Plan to Pay Less Taxes

With two and a half months left in 2017 current year tax liability is easier to estimate. Below are five tax saving tips.

1) Defer income

Normally for individuals, income is taxed in the year it is received. A way to decrease current tax is to defer it. W2 wages are not deferable, however, if you are expecting a bonus, that could potentially be deferred to next year. If you are a business owner who sends bills to your customers, you could wait until the end of the year to send them. The expectation when deferring income is that next year when the income is claimed you will be in a lower tax bracket.

2) Prepaying Expenses

Just as income is taxed in the year it is received, deductions are expensed in the year they are paid. A way to lower tax is to prepay deductions. Examples of these deductions are charitable contributions, property taxes, mortgage interest and medical expenses. Medical expenses will only help if you have met the 10% of adjusted gross income threshold. The expectations of prepaying expenses are that you will be in a higher tax bracket then expected for the following year.

3) Maximizing Retirement Contributions

A great way to lower income tax is by maximizing retirement contributions. The maximum contribution amounts allowed in 2017 for a 401(k) are $18,000 for individuals 49 and younger and an additional $6,000 if you’re 50 or older. The maximum for IRAs are $5,500 for individuals up to 49 and $6,500 for 50 or older. 401(k) deposits need to be made by December 31, 2017 and IRA deposits need to be made by April 18, 2018. To find out if you can qualify for an IRA deduction click here.

4) Take advantage of Capital Loses

If you have sold stocks and mutual funds that have a loss, those losses can help reduce any realized taxable gains. If the gains are less than the losses, $3,000 of the excess loss can be used to decrease other ordinary income. Anything above the $3,000 can be carried forward and be deducted in future years.

5) Tax Free Income

If you have unrealized capital gains you can realize those gains in the 15% tax bracket and pay 0% taxes. Carefully plan to make sure you don’t go over thresholds.

You may find yourself wondering why would anyone want to increase their current year liability. For someone that is expecting a large increase in income next year that would result in a jump in tax brackets, it would be worth saving their deductions for the higher tax bracket and pay the lower tax this year. No matter what direction you decide to go, if you need help finding the best options for you, consult with your local tax preparer.

Farm Use Tax 101

With harvest getting started in South Dakota, some farmers do not realize use tax may be due when they buy products or services without paying South Dakota sales or excise tax.

What is Use Tax?

A purchaser owes use tax on the use of products and services in South Dakota when sales or excise tax is not paid. Unless specifically exempt by law, all products and services, including farm machinery, attachment units and irrigation equipment, used in South Dakota is subject to either sales or excise tax. For example, if a farmer buys a tractor from a dealer in a state that does not tax tractors, use tax is due. This link lists some items that are tax exempt for farmers.

What is the tax rate?

Farm machinery, attachment units, and irrigation equipment used exclusively for agricultural purposes are subject to:

  • 4.5% state tax

Farm machinery, attachment units, or irrigation equipment that is NOT used exclusively for agricultural purposes are subject to:

  • 4.5% state tax; and
  • Municipal sales or use tax

Tools and shop supplies are subject to:

  • 4.5% state tax; and
  • Municipal sales or use tax

Municipal tax applies if the item is delivered to you inside a city that imposes a sales or use tax.

What if I trade-in equipment?

Use tax is due on the trade difference. For example, if the purchase price of a new tractor is $325,000 and you receive $155,000 credit for your used tractor, use tax is due on $170,000 ($325,000 – $155,000 = $170,000). Make sure you pay close attention to your receipts to make sure sales tax was not included on the credited amount.

What if I buy a piece of equipment from another farmer?

If you buy equipment from a person who does not sell equipment on a regular basis and the equipment was not sold at an auction, you do not owe use tax on the purchase. This is called an occasional sale and is exempt from sales or use tax.

When and how do I pay use tax?

Use tax is due when the product is delivered to you in South Dakota. Complete and mail this form along with your payment to the address listed on the form.

If you are questioning if you owe tax on a purchase, consult with your local tax preparer.

Employer Options for Health Insurance

Most employees not only wish to be paid, they wish to have access to benefits. Or ways to reduce the amount they have to pay for ever increasing health insurance costs. As an employer you have several options you can offer for health care. However, there are laws that govern what kind of coverage at a minimum you must provide. Most of this is driven by the total number of employees you have. The Affordable Care Act set the limit at 50 full time equivalent employees. If you have more than 50 full time equivalent employees, then you must offer group health insurance. If you have less than 50 you have several options and a few are listed below.

High Deductible Health Plan

A High Deductible Health Plan (HDHP) is a health insurance plan that contains certain requirements with respect to deductibles and out-of-pocket expenses. The deductibles are generally higher than for a standard health insurance plan. Out-of-pocket expenses are generally not covered (up to a maximum amount) until the annual deductible is reached. Due to the nature of these health plans the premiums are generally lower.

HSA

A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.

Per IRS regulations, employer contributions to employee HSA’s must meet compatible contribution rules. If the contributions do not meet the rules, they will not be tax-deductible to the employer. This means that an employer must contribute the same amount for all individual plans. However, they can offer a different amount for family plans but all family plans must be the same amount. For example, an employer can contribute $75 per month to an employee-only HSA and $150 to family HSA plans.

