Q & A

“Taxed” by Self-Employment?
A Growing Trend – Women Entrepreneurs?
Boy? Girl? Or Tuition Payment?
How Much Life Insurance Do You Really Need?
ID Theft—How Does It Happen?
Do You Owe Estimated Taxes?
Who Benefits from the Zero Percent Capital Gains Tax Rate?
Your Retirement Plan—Ready to Roll(Over)?


“Taxed” by Self-Employment?

Along with the independence of entrepreneurship comes responsibility and, for many business owners, that means paying self-employment tax (SE tax) in addition to regular tax. You are considered self-employed if you run your business either by yourself or with a partner. SE tax covers both Social Security and Medicare taxes, which wage earners also pay. Their taxes are deducted from their pay, and then matched by their employers, who handle payment to the IRS. Entrepreneurs like yourself are on your own.

Who Has to Pay?
If your business is structured as a C corporation, you will not owe SE tax, but you will be subject to corporate tax. SE tax may apply to other business entities, such as sole proprietorships, partnerships, and limited liability companies (LLCs).

For tax purposes, you will still be considered self-employed even if you only have a part-time business or consider yourself an independent contractor. The key determining factors are business structure and income, not time. If you earn $400 or more on your own, you must file Schedule SE along with your tax return. Also bear in mind that if you are considered self-employed and you have employees, you must pay employment taxes, including federal income, Social Security, and Medicare taxes.

In 2010, the SE rate is 15.3% on self-employment income up to $106,800. This umbrella tax has two parts: a 12.4% Social Security tax, covering old-age, survivors, and disability insurance; and a 2.9% tax for Medicare.

There is a deduction to help soothe the SE tax sting. You may lower your income tax by deducting half of your SE tax when calculating your adjusted gross income (AGI).

For SE tax purposes, your net earnings represent your gross business earnings minus permissible business deductions and depreciation. The following types of income generally will not count toward your net earnings, unless such income stems from your business operations:

  • stock dividends
  • bond interest
  • loan interest
  • real estate rental income
  • limited partnership income
  • Estimated Tax Payments

The IRS describes the federal income tax as a “pay-as-you-go” tax, which requires business owners like yourself to plan ahead. If you anticipate owing tax of $1,000 or more, you’ll need to estimate the amount and pay it throughout the tax year, typically in quarterly installments. So, if you are self-employed and do not have income tax withheld, you’ll need to pay estimated tax equal to 90% of your current-year tax liability or 100% of what you paid the previous year. If your AGI on last year’s return was more than $150,000, the percentage requirement increases to the lesser of 110% of last year’s tax or 90% of this year’s tax. Please bear in mind that failure to pay estimated taxes may result in penalties.

For more information on the self-employment tax, visit the IRS online at www.irs.gov and consult our Publication 533. To help ensure you are in compliance, consult your tax professional for specific advice.

Copyright © 2010 Liberty Publishing, Inc. All Rights Reserved.


A Growing Trend – Women Entrepreneurs?

The business landscape is always changing—technological advances, corporate downsizing, restructuring, and telecommuting have reshaped the marketplace. Although these improvements have a great impact on our working environment, perhaps the most notable trend has been the rapid growth in the number of women-owned businesses. According to the Center for Women’s Business Research (2011), three quarters of women-owned businesses are those wherein women own a majority share, and each year, women-owned businesses generate $1.9 trillion in sales.

In fact, additional statistics from the Center for Women’s Business Research reveal impressive gains for women in the marketplace:

  • An estimated 10.1 million companies are owned by women.
  • Women-owned businesses employ 13 million workers.

The “Push” Behind the Numbers
What’s driving these significant numbers? Women have made remarkable progress in the workplace, but they still face a variety of obstacles in terms of opportunities for career advancement. Thus, entrepreneurship has become a very viable option for women.

One out of eleven women owns her own business and is responsible for employing one out of seven workers. It appears that much of the push behind the increase in women-owned businesses is the desire for independence—in large numbers, women have chosen entrepreneurism as their route to financial freedom. As the figures indicate, many women have been able to channel their drive for success into starting and running their own businesses.

