BUSINESS TOPICS

This section includes frequently encountered topics relating to small businesses. It discusses business deductions, how to avoid underpayment penalties, 1099s and much more.

New Employee Hiring Incentives & HIRE Act Credit

The “Hiring Incentives to Restore Employment Act of 2010,” more commonly referred to as the “HIRE” Act, was passed by Congress and signed into law by the President in the first quarter of 2010.  The Act provides employers with incentives to hire unemployed individuals.  The provisions of this new legislation apply to workers hired after Feb. 3, 2010, but only for wages paid after March 18 (the date the legislation was signed into law).    

• Payroll Tax Holiday - The law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee's wages paid from March 19 through December 31, 2010.  Thus, if the newly-hired and previously-unemployed worker earns $106,800 after March 18, 2010 and before the end of the year, the company could save a maximum of $6,621.  This provides the employer with an immediate benefit by reducing the amount the employer must pay in employment taxes.
  
  
• Retention Credit - As an additional incentive, for any qualifying employee hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit equal to the lesser of $1,000 or 6.2% of the wages.  Since the 52-week requirement cannot be met until the subsequent year, the credit will be taken on the employer’s 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.  This credit is not available for domestic workers.

New Employee Qualifications - Although there is no minimum number of hours that a new employee needs to work in order to qualify for either benefit, an employer cannot claim the new tax breaks for hiring family members.  A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause.  The payroll tax holiday can be claimed for rehiring old workers as long as that worker was terminated due to facts and circumstances, such as a factory closure due to lack of demand for the product.

Employee Documentation – To validate the new hire for the benefits, an employer must have the employee sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins.  The IRS provides Form W-11, “Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit,” for this purpose. Employers do not send the completed and signed form to the IRS, but are required to retain it with their other payroll and income tax records.

Interaction with the Work Opportunity Credit (WOTC) – An employer must choose, on an employee-by-employee basis, whether to claim the HIRE benefits or the WOTC; double dipping is not allowed.  The WOTC is in many cases more valuable than the payroll tax holiday, especially for low-wage employees, because it is generally 40% of “qualified first-year wages” of up to $6,000, for a maximum credit of $2,400 per worker.

The payroll tax holiday is equal to 6.2% of wages, and applies only to wages paid through Dec. 31, 2010.  However, the WOTC is harder to qualify for, because the employee must be certified by an agency as belonging to a targeted group.  The main qualification for a payroll tax holiday is that the employee has been unemployed for 60 days, and the employee's affidavit is sufficient for this purpose.

For more information on this topic and other business-related issues, please give this office a call.

Tax Credits for Small Employers Offering Health Coverage

The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term "nonelective contribution" means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement.

o 2010 through 2013 – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000 will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for its employees.  (Note, however, that the phase-out of the credit operates in such a way that an employer with exactly 25 full-time equivalent employees or with average annual wages exactly equal to $50,000 is not eligible for the credit The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000.

No requirement to be in a trade or business - For tax years beginning in 2010 through 2013, an employer may still be a qualified employer even though the employees of the employer are not performing services in a trade or business, meaning a household employer may be eligible to claim the credit.

o 2014 and Later - In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

An eligible small employer generally is an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.

The credit percentage that can be claimed varies with the number of employees and average wages. The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages (AAEW) from the employer of less than $25,000.

Calculating the credit amount - The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage (shown in the table below) and subject to the phase-outs discussed later:

(1) The amount of contributions the eligible small employer made on behalf of the employees during the tax year for the qualifying health coverage.

(2) The amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. Contributions under this method are determined by multiplying the benchmark premium by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer. (See table below)


Computing the Credit Phase-Out – The full credit is only available to eligible small employers with 10 or less full-time equivalent employees with an average annual full-time equivalent wage (AAEW) of $25,000 or less.  If either or both of these thresholds are exceeded, then the credit is reduced. 

There is no credit reduction if there are 10 or less full-time equivalent employees FTEs with an AAEW of $25,000 or less.

There is no credit if the full-time equivalent employees exceed 25 or the AAEW exceeds $50,000.

To figure the reduction of credit when the limits are exceeded, the number of the employer’s full-time equivalent employees and average annual full-time equivalent wages (AAEW) for the year must be determined.

Figuring the number of full-time equivalent employees - An employer's full-time equivalent employees (FTEs) is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any (unless the result is less than one, in which case, the employer rounds up to one FTE).



