Retirement Planning for Small Business Owners
August 30, 2021 | BY Our Partners at Equinum Wealth Management
For many Americans, saving for retirement means participating in the 401(k) or 403(b) retirement plans offered by their companies. This leaves the self-employed and small business owners out in the cold when it comes to saving for retirement. Luckily for them, there are several options they can utilize.
Every American not covered by a company plan, can contribute to an IRA to save for retirement. The $6,000 contribution limit for these plans however, just won’t cut it for many. SEP IRAs were established as a way to help small-business owners establish retirement accounts for their businesses without the headaches that come with ERISA-sponsored plans. Later legislation introduced the solo 401(k), which also offers a simplified way for business owners to save for retirement and enjoy some of the benefits of a 401(k) plan that are not available with SEPs.
Here are the highlights of these two plans, and their key differences:
A Simplified Employee Pension (SEP) IRA is a plan that can be established by employers, including the self-employed. SEP plans benefit both employers and their employees. Employers may make tax-deductible contributions on behalf of eligible employees to their SEP IRAs. SEPs are advantageous because they have low administrative costs, are easy to set up and allow an employer to determine how much to contribute each year, without annual requirements. The contribution limit for 2021 is the lesser of $58,000 per person and 25% of adjusted net earnings. (For self-employed income, the percentage is a little lower.)
One major benefit of a SEP IRA from the employee’s perspective is that an employer’s contributions are vested immediately. No loans are permitted from a SEP IRA. The deadline for SEP IRAs is the filing date, including extensions, which make it a good option if any discussion arises after year’s end. A drawback from the employer’s perspective is that the employer must contribute on behalf of all employees who earn a total annual compensation of more than $600 if they reach the age of eligibility, even if they are only part-time workers.
Solo 401(k) plans are for sole proprietors, small business owners without employees (though spouses can contribute if they work for the business), independent contractors and freelancers.
With these plans, both the employer and the employee can make contributions. Like a regular 401(k), there is a Roth option to have after-tax funds contributed to these accounts. The contribution limit for 401(k)s for 2021, as an employee, is $19,500. If you are 50 or older, you can make an additional catch-up contribution of $6,500.
Wearing the employer hat, you can contribute up to 25% of your compensation. The total contribution limit (employee and employer contributions) for a solo 401(k) is $58,000 for 2021. This does not include the employee’s $6,500 catch-up amount for those over the age of 50. The calculation usually breaks down to the sum of $19,500 as an employee and $38,500 as an employer.
So, which one is a better option – a SEP IRA or a Solo 401(k)? The answer depends on your situation.
If you’re unsure which plan may work for you, please reach out to us at [email protected]. We’ll help you review your options and come to a decision tailor-made for your needs.
Improving Employee Engagement
August 30, 2021 | BY Simcha Felder
For most of us, having a job, a boss and a workplace where we have a genuine sense of purpose is very important. Steve Jobs famously said, “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”
As a business leader, motivating your employees and ensuring that they are engaged in their work is one of the most important things you do for your company. Research has shown time and again, that employee engagement is vital to a business’s success and profitability. According to the analytics and advisory company Gallup, engaged employees display higher levels of enthusiasm, energy and motivation, which translates into higher levels of job performance, creativity and productivity. This correlates to greater revenues and profits for your organization, as well as higher levels of well-being for employees and less turnover.
Despite the importance of employee engagement, just 35 percent of employees in the United States are considered “engaged” in their jobs. So, what is employee engagement and how do you improve it at your company?
Gallup, an industry leader in employee engagement, defines ‘engaged’ employees as those who are involved in, enthusiastic about and committed to their work and workplace. For engaged employees, it is about more than just a paycheck – they work harder and are more dedicated towards their employers, which is then reflected in their individual productivity. Disengaged employees are more likely to only do the bare minimum or even actively damage your company’s work output and reputation.
As a business leader, what can you do to improve the engagement of your employees? Well, it turns out that leaders and managers have a significant amount of input on employee engagement. According to Gallup, 70% of the variance in team engagement is determined solely by the manager. A study by the American Psychological Association found that 75% of Americans say their “boss is the most stressful part of their workday.” So here are a few ways that business leaders can increase employee engagement:
Include Me: Assuring your employees that their work and opinions are important is a simple yet important step to increase engagement. According to cloud-based software company Salesforce, professionals who believe their voice is heard are over four times more likely to feel empowered to do their best work. When you are considering solutions to business problems, encourage your employees to participate in the decision-making process, and give equal consideration to each employee’s suggestions, so they feel valued. Following the success of an important project or initiative, offer praise and emphasize how much you appreciate your employee’s contributions.
