Before the year ends, one thing I have been doing a lot of is year end business planning. I have a lot of entertainment and professional clients with S Corporations that need a sitdown meeting to decide how much compensation they need to take to meet the reasonable compensation rules, plus they have solo 401K retirement plans that they want to contribute to. This is where a decision has to be made – take the absolute minimum reasonable compensation (I have software that can calculate a compensation amount) and possibly forgo some 401K contributions. If my clients want to maximize their 401K contributions, they will need to take $138,000 in wages (the passthrough profit on the S Corporation K-1 doesn’t count) to get the maximum 25% employer contribution of $34,500 (138,000 x 25%). That plus the $17,500 maximum employee deferral ($23,000 if over 50) gets them the maximum contribution of $52,000 ($57,500 if over 50). The offshoot is that on the first $117,000 of wages the client will owe 15.3% of social security tax (12.4% FICA and 2.9% Medicare) but will get a tax savings on all the 401K contributions (if a California resident probably 35% of the contribution.) [...]
Tax Musings of a Burbank CPA: Do You Really Like Loaning the Government Money?
So, you have filed your income tax return with the IRS and your state, and are now waiting for the refund the government(s) owe you. You are thinking of all the things you can do with that money when you get it. Here are some things to think about as you wait: 1. These refunds are in effect interest free loans you have made the government(s) over the year through excess withholding. They are just paying you back money you earned over the previous year that won’t even earn interest unless you file an extension and wait even longer for your money. This is even worse than that bet that your buddy owes you because at least you know where to find him if he doesn’t pay you right away. With our government you call on the phone and wait an hour for them to tell you that the refund is being processed or go on their website and find out there is a problem and you have to call anyway! 2. You could be earning some income on this refund if you take it with each paycheck instead of putting it into additional withholding. Even with the low interest [...]
Tax CPA Musings: Tax Deduction For Your Sole Proprietorship Hiring Your Kids
This is an update on a posting of mine a year ago, but is still a good planning opportunity if you have a sole proprietorship and kids under 18: If you are a sole proprietor and have kids under 18, you can hire the kids and save on both income tax and self employment tax! You can pay them up to $6,200 in 2014 and save. Your child’s income is tax free to them and because of the exclusion for social security, medicare, state disability (in California) and unemployment taxes, you can effectively get a tax deduction in your sole proprietorship (for income tax and self employment taxes) without having to pay any taxes anywhere else. It can be a great tax planning strategy, but remember it will only work in a sole proprietorship (corporations and LLCs need not apply). Now remember that the kids actually have to do work for you to qualify, the salary has to be reasonable and the money actually belongs to the kids. Since you give them allowance and other things anyway you can probably make this work. Call me or email me and we can discuss this to see if it will work for your business! [...]