Calculating average annual wages (AAEW) - Average annual equivalent wages is determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer's full-time equivalent employees for the year (rounded down to the nearest $1,000 if need be).



Credit reduction - If the number of full-time equivalent employees exceeds 10 or if AAEW exceed $25,000, the amount of the credit is reduced (but not below zero).  Both reductions can apply at the same time!



Example – Joe owns a small California wood working business and has 12 employees, not counting himself or family members.  The total FICA wages (without regard for wage base limitations) for the year were $297,500 and total hours worked by his employees during the year were 24,400.  None of his employees worked more than 2,080 hours during the year.   Joe made nonelective contributions to purchase health insurance for his employees in the amount of $49,800 for the year.  Joe’s credit is determined as follows:

• Small Business Benchmark Premium (from Table Below) = 12 x 4,628 = $55,536
• Smaller of actual premium paid or Benchmark premium = $49,800
• Tentative credit = $49,800 x 0.35 = $17,430
• Full-time equivalent employees (FTEs) = 24,400/2080= 11.7 rounded down = 11
• Average annual full-time equivalent wages (AAEW) = $297,500/11 = $27,045 rounded down = $27,000
• FTE Reduction = ((11-10)/15) x $17,430 = $1,162
• AAEW Reduction = ((27,000-25,000)/25,000) x $17,430 = $1,394
• Joe’s health insurance tax credit = $17,430 - $1,162- $1,394 = $14,874



Other Issues:

o The credit reduces the employer's deduction for employee health insurance. 

o Special rules apply if the employer benefits from state tax credits or a premium subsidy paid by the state for providing health insurance for its employees.

o Aggregation rules apply in determining the employer. 

o Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit.

o There's a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. 

o The credit is a general business credit and can be carried back one year and forward for 20 years. However, because an unused credit amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward. 

o The credit is available to offset tax liability under the alternative minimum tax. 

o The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under State law.

o For tax years beginning in years after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.

Please call this office if you have questions related to Tax Credits for Small Employers Offering Health Coverage.  

What Happens When I Default on a Business Loan?

What does it mean to default on a loan?

A loan default is the failure to meet the financial obligations indicated in the loan agreement that is signed by you and your lender. Often, a loan default translates into the business owner's inability to pay their debts on time. Due to the differences in each loan agreement, default penalties vary. However, the effects of defaulting on the loan fall into two general categories- immediate repercussions and future implications for both you and your business.
 
What are the immediate effects to my business if I default on a loan?

Drop in business and/or personal credit score. Missing your payments and defaulting on your loans negatively impacts your business credit score. Your personal credit score may be affected, depending on the type of business structure that you have in place.  Read on for more tips on how to protect your personal liability.

Increased interest rates. Your business interest rates (and possibly your personal interest rates) may increase if your credit score dips. Depending on your loan agreement, a higher interest rate could affect the loans that you currently have, as well as future loans you plan to seek.

Foreclosure or seizing of property and collateral. Foreclosure may be the most severe repercussion due to a loan default, allowing lenders to recuperate losses from loan defaults. In this situation, your lender will have the full right to take control and ownership of your property and collateral that you have included in your contract. They normally will sell your property privately or by a public auction, depending on the profit margin.

What steps should I take next?

Negotiate terms with your lender. If you default, you can try renegotiating the terms of your loan contract with your lender. While lenders may not always be willing to renegotiate, if you are successful you can minimize the damage to your business's financial health. Ways to reduce the negative impacts of the loan default include:

• Changing the terms of payment, e.g., paying less per installment but for a longer period of time
• Paying less over more time with a higher interest rate
• Asking your lender to forgive a portion of your late payment and agree to pay on time in the future

Consider government debt relief options. There are some government-backed options for managing debt that you can consider, such as the American Recovery and Reinvestment Act (ARRA), ARC Loan Program. and SBA Loan Program. Read more about Managing Small Business Debt through Government Loans and Refinancing Lifelines here.

Cut costs. Minimize your expenses. Though this may not be an ideal situation, you can consider laying off part of your staff and downsizing your business, among others.

Sell business assets. Liquidating business assets or converting your assets into cash may temporarily help you pay off your loans until you can afford to pay your bills on time again.

Consult a lawyer. Consulting a lawyer about your options may also help you through the process. Learn how to find legal representation for your small business here.

What does this mean for the future of my business?

Difficulty finding new loans. After you default on one loan, it will make it much more difficult to find a new loan. If loans are the chief means of financing your business, then you will be running into some difficult hurdles. You may want to start looking into other methods of funding your business. Read more about alternative financing solutions in I Need Money- Where Do I Get It?