The “Pull” Exerted by This Trend
Women entrepreneurs are bringing a fresh perspective to the business world, which creates a new generation of inspirational role models. The ideas generated by this dynamic force translate into innovations in the marketplace that benefit both other businesses and individual consumers.

From a market perspective, women-owned businesses expand the field of opportunity. From insurance and other financial services to communications and office products, businesses will need to address women business owners as business customers. This will require a change from the long-standing view of the women’s market as a singular consumer market at the retail level.

In many ways, we are a society in which “money talks.” As women gain more economic power through the success of their own business ventures, they will exert greater influences on the financial, social, and political institutions that will shape the future for all of us.

Copyright © 2012 Liberty Publishing, Inc. All Rights Reserved.


Boy? Girl? Or Tuition Payment?

You just received the wonderful news that you and your spouse are going to become parents. Thoughts of the many adventures parenting will bring are swirling through your head. The last thing on your mind may be paying for college, but thinking about it now may save you later. The cost of a four-year degree at a private college can easily exceed $150,000 (Source: Trends in College Pricing—2011, The College Board).

However, even if you are aware of the importance of saving for an education, you may be unsure of available options. The following is an exploration of the most common college savings vehicles:

  • 529 Plans. 529 plans come in two forms—prepaid tuition plans and college savings plans. Prepaid tuition plans allow you to buy future tuition at today’s prices. College savings plans, on the other hand, offer tax benefits and a variety of investment options. Earnings grow tax-deferred, and qualified withdrawals are tax free. Nonqualified withdrawals are subject to income tax, as well as a 10% federal income tax penalty.
  • Coverdell Education Savings Accounts (ESAs, formerly known as Education IRAs). You can contribute $2,000 annually to an ESA, and funds may be used to pay for elementary and secondary education, in addition to college expenses. One major advantage of Coverdell ESAs is that if the funds are used to pay for qualified education expenses (e.g., room and board), earnings will not be taxed. Certain income limits may apply.
  • Series EE Savings Bonds. These types of savings bonds usually can be purchased and/or redeemed at your local bank. They are issued in denominations that are half of the bond’s face value ranging from $50 to $10,000. For example, a $50 bond would cost $25. Depending on your income tax bracket, EE savings bonds may offer state and local tax-deductible interest. When used for qualified education expenses, interest may be free of state and federal taxes, as well. However, they are generally subject to federal income tax and early redemption penalties may apply if the bond is redeemed in the first five years. Another possible advantage to savings bonds is that they may be purchased by anyone for your child, for any occasion.
  • Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). UGMA and UTMA accounts are custodial accounts. You may make unlimited contributions to such accounts, and the funds may be used for whatever purchases you deem appropriate. The UGMA account is particularly useful if you are considering purchasing stocks or mutual funds for your child to help save for education. More specifically, UGMA typically authorizes the transfers of cash, bank accounts, stocks, and mutual funds to minors without the need for an attorney; an UTMA account authorizes expanded transfers, including real estate, and royalties. For both UGMA and UTMA accounts, a portion of the earnings may be tax free or taxed at the child’s rate, generally a lower figure. You may make unlimited contributions to such accounts, and the funds may be used for whatever purchases you deem appropriate.

The last option you might consider when saving for your child’s future education may be a simple bank savings account. Although bank savings accounts may offer immediate liquidity and versatility, there are no tax advantages, and given their low risk, the earning potential is very low. Therefore, when it comes to saving for education, it may not be the most beneficial choice.

Start Now
So, if you are wondering whether you should begin saving for your child’s education now, the answer is, yes. Regardless of which option you choose, beginning today to save for a child’s education will help ensure your child a more secure tomorrow.

Copyright © 2012 Liberty Publishing, Inc. All Rights Reserved.


How Much Life Insurance Do You Really Need?

Sometimes people buy life insurance before performing a financial needs analysis. They might choose an amount that seems comfortable, without actually taking into account all the potential expenses their families might face in the event of an untimely death. If they did make an objective assessment of the possible economic consequences, they would be doing what is called a financial needs analysis.

