rates.






The use of 529 plans could become more popular in future years, based upon market conditions and the rising cost of college. These college savings plans can have fairly long investment time horizons whereby assets can grow tax deferred and distributions for qualified educational expenses can be taken tax free. Furthermore, individuals can accelerate their annual gift tax exemption and, subject to making the proper affirmative election, take five years’ worth of exemptions in one year. That means a married couple could transfer $130,000 into a 529 plan for each child and pay no gift tax. Finally, wealthy families may wish to pay a child or grandchild’s tuition directly to the school. The payment would reduce their taxable estate but would not result in a gift tax or otherwise reduce or affect their annual gift exclusion amount.






The current low interest rate environment may make grantor retained annuity trusts (GRATs) more appealing. Parents and grandparents may wish to transfer assets, preferably investments that have declined in value or underperformed, to a GRAT. To the extent that the trust assets grow more than 120% of the federal mid-term rate (sometimes referred to as the “hurdle rate”), those gains can be transferred as a gift to the trust beneficiaries tax free.


Annual intra-family transfer limits 2


Conclusion






Although no one can accurately predict what the tax landscape will look like in the next few years and beyond, one thing is certain: tax planning will become a more important part of a taxpayer’s overall strategy. The time to consult with financial and tax advisers is now.


By: Brandon Buckingham, JD, LLM, Advanced Planning Attorney
National Manager Special Markets, John Hancock

Wednesday, October 13, 2010

IRS Issues Final Regulations on New Basis Reporting Requirement; For Investors, Reporting Gains and Losses Gets Easier Starting in 2011

WASHINGTON — The Internal Revenue Service today issued final regulations under a law change that will require reporting of basis and other information by stock brokers and mutual fund companies for most stock purchased in 2011 and all stock purchased in 2012 and later years. The reporting will be to investors and the IRS. This additional reporting will be optional for stock purchased prior to these dates.

“This important reporting change means investors will now receive the information they need to more easily and accurately report their gains and losses,” said IRS Commissioner Doug Shulman. “We will continue to work closely with stakeholder groups to ensure a smooth implementation of the new requirement, which reduces the recordkeeping and paperwork burden for millions of taxpayers.”

These regulations, posted today in the Federal Register, implement a provision in the Energy Improvement and Extension Act of 2008. Among other things, the regulations describe who is subject to this reporting requirement, which transactions are reportable and what information needs to be reported. Besides providing numerous examples, they also adopt a number of comments and suggestions received since the proposed regulations were issued last December.

Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, long used to report sales prices, will be expanded in 2011 to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stock brokers and mutual fund companies will use this form to make these expanded year-end reports. The expanded form will also be used to report whether gain or loss realized on these transactions is long-term (held more than one year) or short-term (held one year or less), a key factor affecting the tax treatment of gain or loss. The expanded form, to be first used for calendar-year 2011 sales, must be filed with the IRS and furnished to investors in early 2012.

The IRS today also announced penalty relief for brokers and custodians for reporting certain transfers of stock in 2011.

The relief is described in Notice 2010-67, which was posted today on IRS.gov.

Tuesday, October 12, 2010

Payroll Tip - Determining A Worker's Status

“Worker” is a broad term covering various types of individuals who provide services. Not all workers are employees, however, and it is the employer's responsibility to determine when the employment status applies. Making a determination can sometimes be difficult, particularly in today's workplace.

There are many types of workers that provide services for employers— leased employees, temporary help agency referrals, independent contractors, common-law employees, statutory employees, and statutory nonemployees. This article describes each and relates the guidelines for determining the status of a worker.

The Employee

An employee, unlike other workers, is paid through the payroll department. This is because the employee is subject to many legal and tax requirements that cannot be effectively administered in the accounts payable area. The payroll function is specialized to handle the unique tax and reporting requirements associated with wage payments.

Leased Employees and Temporary Help Agencies

Employee leasing agencies, also known as professional employer organizations (PEOs), hire employees for the client firm and assume the administrative tasks of payroll and human resources. The client firm has final say over the hiring and firing of the leased employees, sets wage levels, and oversees the work. Leased employees are nevertheless employees of the leasing agency, not of the client firm. The client firm pays the leasing agency through its general fund rather than through the payroll account.