Bankruptcy. If your business cannot repay its loans, you may need to file for bankruptcy. Read more about filing for bankruptcy on our blog Bankruptcy Options for Small Business Owners.
 
What Can I Do to Avoid a Loan Default?

Of course, the best way to avoid defaulting is to pinpoint the pitfalls of bad loans and avoid them at all costs. To avoid loan defaults, business owners should remember the following best practices:

• Have a concrete payment plan before you decide to borrow
• Do not offer collateral and property in your contract that you cannot afford to lose
• Read the fine print and thoroughly understand the terms of the contract

Penalties for Failure to File or Furnish Information Returns

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year.  The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the Small Business Jobs Act of 2010, those penalties were doubled.  The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts.  Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

The following table shows the penalties for information returns required to be filed in 2010 and those imposed for returns required to be filed after 2010.




In addition, the minimum penalty for each intentional failure-to-file act increased from $100 to $250.

Avoiding Underpayment Penalties

Congress considers our tax system as a "pay-as-you-go" system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the "pay-as-you-go" requirement. These include: 

• Payroll withholding for employers; 
• Pension withholding for retirees; and 
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is 2% higher than the prime rate and the penalty is computed on a quarter-by-quarter basis. 

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than a de-minimis amount, no penalty is assessed. The de-minimis amount is $1,000. This means, if you owe $1,000 or less on your tax return, you will not be subject to the federal underpayment penalty. In addition, the law provides "safe harbor" prepayments. There are two safe harbors:

1. The first safe harbor is based on the tax you owe in the current year. If your payments equal or exceed 90% of what you owe in the current year, you can escape a penalty. 

2. The second safe harbor is based on the tax you owed in the immediately preceding tax year. If your payments equal or exceed 100% (110% if your prior year adjusted gross income was more than $150,000) of what you owed in the prior year, you can escape a penalty.

Example: Suppose your 2010 tax is $10,000, and your 2010 prepayments total $5,800. The result is that you owe an additional $4,200 on your 2010 tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception.

However, the other safe harbor may still apply. Assume your 2009 prior year tax was $5,000 and your 2009 income was $50,000. Since you prepaid $5,800, which is greater than 100% of the prior year's tax of $5,000, you qualify for this safe harbor and can escape the penalty. If your 2009 income exceeded $150,000 (and you didn’t file as married separate), your prepayment target would be $5,500 (110% x $5,000). Having prepaid $5,800, you’d also avoid the penalty.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc.

Looking for Business Tax Deductions? Look No Further Than Your Business Vehicle!

With all the recent changes in the tax laws and regulations, the options for deducting the business use of a vehicle are both numerous and generous. In fact, there are so many options that some can easily be overlooked. Note: When a vehicle is used both for personal and business use, the expenses must be prorated based on miles driven for each purpose.

Listed below are some of those options:

• Lease or Purchase – Your first option deals with the manner in which you acquire the vehicle. Whether you decide to lease the vehicle or purchase it, you may choose to deduct the business use of the vehicle using either the actual expense method or the standard cents-per-mile method. Note: If you choose the actual expense method the first year, then the standard cents-per-mile method cannot be used in any future year.
  
  
• Trade-In or Sell Old Vehicle – If you are replacing an existing vehicle, you have the option either to trade in the old vehicle or to sell it. Without considering other economic factors, if the sale of the old vehicle would result in a gain, then you may wish to consider trading it in and avoid the need of reporting the gain and instead reduce the cost basis of the replacement vehicle. On the other hand, if the sale will result in a loss, then it would probably be better to sell the vehicle and take the loss on your return.
  
  
• Cents-Per-Mile Method – This method requires the least amount of bookkeeping. You need only record the business miles and total miles driven on the vehicle each year, and the business deduction is the business miles multiplied by the rate for the year. Note: This method cannot be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously, such as in fleet operations.
  
  
• Actual Expense Method – As the name implies, this method involves deducting the actual expenses of operating the vehicle. This requires keeping track of the operating costs, including fuel, oil, maintenance, repairs and insurance. In addition, either the annual lease expense or, depending on the class of vehicle, an allowance for wear and tear on the vehicle is added to the annual expenses. A record of the business and total miles must also be maintained to determine the business portion of the expenses.
  
  
• Class of Vehicle – The class of vehicle affects the limitations that are applied to the allowances for wear and tear available for a particular vehicle.
  