HRA

A Health Reimbursement Arrangement (HRA) is a tax-advantage benefit that allows both employees and employers to save on the cost of healthcare. HRA plans are employer-funded medical reimbursement plans. The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis.

FSA

A health Flexible Spending Arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from contributions.

The Affordable Care Act: Are you In Compliance?

The Affordable Care Act (ACA) requires taxpayers to do at least one of three items listed:

  • Have qualifying health insurance coverage all year.
  • Have an exemption from the requirement to have coverage.
  • Make an individual shared responsibility payment when filing your federal income tax return.

Qualifying Heath Insurance

Qualifying health insurance coverage is an insurance plan that has been certified by the Health Insurance Marketplace. It provides essential health benefits, follows established limits on cost-sharing, and meets other requirements under the ACA. Most taxpayers are in this category. For a list of minimum essential coverage options click here.

Exemption

Taxpayers who do not have qualifying health insurance will normally be assessed a tax penalty for each month they do not carry qualifying health insurance. However, if they qualify for a health coverage exemption they will not need to pay a fee. Click here for a list of exemptions and who grants them. Furthermore,  coverage exemptions are reported on Form 8965 and get attached to your personal tax return.

Shared Responsibility Payment

If qualifying health insurance isn’t obtained and there are no exemptions that qualify; an individual shared responsibility payment will need to be made. The law says that individuals, employers and the government have the responsibility of keeping everyone covered by insurance.  Consequently, the issued tax penalty is to help cover the taxpayers share.  For an explanation of how the shared responsibility payment is calculated click here.

In conclusion, we all know the ACA has been a hot topic of debate. In most recent news, the Senate voted to reject the measure to partly repeal the ACA. It was a close 49 to 51 vote that left us on the edges of our seats, making it clear that this will not be the final discussion on this topic. However, until something is repealed or passed the ACA will stay as is.

Health Care: Making the Best of the Worst

It’s the necessary evil, the expense that is more than your house payment and the biggest obstacle in becoming self-employed. It’s health care and it’s inevitable. You need it but don’t know how to control it. Here are a few ways to help manage costs:

Cost Management Tips
  1. If you have a grandfathered plan with good rates that you can keep, keep it.
  2. Find a high deductible plan compatible with a health savings account.
  3. Use the marketplace to take advantage of the premium tax credits if you qualify.
  4. Consider a cost sharing ministry.
  5. If you are self-employed and your spouse works for you, hire them and take advantage of a 100% deduction for all medical costs.
  6. More than one person on your plan? Consider a group plan if feasible.
  7. If you have coverage from your job and are healthy, use a high deductible plan.
  8. Use a health savings account if you are eligible. These funds are yours even if you don’t use them all in one year.
  9. Utilize a flexible medical spending account through your employer.
  10. If your working children are under 26 and on your health plan, educate them on the cost and have them help pay for their own.
  11. Keep working until you are 65 and qualify for Medicare.
  12. Take care of yourself to minimize doctor visits.

There are many options to consider, explore all of them that work for you. Consult with your advisors before making a move and make sure you are taking advantage of all the tax benefits that you can.

Some individuals only have one option for a health care provider and no longer have a choice of what they are offered. We are hopeful we will see changes in health care over the next few years under the Trump administration. There are parts of the current system that are good and parts that can be improved upon. As a result, we challenge our congressional representation to discern the difference.

Finding Skilled Staff

Is your business growing or are you tired of putting in 65 hours a week at the office? How do you find skilled staff so you can spend more time at home with your family? Good employees are hard to find!

Incentives For Referrals

Motivate your current trusted employees to find their new co-worker. Your current employees know what it takes to do the job. Ask them about previous favorite co-workers or classmates. Those trusted employees will enjoy a nice referral bonus.

Social Media

Have you resisted joining online social media: Facebook, Twitter, Instagram or LinkedIn? Though they can be a distraction during the day, online social media has become a great place to find skilled employees. On Facebook, you can post your job openings on your company page and ask employees and friends to share with their friends. On LinkedIn, you can run advanced searches to find potential candidates in your area.

Around the World

Do you need to hire a copywriter? Does the copywriter need to be located in your office? Why not hire a copywriter as a freelancer for a few months. Then, if you see in that time they are a skilled worker, consider hiring them full time to work remotely.

As one that hires new employees, you should always be on the lookout for talent wherever you go and stay in touch with good candidates you don’t hire. Before making the final hiring decision you might want to consider giving the prospective new employee the Everything Disc to make sure they will fit into the good team you have now.

 

Payroll Taxes 101

Great news – you are hiring someone! Now comes the fun part of knowing what that means for cost and what needs to be done. If taxes are not for you, have someone help you to stay in compliance. The penalty for not paying taxes can be steep.

Payroll taxes include FICA which is made up social security (6.2% on the first $127,200) and Medicare (1.45%). There is an additional .9% Medicare tax that will be withheld if an employee makes more than $200,000. This tax is deducted from the employee’s gross wages and the employer matches what is withheld.