EXAMPLE: Slo Poke Manufacturing leases all 35 of its employees from Workforce Leasing, an employee leasing agency. Slo Poke interviews each candidate referred by Workforce Leasing and makes the final decision to hire. Slo Poke also conducts regular performance appraisals of the leased employees and requests that Workforce Leasing terminate poor performers. Slo Poke Manufacturing pays Workforce Leasing $95,000 per month for the services of the leased employees.

UNEMPLOYMENT EXCEPTION Some states do not recognize the PEO as the employer for state unemployment insurance purposes. In such case, the employer must file unemployment returns and pay unemployment insurance under its own EIN. Check the state requirements.

The benefits of leased employees:

Lower-priced benefits packages. Employers with fewer than 100 employees may have difficulty obtaining favorable group rates for benefits such as health and life insurance. The leasing company, on the other hand, qualifies for reduced group rates because it acts as the employer for several client firms. In addition, the small employer generally cannot afford to invest in full-time employees who are dedicated to the task of administering the payroll and human resources functions. For these reasons, employee leasing agencies are particularly appealing to the small business.
Resource for specialized skills. Leasing companies are sometimes used to fill the need for a specialized group of workers for a particular job, location, or facility.
Cut administrative overhead. Increasingly, large employers are turning to employee leasing agencies for relief from the administrative burden of complying with payroll and employment practice requirements.

Pitfalls to avoid with leased employees and other third-party contractor services:

Leased employees must be on someone's payroll. In the past, agencies would refer “independent contractors” to the client firm. The Tax Reform Act of 1986 clarified that leased employees who provide services to a client as an engineer, designer, drafter, computer programmer, systems analyst, and other similarly skilled worker engaged in a similar line of work must be treated as employees of the leasing company.
Pension and retirement plans. The various IRS regulations that have been adopted to prevent avoidance of employee benefits requirements may require consideration. For instance, the employer may be required to include leased employees in its pension and retirement plans. The additional cost of providing benefits to leased employees should be considered when the contract is negotiated with the leasing agency.
State unemployment. In some states, the leasing company is not recognized as the employer and the client firm may be required to pay state unemployment tax on its leased employees' wages. In these cases, the leasing company will often file the client firm's unemployment tax returns as an agent of the client.
Liability for taxation and reporting. The IRS can hold the client company liable for tax reporting or deposit failures. For this reason it is important to ensure that the leasing company has a history of meeting tax and reporting requirements and that there are periodic checks in place to confirm that the leasing company is filing returns and depositing taxes correctly and on time. (Additionally, funds provided to the third party to meet other payroll obligations may be impounded for debts of the PEO if not insured through a trust instrument.)
Compliance with wage-hour law. Both the client firm and the PEO are jointly responsible for complying with federal and state wage-hour law, including garnishments. In fact, the greatest weight of responsibility lies with the client, because the client firm has direct control of the work schedule, time reporting, etc.

Temporary help agencies: Unlike employee leasing agencies, temporary help agencies do not hire employees for lease to a specific client firm. Instead, employees are hired by the temporary agency to provide short-term services for many client companies. The client firm does not have the final say over the hiring and firing of the temporary agency's employees, although the services of a specific temporary employee may be requested. The temporary agency referral is an employee of the temporary agency and not the client firm. The temporary help agency assumes the payroll and human resources responsibilities.

EXAMPLE: AB Pharmaceutical needs assistance preparing Forms W-2 for distribution. The payroll manager calls Rent-a-Temp for one week of temporary assistance. Rent-a-Temp sends its employee Joan Smith. AB Pharmaceutical will pay $500 to Rent-a-Temp for one week of Joan's services. Joan will be assigned to a new client firm when her assignment with AB Pharmaceutical is completed.

The benefits of temporary help agency referrals:

Eliminate risk of unemployment claims. Many employers find temporary help agencies cost-effective when employees are needed for short-term projects. By using a temporary help agency, the employer can terminate the employment relationship at the end of the project without a potential liability for benefit charges to its unemployment account.

BUYER BEWARE If the employee leasing agency or temporary help agency should fail to pay its federal payroll taxes or if a settlement liability is incurred as a result of a federal/state labor law violation, the client business, not the temporary help or leasing agency, may be forced to pay the underwithheld tax, employer taxes, penalty, and interest. This would be true, for example, if an employee leasing agency or temporary help agency were to file for bankruptcy. It is important that employers do business with agencies that have well established reputations and are financially stable. An individual or a department within the organization, such as human resources, should conduct a careful review of leasing or temporary help agencies before engaging their services. In addition, all supervisors and department heads should clear requests for temporary help or leased employees through the individual or department within the organization responsible for agency review and selection.