In fact, you could analyze your own financial needs by following a few simple steps. First, total the value of all the things that you and/or your spouse own. These are your assets. (Enter amounts in one column for yourself and in another column for your spouse.) When totaling your assets, you might typically include what you currently have insavings and retirement funds (such as IRAs, 401(k) plans, or TSAs, etc.), as well as real estate and existing life insurance. Next, list and evaluate all expenses that you or your family may face, in case one spouse dies. These are your potential liabilities.

In order to determine how much cash is needed following the death of a spouse, take a look at these potential cash needs and assign a dollar amount to each:

  • Immediate Money Fund. This includes the total cost of possible medical and hospital expenses, outstanding bills, burial costs, and attorney/executor fees.
  • Debt Liquidation. Your debt, if any, may be in the form of credit card bills, school and auto loans, unpaid notes, outstanding bills, etc.
  • Emergency Fund. Unexpected bills not readily payable from current income could include major home and car repairs, or even medical emergencies.
  • Mortgage/Rent Payment Fund. How much would you need to pay off your mortgage or provide for at least ten years’ house or apartment rent should one spouse die?
  • Child/Home Care Fund. Expenses may be created as a result of the death of a spouse who had been performing child and/or home care duties; be sure to estimate the cost of hired help needed to substitute your spouse’s duties.
  • Education Fund. Be sure to include the cost of funding a four-year undergraduate education or comparable vocational training for your children.

The total of all of the above costs minus your liquid assets and life insurance would give you your newcash needs. The numbers will be different for you and for your spouse, because assets and existing life insurance, as well as child/home care amounts, are likely to be different.

The steps noted above are a simple way for a family to figure out how much life insurance is really needed. Circumstances vary from person to person and from family to family. Analyzing your financial needs in detail is an important step toward determining the right coverage for you and your family.

Copyright © 2011 Liberty Publishing, Inc. All Rights Reserved.


ID Theft—How Does It Happen?

In today’s technologically advanced society, identity theft is easier to commit than you might think. The Identity Theft and Assumption Deterrence Act of 1998 defines identity theft as the following: when someone “knowingly transfers or uses, without lawful authority, a means of identification of another person with the intent to commit, or to aid or abet, any unlawful activity that constitutes a violation of Federal law, or that constitutes a felony under any applicable State or local law.”

The Internet and automated teller machines (ATMs), now widely used for a variety of financial transactions such as shopping online and making cash withdrawals, are often cited as two contributing factors to what many perceive to be an identity theft epidemic.

If you worry about your personal information getting into the wrong hands, familiarize yourself with the following ways a criminal might obtain information with the intent to steal money or commit other crimes:

“Shoulder Surfing”. Shoulder surfing occurs when someone lurks near you while you give personal information to a person or enter it into a machine. Usually, the perpetrator peers over your shoulder and procures your information while you continue with your transaction. For example, if you are in a public place using a cellular phone to make hotel reservations, an eavesdropper might be able to remember, or write down, your name and credit card information. That information can then be used to make fraudulent purchases. Or, suppose you make a store purchase with a credit card and lose your receipt. Someone—even the store employee—could take the receipt with your information and commit fraud. Shoulder surfing can also be a hazard at ATMs. If someone inconspicuously standing in line manages to get your personal identification number (PIN), it may help him or her gain access to your bank account.

Pickpocketing and Lost Wallets. Years ago if you lost a wallet or were pickpocketed, you probably only worried about the cash that was inside. However, nowadays, being pickpocketed or losing a wallet can mean facing thousands of dollars in fraudulent purchases with credit cards.

“Dumpster Diving”. Dumpster diving is as obvious as it sounds. If you dispose of trash in a dumpster, others may have access to it. Identity theft perpetrators might “dive in” and easily find the information they need, via old bank statements, receipts, and bills, to wreak financial havoc in your name.

Intercepting Mail. Identity thieves watch mailboxes every day, waiting for the next credit card pre-approval letter to arrive. They then call the credit card company posing as the victim in order to open an account. While you cannot stop all solicitations, you can choose to “opt out” of receiving some of these letters. Calling 1-888-5-OPTOUT can help you limit the amount of unsolicited mail and phone calls you receive.

The Internet. Many Americans rely on the Internet to help them handle their personal finances. While it can be a useful tool for banking or paying bills, the Internet can also be a haven for prospective identity thieves. Entering your personal information into an unsecured website may allow an experienced hacker to obtain that information and use it at your expense.