  A. Vehicles With No Limitations: The following vehicles qualify for the Sec 179 deduction, regular depreciation and bonus depreciation. Depending on the methods selected, virtually any amount of the cost of this type of vehicle can be deducted in the year of purchase.
  
  - Heavy Vehicle – A vehicle exceeding 6,000 pounds gross unladen weight such as many of today’s sport-utility vehicles.
  
  - Qualifying Nonpersonal Use Vehicle – A vehicle that has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes.
  
  - Exempt Vehicles – A vehicle used directly in a taxpayer’s trade or business of transporting persons or property for compensation or hire, such as an ambulance, hearse, taxi, clean fuel vehicles, bus or commuter highway vehicles.
  
  B. Those With Limitations: The following vehicles are limited by the luxury auto rules:
  
  - Luxury Vehicle – Generally, a vehicle costing more than an annually inflation-adjusted threshold ($15,300 to $17,004) and not falling into one of the other previous categories. This threshold and the annual limits are not determined until late in the year.
  
  - Special Trucks & Vans – Defined as passenger autos that are built on a truck chassis, including minivans and sport-utility vehicles (SUVs). These vehicles are subject to the annual luxury vehicle limitations, but are allowed an additional amount (usually $100 or $200, depending on the year purchased) added on to those limitations.
  
  C. Vehicles with Other Limitations: In addition to those described above, there are certain other seldom encountered vehicles, such as electric vehicles and certified clean fuel vehicles, with other special allowances.
  
  
• Interest and Taxes – In addition to the other deductions discussed above, the business portion of personal property taxes, license and interest on the debt to purchase the vehicle are also deductible when the vehicle expenses are being deducted on a business schedule.

Mixing Business With Pleasure

It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that convention timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.

Business and Personal Travel

A taxpayer can deduct all travel expenses while away from home if the primary purpose of the trip was business-related. Expenses such as transportation, meals, lodging and incidentals are deductible provided they are not lavish or extravagant. If the taxpayer engages in both business and personal activities while away traveling, he can deduct the transportation expenses in their entirety if the primary purpose of the trip is business- related. Lodging and 50% of meal costs are also deductible. Where a companion, such as a spouse, accompanies the taxpayer, the companion's meals and travel expenses are generally not deductible. In addition, deductible lodging expense is based upon the single occupancy rate.

Cruise Ships
 

Occasionally, conventions will be held on cruise ships. There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer's trade or business. The cruise ship must be a vessel registered in the United States. All ports of call must be located in the U.S. or any of its possessions. 

In addition, the taxpayer needs to fulfill stringent reporting requirements, including a written statement providing specific information by both the attendee and an officer of the sponsoring organization. Also, the taxpayer is limited to an annual deduction of $2,000 regardless of how many cruises are involved.

Foreign Conventions

In order to deduct a foreign convention (held outside of North America), the costs need to be: 1) directly-related to the active conduct of the taxpayer's trade or business and 2) be just as reasonable to hold the convention or seminar outside the US as it is inside the North American area. 

Please note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area. Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting's purpose, the sponsor's purpose and activities, the residence of the organization's members, the locations of past and future seminars.

If you have a particular question involving travel and the deductibility of the expenses, please give this office a call so we can assist you.

Self-Employed Education Twists

Self-employed taxpayers should consider their options carefully when it comes to applying tax benefits for their own education tuition and expenses. Tax law provides multiple ways to benefit from the educational expenses and one may provide more benefit to you than another based on your particular set of circumstances. In addition, your tuition may qualify for one tax benefit while other education expenses qualify for another.

• As a Business Expense – Generally, if the education qualifies, it is better to take the cost as a business expense since as a business expense it will offset both income taxes and self-employment tax. The expenses can include tuition, books, supplies, and allowable travel for the education. To qualify as a business expense, the education must either be to maintain or improve your skills or be required in your business. You may, however, not wish to use the education’s costs as a business expense when doing so limits your net profit and consequently limits your pension plan contribution. Another situation when you may not want to claim the education costs as a business expense is when your Schedule C only has a very small profit or shows a loss for the year.

• As an Adjustment to Income – If the education expense is tuition at an institution of higher education and you are under the AGI phase-out limit for this deduction, you have the option to deduct up to $4,000 as an adjustment to overall income for the year. You can take this above-the-line education deduction whether or not the education maintains or improves your skills required in your business. Other expenses related to this education such as books, supplies, and travel can still be deducted on your Schedule C as long as the education maintains or improves your skills required in your business. The deduction is a maximum of $4,000 if AGI does not exceed $65,000 ($130,000 for married couples filing jointly) or a maximum of $2,000 if AGI doesn’t exceed $80,000 ($160,000 for married joint filers). This provision is scheduled to expire at the end of 2011, unless extended by congress.