The employer is also responsible for paying state and federal unemployment taxes. Federal Unemployment Tax (FUTA) tax rate is .6% on the first $7,000 in wages for an employee as long as state unemployment taxes are paid timely. Other payroll taxes include state withholding tax and municipality income taxes (deducted from an employee’s paycheck).

Payroll Taxes

The most efficient way to file your federal withholding tax is electronically. This can be done through most payroll software programs or through the EFTPS website. In order to file payroll taxes, you must have a Federal ID number, PIN, and your bank account information. Most states have websites to pay electronically also.

There are two deposit schedules, monthly and semi-weekly.

Payroll Tax Reports

  • 941/943/944 (one, not all)
    • 941 Employer’s Quarterly Federal Tax Return.  Due date is always the last day of the month following the quarter end. Quarters are: Jan – Mar, Apr – Jun, Jul – Sep, Oct – Dec .
    • 943 Employer’s Annual Federal Tax Return for Agricultural Employees, this return is filed on an annual basis if you are an agriculture employer. Due date is 1/31.
    • 944 Employer’s Annual Federal Tax Return. The annual 944 is designed for small employers (payroll tax liability is $1,000 or less). Due date is 1/31.
  • 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return. Due date is 1/31.
  • W2 Employee Wage and Tax Statement. The W2 is due to the employee and SSA (Social Security Administration) no later than 1/31.
  • W3 Transmittal of Wage and Tax Statements. The W3 serves as a cover letter to send your W2 wage reports to the SSA if you file paper returns. If you file your W2s electronically through payroll software the W3 may not be required. Due 1/31 with the W2s.

There are also various state withholding and unemployment tax returns that are due. It is best to check with your state to see what the requirements are for filing as well as due dates.

Example:  You have hired an employee for $20/hr.  The total cost would be:

Wages         20.00

SS                    1.24

Medicare         .29

FUTA               .12

SUTA               .35

Work Comp    .20

Total cost    22.20

Hiring & Firing Employees

Ever since your business started you have done it all. The day to day operations, management tasks, buying, selling, marketing & booking. Now that you are focusing on the $100/hr tasks, you are taking the leap to hire your first employee. Below we have outlined the considerations of hiring and terminating employees.

Hiring

  1. Attain workers’ compensation insurance.
  2. Require all employees to fill out W-4 and I-9 forms.
  3. Report all employees to the South Dakota New Hire Reporting Agency.
  4. Post all required Department of Labor notices.
  5. Create an employee handbook.
  6. Set up employee benefits as desired.

Termination

  1. Consider creating a discipline policy and conducting exit interviews.
  2. South Dakota is an at-will state. This means that an employee can be fired at any time and an employee can leave at any time. Although the at-will option exists, there are still limitations to this. The termination of employment laws can be found here.
  3. Pay all wages and compensation due to the employee.
  4. Depending on the cause of termination the employee may be able to collect unemployment.  This can influence your company’s unemployment rate.

The hiring steps are black and white while the firing are gray. If you want to learn more, the Department of Labor has set up the interactive e-laws site to help employees and business owners learn more about their rights and responsibilities. Each state has different laws, so make sure to check the laws in your state.

The $100/hour Job

Is it possible to make $100/hour? Yes, but it’s not easy if you are not a natural manager. When you first start as an entrepreneur you are trading time for money, as you grow, you shift to trading money for time. Managing employees is inevitable if you have a business or operation that is growing. Even if you are not growing, if you want to get to the point that you are not tied to it 24/7, you will have to. I operated for 4 years on my own until realizing I want my kids to grow up wanting to be an accountant because I love what I do. Not dislike being an accountant because mom worked too much. Something needed to change. How do you do it when you are used to controlling everything?

  1. Plan, plan, plan.  List all the tasks that you currently do in a day, month, week, year.  Keep a notebook handy to always write down what you are doing.
  2. Note everything that could be delegated to someone else.  Where is your time best spent (Building fence or marketing cattle?  Stuffing envelopes or networking with a colleague)?
  3. Assign time to these tasks.  How much of your time can you free up by delegating?
  4. Imagine what your week would look like if you did hire someone.  Where would you refocus your energy for the $100/hr jobs?  Marketing, networking, goal setting, management are a few ideas.
  5. Consider if this looks like full time, part time, or contract.  An employee will take more management than a contractor (someone who is already familiar with the tasks at hand).  What is the total cost of this position?
  6. What you are willing to give financially for this work.  How does it fit in your overall picture?  Do you have the income currently to cover this person or how much do you need to grow to cover the cost?  And what will this person enable you to spend time on to be more profitable?
  7. How are you going to invest in this person so they grow?
  8. Surround yourself with people who give you wisdom and help you grow.

Sample week after hiring ($20/hr):

You may go through this exercise and say it’s not worth it in the end, and that very well might happen. If so, then you must decide where your current energy will get the highest return on investment. Employees are not for everyone. The right employees can be game changers. Careful planning will help make a smooth transition to management. If you do decide to delegate, now you must focus on the $100/hr tasks.