Protecting Yourself
If you become a victim, it can be financially, as well as emotionally, devastating. With your personal information, a criminal might be able to simply open a credit card account and make fraudulent charges, or in more extreme cases, he or she may even assume your identity, open bank accounts, and commit more serious crimes—all under your name. These are just some of the ways criminals commit identity theft, the effects of which can be difficult and time-consuming to correct. Therefore, taking steps now to protect yourself may save you aggravation and money in the long run. For more details on how to avoid falling victim to identity theft, visit the Federal Trade Commission (FTC) online at www.ftc.gov.

Copyright © 2012 Liberty Publishing, Inc. All Rights Reserved.


Do You Owe Estimated Taxes?

If you are self-employed or have additional sources of income outside of your regular job, you may fall into the category of Americans who are required to file their federal taxes not just once a year in April, but four times annually. While no one likes having to pay estimated taxes to the IRS, you can make the process easier by setting aside money regularly and keeping good records.

The rationale for requiring people to file who do not have all their taxes regularly withheld from their paychecks is simple: The IRS expects Americans, whether employees or independent contractors, to settle their taxes on a pay-as-you-go basis. Failure to pay taxes within a short time after they are owed can result in penalties.

You may need to file estimated taxes if you start your own business or work as a freelancer, or if you sell investments or other property, thus triggering capital gains taxes. Even a sudden change in the types of deductions you are able to take could mean that your usual withholding may no longer be sufficient to cover your tax bill. In short, if you expect to be hit with a large tax bill in April because you have received additional untaxed income or have lost important deductions, you may need to start making estimated tax payments.

Taxpayers with adjusted gross incomes (AGIs) below $150,000 are, generally, expected to pay in advance at least the amount owed on last year’s return, and those with incomes above $150,000 must pay at least 110% of the taxes owed the previous year. The IRS does not usually penalize taxpayers for failure to file estimated taxes if their federal income tax liability is less than $1,000 or if their withholding covers 90% of the tax bill. Recipients of sudden, one-time windfalls are also seldom required to make estimated payments, provided they pay the taxes due at the end of the year. Interest charges are likely, however, if the amount of underpayment is substantial or if income is received not just once, but on a regular basis.

If you are employed but have other sources of income on which you will owe taxes, you may be able to get around having to make estimated tax payments by increasing your withholding on your W-4. Self-employed people must, however, make estimated payments in quarterly installments. For the tax year 2012, the due dates for estimated tax payments are April 17, June 15, and September 17, 2012, and January 15, 2013.

Assuming your income is fairly steady over the course of the year, the IRS expects the four estimated tax payments to be in equal installments. Most taxpayers use the amount of taxes owed in the previous year in order to set their estimated payments for the following year. If, however, your income fluctuates greatly, you are permitted to adjust your payment amounts using an annualized income calculation. Your records should reflect these variations in income, or you will not be permitted to use this method for calculating tax liability.

If the IRS finds you guilty of underpaying your taxes or of failing to pay estimated taxes on time, the agency will levy interest on the amount of the payment owed based on market rates. Thus, penalties will vary depending on the size of the underpayment, prevailing interest rates, and the amount of time that has elapsed since the payment was due.

Fortunately, filing estimated taxes is relatively easy: Simply fill out Form 1040-ES, Estimated Tax Voucher, enclose a check for the appropriate amount, and send your payment to the IRS. After you have made your first estimated tax payment, the IRS will send you pre-printed forms that you can use in the future. Keep in mind, however, that paying estimated taxes is not a substitute for filing a complete income tax return by April 15 of each year. For more information, consult your tax professional.

Copyright © 2012 Liberty Publishing, Inc. All Rights Reserved.


Who Benefits from the Zero Percent Capital Gains Tax Rate?

Through 2012, taxpayers in the 10% and 15% tax brackets will owe no taxes on qualified dividends and long-term capital gains. While many investors earn too much to benefit from this temporary tax break, certain categories of taxpayers, including middle-income workers, retirees, and families with children, may be able to take advantage of the 0% rate.