Employees may be entitled to participate in the benefit plans of both the client firm and the temp agency: A 1999 refusal by the Supreme Court to hear Microsoft's appeal of a federal court ruling has increased the possibility that client firms may be required to permit employees of temporary help agencies to participate in their fringe benefit plans.

The facts of the case. The U.S. Court of Appeals for the Ninth Circuit ruled in May 1999 that all Microsoft workers since December 29, 1986 who worked at least 20 hours per week for five months of the year and met the common-law definition of an employee should be allowed to continue their claims against the company for benefits under certain of Microsoft's fringe benefit plans. In its appeal, Microsoft argued that the U.S. Court of Appeals decision covered too broad a class of former workers and by doing so gave individuals employed by temporary employment agencies access to double the benefits—benefits through the temp agency and also through its plans.

The refusal of the Supreme Court to review Microsoft's appeal has temporary employment agencies concerned that client firms will be reluctant to use their services because of the risk of incurring additional fringe benefit costs. In a “friend of the court” brief supporting Microsoft's appeal, the Information Technology Association of America, the American Staffing Association, the Association of Private Pension and Welfare Plans, and the U.S. Chamber of Commerce, among others, argued that the appeals court decision that temporary service employees may be considered employed by both the agency and the company contracting with the agency violates the Employee Retirement Income Security Act. According to the brief, the decision “exposes the thousands of businesses that use staffing firm employees for legitimate business reasons to lawsuits for retroactive employee benefit coverage by plaintiffs looking for a windfall.”

The case was returned to the U.S. District Court in Seattle for a determination of the number of temporary workers that will benefit from the court decision and the amount of compensation owed them.

IRS provides guidance on the exclusion of reclassified workers from employer benefit plans: The IRS unofficially released a technical advice memorandum (TAM) in response to a request from the IRS Cincinnati key District Office, in which it concludes that individuals, including those later reclassified as common-law employees, can be excluded from participation in an employer's pension plan. A TAM is advice or guidance in the form of a memorandum furnished by the IRS National Office upon the request of a district director or appeals office chief in response to any technical or procedural question that develops during any proceeding. While a TAM is requested by the District Office or Appeals, a taxpayer may request that the District Office obtain a TAM. A TAM is generally binding on the District Office or Appeals but is not binding on the taxpayer; however, TAMs are useful in understanding IRS thinking on the issues raised.

The facts. The taxpayer had two pension plans, amended in 1998, that included a clause stating that to be eligible under the plans, an individual must be “reported on the payroll records” as a common-law employee. Further, the plans specifically excluded "any other common law employee or any leased employee,” and stated that "individuals not treated as common law employees are to be excluded even if a court or administrative agency determines that such individuals are common law employees and not independent contractors.”One of the plans also excluded individuals classified as “special assignment” workers from pension plan participation. The special assignment classification included two types of workers: (1) those hired to perform work on specific contracts with specific deadlines for specific compensation and benefits, and (2) salaried union employees who had been laid off and were on an "inactive seniority” list. The second category would be rehired for project work for a set period of time and were not entitled to participate in the retirement plan.
IRS conclusion. In its memorandum, the IRS concluded that [IRC §410(a)] does not prohibit employers from excluding from retirement plan participation whichever classifications of employees it chooses to exclude, unless, with limited exceptions, the exclusions are based on age or service. Similarly, IRS regulations do not preclude an employer from placing conditions on participation, unless, as stated previously, these conditions are based on age or service. In fact, IRS regulations permit an employer to condition participation on "those employees being employed within a specific job classification.”

The IRS commented that many employers have amended their retirement plans in the wake of the decision in Vizcaino v. Microsoft in an attempt to protect their plans against the uncertainty that may be created by retroactive IRS determinations that workers are common law employees rather than independent contractors. In the Microsoft case, workers who were initially classified as independent contractors were later determined by the IRS to be common-law employees for employment tax purposes. As a result, the workers claimed benefits under Microsoft's benefit plans, including Microsoft's §401(k) plan. Microsoft's §401(k) plan limited participation to employees on its U.S. payroll.