Inspire Me: Trust and autonomy are core ingredients that inspire engagement amongst employees. Be sure to delegate important tasks and projects to your team because it demonstrates trust and empowers your employees. To delegate effectively, ensure you are assigning tasks to employees who are equipped with the knowledge, skills and resources to handle them. Take time to clearly define the expectations and the required results, but leave your employees to accomplish the assigned task and don’t micromanage.
Grow Me: Many business leaders and managers are so focused on their own careers or success that they often forget about the careers of their employees. It is important for leaders to recognize that most employees are looking to be a part of an organization that offers a visible path for career progression. People want to feel that they have partners in developing their careers – and that goes beyond timely promotions. They want personal and professional development, such as the opportunity to cultivate new skills and experiences or by pursuing valuable certifications or degrees. As your employees’ careers develop and grow, your organization will be poised to reap the rewards.
Now more than ever, good pay and benefits are not enough to fully engage employees. You need to give your employees challenging work, truly value their contributions and show that you care about them and their careers. If you follow these steps, you will find that you have happier employees who are willing to work harder for you and your business.
New Guidance and Election Application for the Optional PTET
August 26, 2021 | BY admin
Possible Tax Consequences of Guaranteeing a Loan to Your Corporation
August 18, 2021 | BY admin
What if you decide to, or are asked to, guarantee a loan to your corporation? Before agreeing to act as a guarantor, endorser or indemnitor of a debt obligation of your closely held corporation, be aware of the possible tax consequences. If your corporation defaults on the loan and you’re required to pay principal or interest under the guarantee agreement, you don’t want to be blindsided.
Business vs. nonbusiness
If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations on deductions of capital losses. A nonbusiness bad debt is deductible only if it’s totally worthless.
In order to be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this tends to show that the dominant motive for the guarantee was to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee was primarily to protect your investment rather than your job.
Except in the case of job guarantees, it may be difficult to show the guarantee was closely related to your trade or business. You’d have to show that the guarantee was related to your business as a promoter, or that the guarantee was related to some other trade or business separately carried on by you.
If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.
In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if:
- You have a legal duty to make the guaranty payment, although there’s no requirement that a legal action be brought against you;
- The guaranty agreement was entered into before the debt becomes worthless; and
- You received reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.
Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.
These are only a few of the possible tax consequences of guaranteeing a loan to your closely held corporation. Contact us to learn all the implications in your situation.
Is Your Business Underusing Its Accounting Software?
August 16, 2021 | BY admin
Someone might have once told you that human beings use only 10% of our brains. The implication is that we have vast, untapped stores of cerebral power waiting to be discovered. In truth, this is a myth widely debunked by neurologists.
What you may be underusing, as a business owner, is your accounting software. Much like the operating systems on our smartphones and computers, today’s accounting solutions contain a multitude of functions that are easy to overlook once someone gets used to doing things a certain way.
By taking a closer look at your accounting software, or perhaps upgrading to a new solution, you may be able to improve the efficiency of your accounting function and discover ways to better manage your company’s finances.
The seeds of accounting software underuse are often planted during the training process, assuming there’s any training at all. Sometimes, particularly in a small business, the owner buys accounting software, hands it over to the bookkeeper or office manager, and assumes the problem will take care of itself.
Consider engaging a consultant to review your accounting software’s basic functions with staff and teach them time-saving tricks and advanced features. This is even more important to do if you’re making major upgrades or implementing a new solution.
When accounting personnel are up to speed on the software, they can more easily and readily generate useful reports and provide accurate financial information to you and your management team at any time — not just monthly or quarterly.
Commit to continuous improvement
Accounting solutions that aren’t monitored can gradually become vulnerable to inefficiency and even manipulation. Encourage employees to be on the lookout for labor-intensive steps that could be automated and steps that don’t add value or are redundant. Ask your users to also note any unusual transactions or procedures; you never know how or when you might uncover fraud.
At the same time, ensure managers responsible for your company’s financial oversight are reviewing critical documents for inefficiencies, anomalies and errors. These include monthly bank statements, financial statements and accounting schedules.
The ultimate goal should be continuous improvement to not only your accounting software use, but also your financial reporting.
Don’t wait until it’s too late
Many business owners don’t realize they have accounting issues until they lose a big customer over errant billing or suddenly run into a cash flow crisis. Pay your software the attention it deserves, and it will likely repay you many times over in useful, actionable data. We can help you assess the efficacy of your accounting software use and suggest ideas for improvement.