• As a Tax Credit – As with the adjustment to income above, if the education expense is tuition at an institution of higher education, you might qualify for the lifetime learning credit. It may be more beneficial than the business expense or AGI adjustment for the tuition portion of the expenses, especially if you are in a lower tax bracket or the business profits are low. The lifetime learning credit allows you a credit of 20% of the cost of your tuition (up to $10,000 of costs) as a tax credit. It, too, has an AGI phase-out limitation. For 2011, the credit for single taxpayers phases out between $51,000 and $61,000 and $102,000 to $122,000 for joint filers.  If you meet the full-time student requirement, you may qualify for the more beneficial American Opportunity or Hope credits.

If you have any questions regarding these various options, please call our office.

Employing a Family Member

Another way to reduce the overall family tax bill is by employing family members to work in your business by shifting income to them and providing them with employment benefits.

• Employing your Spouse. Reasonable wages paid to your spouse entitles you to a business deduction. Although the wages are subject to both income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse’s retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee.
  
  
• Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2010 is $5,700 (projected to be $5,800 for 2011) if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $5,700 (2010) in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, but you may provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions.

Your child may also make deductible contributions to an IRA of the lesser of earned income or the annual limitation. These contributions can offset earned and unearned income. As example, in 2010 your child could receive $10,700 gross income ($5,700 earned and $5,000 unearned) by combining the IRA deduction ($5,000) with the standard deduction ($5,700) and pay no tax. You should consider giving him or her part or all of the money needed to fund the IRA (as part of your $13,000/$26,000 annual exclusion for gifts) if your child does not want to use his or her earned income to fund an IRA contribution.

Please keep in mind that when you employ a family member in your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business.

Health Insurance for the Self-Employed

Becoming self-employed often means leaving the comfort of affordable and easily obtainable health insurance. The following tips may save you some of the frustration you may encounter as a self-employed individual in the market for health insurance.

Do your homework.Research the company and policy thoroughly before buying insurance and you may save hundreds of dollars yearly. Here are some guidelines to consider....

• Become familiar with the different policies available. Being ignorant will not help you in your decision-making. You have a wide range of resources such as the Web to determine the pros and cons of each policy.
  
  
• Determine the companies which offer the type of policy that best fits your needs. After you have decided on the type of insurance you need, research the agents and local companies that offer the policies you are looking for.
  
  
• Obtain in writing what the policy will pay for and what it won't. It needs to include the total out-of-pocket expenses you will be liable for and the coinsurance limit. In addition, request a detailed explanation on reimbursement of office visits, prescriptions and emergency room visits. It might also be helpful to find out the hospitals and groups in the coverage area and at which percentage.
  
  
• Before agreeing to a policy that excludes pre-existing conditions, THINK CAREFULLY! Before considering one of these plans, make sure it remains in place for no longer than six months.

Make annual or semi-annual payments of premiums. Ask your agent about service fees and discounts. If you pay annually or semi-annually, the service fee may be waived, and you may receive a discount.

A higher deductible should be taken into consideration. You may want to consider changing to a higher deductible if your family is healthy and has been for a number of years. A higher deductible could significantly reduce your premium. Also read the article "Health Savings Accounts Offer Tax Breaks."

Participate in an independent group plan. To help lower the overall cost of insurance premiums, most self-employed people join associations to enroll in a group health plan. If an existing group health plan is not available, consider starting one within the trade association you are affiliated with.

Tax Deduction Considerations - A self-employed individual may deduct, in computing adjusted gross income, amounts paid during the tax year for insurance that constitutes medical care for the taxpayer, spouse, and dependents, if certain requirements are satisfied.  Effective March 31, 2010, the Affordable Care Act extends that deduction to any child of the taxpayer who hasn't attained age 27 as of the end of the tax year.  A “child” includes the taxpayer’s child, stepchild, legally adopted individual, an individual lawfully placed with the employee for legal adoption, and an eligible foster child.  There are no other qualifications other than being the taxpayer’s child; thus income or marital status has no bearing.

If the self-employed person considers these issues in the initial process, finding an affordable and convenient health insurance should be effortless. Contact this office for further assistance.