The Ninth Circuit concluded that because the workers were reclassified as common-law employees they were eligible, under the plan's terms, to participate in the §401(k) plan. Subsequent appeals by Microsoft have been unsuccessful in overturning this decision.

In conclusion, the IRS ruled that the taxpayer's two retirement plans could be designed to exclude from participation employees who were either not reported on the company's payroll records as common-law employees, even if a court or administrative agency later determines such individuals to be common-law employees, and those individuals identified by a specified job classification code in the employer's payroll records. The IRS also held that the taxpayer's retirement plans met the definite written plan requirement under the Internal Revenue Code because the identification of who is included or excluded under the plan could be clearly understood by the company's employees, the plan administrator, and the plan fiduciaries.

Independent Contractors

Unlike employees, independent contractors carry on an independent trade or business, generally providing services for (and actively seeking work from) more than one employer. In most cases, the services provided by an independent contractor, unlike those provided by an employee, are not integral to the employer's primary business.

EXAMPLE: Sam's bakery engaged the services of an independent contractor to repair and maintain the heating and cooling system on a monthly basis. Sam's primary business is the preparation and distribution of baked goods. The heating and cooling system is merely incidental to the primary business of the bakery.

The independent contractor is in fact independent. Unlike the leased employee or temporary help agency referral, the independent contractor is an employee of no other entity. Rather, the independent contractor is “self-employed” or is an “employer.”

The designation of “independent contractor” is often applied loosely to workers who are in fact “employees.”Although there are no clear guidelines for distinguishing an employee from an independent contractor, definitions and general rules are offered by various federal and state agencies. It should be emphasized that governmental agencies always favor the employee designation; therefore, the employer must provide compelling proof that workers are properly designated as independent contractors.

Independent Contractor vs. Employee

What is the difference between an employee and an independent contractor? For government agencies, the big difference is revenue. Studies by the General Accounting Office (GAO) have shown that the U.S. Treasury Department loses billions of dollars in annual tax revenue due to worker misclassification. This loss of revenue is precisely why government agencies are cracking down on employers that misuse the independent contractor designation.

There are other important differences as well.

Employees:

•An employee generally is covered by federal and state wage-hour laws (see Chapter 4 of Principles of Payroll Administration).
•The employer generally is required to pay the applicable employer portion of Social Security and Medicare (FICA) tax and withhold the employee portion of FICA tax from employees.
•The employer generally is required to withhold federal, state, and local income tax from the wages of employees.
•The employer generally is required to report wages and taxes withheld from employees on the Form W-2 and other wage and tax returns.
•The employer is required to pay any applicable federal and state unemployment/disability insurance taxes.
•The employer is required to deposit taxes with the IRS and other taxing authorities under the applicable depository regulations.

Independent contractors:

•Any “fees” or payments of $600 or more in a calendar year are reported by the payer on Form 1099-MISC. (Most states impose the same or a similar reporting requirement.)
•If the independent contractor has not provided a taxpayer identification number (TIN) to the payer, a 28% (for 2009 and 2010) backup tax must be withheld by the payer (on payments of $600 or more in the year) and submitted to the IRS under the depository regulations.
•The independent contractor is responsible for the payment and reporting of the applicable state and local taxes; federal income tax (FIT); and tax under the Self-Employment Contributions Act (SECA) which is currently equal to the employee and employer portion of Social Security and Medicare.

Common-Law Employee vs. Statutory Employee

Common-law employee: A common-law employee is one who meets the common-law test. The employer is required to withhold FIT and FICA tax from the “wages” paid to common-law employees. In addition, the employer is required to pay federal (and state) unemployment tax and its share of FICA tax on the taxable amount.

Statutory employee: Payments made to statutory employees are not subject to federal income tax withholding but are subject to FICA withholding. In addition, the employer is required to pay federal unemployment tax (FUTA) and its share of FICA on the taxable amount.

A “statutory employee” is any individual who falls into one of the following categories:

•A driver who is an agent of the employer or is paid on a commission basis, who distributes meat, vegetables, fruit, baked goods, or beverages (other than milk) or picks up and delivers laundry or dry cleaning.
•A full-time life insurance sales agent, whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company; however, if these individuals are paid strictly on a commission basis, their commissions may be exempt from FUTA.
•Certain homeworkers, who work at home on materials or goods the employer supplies. The work must be returned to the employer or to a person the employer names. The employer provides the specifications for the work that is to be done by the homeworker.
•A full-time traveling or city salesperson, who works on the employer's behalf and takes orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed by the salesperson must be his or her principal activity.