With the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), Congress lowered the maximum capital gains tax rate from 20% to 15% for taxpayers in tax brackets of 25% and higher, and from 10% to 5% for people in the lower two tax brackets. Under JGTRRA, the 0% rate for lower-income taxpayers was slated to be in effect for 2008 only. But, with the passage of the Tax Prevention and Reconciliation Act of 2005 (TIPRA), the 0% rate was extended for two more years. It was extended again under the 2010 Tax Relief Act. The long-term capital gains rate will remain unchanged at 15% through 2012 for taxpayers in higher brackets.

To qualify for the 0% long-term capital gains rate in 2012, married couples filing jointly are permitted to have taxable incomes of up to $69,000, and single filers may have taxable incomes of up to $34,500. If, however, a large gain lifts a taxpayer’s income above these levels, only a portion of the gains will qualify for the 0% rate.

Lower-income retirees with investments in taxable accounts may want to consider liquidating those assets while the 0% capital gains rate is in effect. Meanwhile, adult children of retired parents on lower incomes may want to give their parents stocks and bonds to sell at the 0% rate in lieu of providing cash support. Because such gifts could impact a retiree’s tax liability and eligibility for certain benefits, professional advice should be sought before making these types of transfers.

Parents of younger children who do not qualify for the 0% long-term capital gains rate could still benefit from this tax break by giving appreciated assets to their children to sell. However, the so-called “kiddie tax” could make it more difficult for parents to transfer investment income to a child. In 2012, children will owe no taxes on the first $950 of unearned income, and will be taxed at their own rate on the next $950. For unearned income above these amounts, children will be taxed at their parents’ marginal rate.

Beginning in 2008, the cutoff age for the kiddie tax, which rose from 14 to 18 in 2006, increased to age 19. Full-time college students under the age of 24 will be taxed at their parents’ rate on unearned income above $1,900, unless the earned income of the students is greater than one-half of their annual support.

For more information about long-term capital gains taxes and the zero-tax window, contact your tax professional.

Copyright © 2012 Liberty Publishing, Inc. All Rights Reserved.


Your Retirement Plan—Ready to Roll(Over)?

Simply stated, a rollover happens when you “roll over” assets/funds from one qualified retirement plan directly into another. You must enact this transaction within 60 days of receiving the funds from the original plan, or you will face a penalty. The transfer is done tax free.

There are several rules governing rollovers. Any part of the taxable portion of a distribution from a qualified plan, annuity plan, or tax-sheltered annuity (TSA)—other than a minimum distribution—may be rolled over tax free to an Individual Retirement Account (IRA), annuity, or other qualified plan. However, if the distribution is in the form of certain periodic payments, a rollover is not allowed.

How to Make a Rollover
Rollovers can be done in two ways:

Option 1: You (the plan participant) may receive the distribution yourself, but you must reinvest it into an IRA or qualified plan within 60 days. This form of distribution (where you actually receive cash) is subject to a 20% withholding requirement. This 20% withholding rate is imposed by law on distributions that are eligible for rollover but that aren’t transferred directly to an eligible transferee plan. The employer must withhold taxes for these distributions. This means that employees receiving direct distributions will receive only 80% of their account, since 20% is withheld. However, the withheld funds may be refunded after the employee files his or her tax return, as long as the distribution is rolled over into another IRA or qualified plan within 60 days.

Since the 20% that is withheld is treated as a taxable distribution, the employee will need to make up the withheld 20% from his or her own funds to achieve a 100% tax-free rollover; otherwise, the 20% withheld will be treated as taxable. In addition to the income taxes owed on that 20%, the employee will also be required to pay a penalty tax of 10% if he or she is under the age of 59½.

Option 2: To avoid the 20% withholding requirement, the employee may request a direct trustee-to-trustee transfer to an IRA or qualified plan. Annuities or qualified plans must allow payees of eligible rollover distributions to choose a direct trustee-to-trustee transfer. However, a qualified plan is not required to accept this form of transfer. This type of transfer is considered a distribution option, so that spousal consent and other similar participant and beneficiary rules of protection will apply.

There are many factors to consider in deciding when and how to use a rollover. Getting knowledgeable assistance from a professional can make the difference between a “rocky” rollover and a smooth, effective one.

Copyright © 2012 Liberty Publishing, Inc. All Rights Reserved.