NOTE Statutory employees under [IRC §3121(d)(3)] are independent contractors for all purposes other than Social Security and Medicare taxes. This means that they report their income and expenses on Schedule C, and are not subject to the limitations that pertain to employer-reimbursed business expenses. If workers are common-law employees, they are not statutory employees merely because they provide the type of service described in [IRC §3121(d)(3)] or merely because the employer checked the “statutory employee” indicator in box 13 of the Form W-2. These common-law employees (i.e., workers who provide the type of service described in [IRC §3121(d)(3)] but otherwise meet the definition of a common-law employee) often request that employers check the “statutory employee” box because they would like to report their business expenses on Schedule C rather than itemize their deductions on Schedule A.

Statutory nonemployees: The employer is not required to withhold FIT or FICA taxes from payments made to statutory nonemployees, nor are the payments subject to FUTA tax.

There are two groups of employees meeting the definition of statutory nonemployee—direct sellers and licensed real estate agents. These workers are treated as self-employed for federal income and SECA tax purposes if:

1.substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other achievements, rather than to the number of hours worked; and
2.the services of the real estate agents are performed under a written contract that stipulates that they will not be treated as employees for employment tax purposes (e.g., FIT, FICA, and FUTA).

•Direct sellers.Direct sellers are people engaged in (1) selling consumer products in the home or at the place of business other than a permanent retail establishment, or (2) selling consumer products to any buyer on a buy-sell basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment. (Most states do not exempt these individuals from state unemployment tax.)

Effective January 1, 1996, a person engaged in the trade or business of the delivery or distribution of newspapers or shopping news (including any services that are directly related to such trade or business such as solicitation of customers or collection of receipts) is a direct seller. Wages paid to him or her are exempt from employment tax provided that (1) substantially all the compensation for the performance of the services is directly related to sales or other output rather than to the number of hours worked, (2) the services performed by the person are performed pursuant to a written contract between such person and the service recipient, and (3) such contract provides that the person will not be treated as an employee for federal tax purposes.

•Licensed real estate agents. Licensed real estate agents include individuals engaged in appraisal activities for real estate sales if they earn compensation based on sales or other achievements.

Wednesday, October 6, 2010

Tuesday, October 5, 2010

Should You Invest in Life Insurance?

The purpose of life insurance is to provide a source of income, in case of your death, for your children, dependents, or other beneficiaries. (Life insurance can also serve certain estate planning purposes, which we won't go into here.)

Whether you need to buy life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, you probably need life insurance.

Life insurance protects your family in the event of death. Most people do not have the right amount of insurance. It is important to determine the amount that suits your needs.

There are two basic types: term and permanent. Term insurance is simply insurance that covers a specified period. If you die within this time frame, your beneficiary receives the insurance benefit. Term policy premiums usually increase with age.

Permanent insurance, such as universal life, variable life, and whole life, contains a cash value account or an investment element to the insurance.

Rules of Thumb

  • The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.

Tip: If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap.
  • If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping, etc.). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance for the wage earner.
  • If your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.
Tip: At a minimum, you will want to provide for burial expenses and paying off your debts.

  • If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.
We can help you determine the proper amount of life insurance. Give us a call and we'll discuss your situation.

Friday, October 1, 2010

American Workers $6 Trillion Short

A new study conducted by Boston College’s Center for Retirement Research states that Americans are $6.6 trillion short of what they need to fund their retirement, due in part to declines in stock and housing values.

The study, based on American workers ages 32-64, used conservative assumptions including: a 3% rate of return on assets, no further cuts in pension coverage or Social Security benefits, and no increase in the age of retirement. While 3% may be appropriate for this study, most people are still thinking in terms of 5%, 6% or even 8% returns, and these may not be attainable as long-term returns with conservative investments.

What does this mean? No, it’s not time to panic, but it does means these workers need to become more self reliant in their retirement planning. This includes the use of insurance-based products such as annuities to provide underlying guarantees for lifetime income, and life insurance for capital and income replacement in the event of an early death.

Start planning today. Your retirement future and security is up to you.
 

by Marvin H. Feldman, CLU, ChFC, RFC, President and CEO of the LIFE Foundation