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An HSA Can Also Be Used to Save for Retirement

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Health Savings Account ( HSA ) coin jar with piggy bankHealth savings accounts (HSAs) were created as a savings vehicle to help people pay out-of-pocket medical expenses. If qualified, you can establish an HSA in much the same way you establish a traditional savings account or an individual retirement account. You can open one with a lump-sum payment or through regular contributions, usually through paycheck deductions.

What makes HSAs appealing is that they offer several valuable tax-saving features. For example, your contributions are excluded from deductible income, all account earnings accumulate tax free, and, as long as the medical expenses paid with HSA savings are “qualified” expenses for you, your spouse, or your dependents, withdrawals from HSAs are tax free also. It is these tax savings features plus the ability to invest contributions in longer term assets that can make HSAs viable as alternative retirement savings vehicles.

Before looking into how HSAs can be used to save for retirement, it can be helpful to explain how they actually work.

The Rules on Contributions

The maximum family contribution for 2024 is $8,300 plus a $1,000 maximum catch-up contribution for participants who are age 55 or more. For self-only coverage, the maximum contribution for 2024 is $4,150 plus a $1,000 catch-up contribution for those participants age 55 or more. The limits will be adjusted for inflation in future years. An individual’s employer or family member may contribute as long as the total contribution amount does not exceed the annual limit.

Investing Contributions

As a participant in an HSA, you have the choice of keeping contributions in cash or investing them in other assets, such as stock and bond mutual funds.* Money not spent on qualified expenses during the year is rolled over for subsequent years. If you are in fairly good health and underutilize medical and health services, you could potentially build up a relatively large balance in the HSA account over several years.

Making HSAs Work as Retirement Savings Vehicles

If you currently maximize contributions to all tax-favored retirement accounts and also save in taxable accounts, you could treat the HSA as one more option to increase your savings and do so in a tax-favored way. Essentially, you would treat the HSA as a retirement savings account and allow the assets in the account to accumulate for as long as possible while paying out-of-pocket medical costs with taxable funds. Of course, this approach does not work if you cannot fully fund all your tax-advantaged retirement savings vehicles.

Remember, each person’s situation is different and you will benefit from discussing this option — and other retirement savings options — with an experienced financial professional

Double Taxation: How Small Businesses Can Avoid It in the U.S.

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Double taxation symbol. Concept words Double taxation on wooden blocks on a beautiful canvas table canvas background. Business tax and double taxation concept, copy space.Double taxation is a significant concern for small business owners in the United States. It occurs when the same income is taxed twice: once at the corporate level and again at the individual level when profits are distributed as dividends. This situation can create a financial burden for small businesses, affecting their ability to reinvest profits and grow. Understanding how double taxation works and exploring strategies to avoid it is crucial for small business owners aiming to maximize their financial efficiency.

Double taxation typically affects businesses structured as C corporations. In this setup, the corporation itself is taxed on its earnings. When these after-tax profits are distributed to shareholders as dividends, the recipients must pay personal income tax on the dividends, leading to the same money being taxed twice.

Strategies to Avoid Double Taxation

1. Choosing the Right Business Structure

One of the most effective ways to avoid double taxation is to choose a business structure that bypasses the issue entirely. Here are some alternatives:

  • S Corporation: By electing S corporation status, a business can avoid federal corporate income taxes. Instead, income is passed through to shareholders and taxed at their individual rates, thus eliminating one layer of taxation.
  • Limited Liability Company (LLC): An LLC can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation. Most small LLCs opt for pass-through taxation (as a sole proprietorship or partnership), where business income is reported on the owners’ personal tax returns.
  • Partnership: Similar to LLCs, partnerships enjoy pass-through taxation, allowing profits to be taxed only at the individual partner level.

2. Retaining Earnings

C corporations can retain earnings rather than distributing them as dividends. While this means the corporation pays tax on the earnings, the shareholders avoid paying personal tax on dividends, thus mitigating double taxation. However, this strategy requires careful planning, as the IRS may impose an accumulated earnings tax on corporations that retain earnings beyond reasonable business needs.

3. Paying Salaries to Owners

Another strategy for avoiding double taxation is to pay salaries to owner-employees. Salaries are deductible as a business expense, reducing the corporate taxable income. This way, the income is only taxed once as personal income for the recipients. It’s crucial to ensure that the salaries are reasonable and commensurate with the work performed to avoid IRS scrutiny.

4. Using Fringe Benefits

C corporations can provide tax-deductible fringe benefits to owner-employees, such as health insurance, retirement plans, and education assistance. These benefits are not considered taxable income for the employees but are deductible for the corporation, thus reducing taxable income and avoiding double taxation.

5. Borrowing Instead of Distributing Dividends

Shareholders can receive loans from the corporation instead of dividends. This approach can defer personal income tax liability. However, the loan must be structured as a bona fide loan with a reasonable expectation of repayment to avoid reclassification as a dividend by the IRS.

6. Reinvesting Profits

Reinvesting profits in the business for expansion, research and development, or other growth initiatives can reduce taxable income at the corporate level. By lowering the corporate tax burden, the business can mitigate the effects of double taxation.

Double taxation can pose a significant challenge for small businesses, but by understanding the tax implications of different business structures and implementing strategic financial practices, owners can minimize their tax burden. Whether through electing S corporation status, leveraging the flexibility of LLCs, retaining earnings, paying reasonable salaries, or using fringe benefits and loans, small businesses have several tools at their disposal to navigate and avoid the pitfalls of double taxation. Consulting with a tax professional can further ensure that small business owners make informed decisions tailored to their specific financial situations and long-term goals.

How Do You Determine How Much to Pay New Hires?

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Healthcare, onboarding and handshake, doctors at job interview, meeting with HR recruitment agent. Diversity, human resources and hiring, asian woman shaking hands with doctor in welcome or thank youSmall business owners know that high performers seek out jobs that offer them an opportunity to grow and to develop professionally. Benefits are also important to job seekers. However, salary plays a major role in the decision to accept a job offer. Every owner of a small business struggles with the question of how much to pay a new hire.

As a small business owner, you understand that applicable wage and hour laws are an important factor in that decision. But beyond these legally mandated requirements, what else should you look at when trying to figure out a compensation rate that is fair and competitive? Here are some issues that you should review.

Education and Experience Requirements

It’s a given that jobs that require a specialized set of skills, long experience, or extensive educational background will be harder to fill than jobs that require only very general skills. Employees with in-demand skills expect a premium salary. If you find a likely candidate for an important position within your company, you may want to determine what others in your industry and in your location are paying for that type of job before you make that prospective employee an offer. The Bureau of Labor Statistics (BLS) website is a good source for information on employment and wage statistics for various occupations throughout the country. BLS data is broken down into occupational types as well as various subcategories within that occupation.

The Nature of Your Industry

Certain industries, such as engineering and health care, typically pay employees more in wages and benefits than other low-paying industries, such as hospitality and retail. However, you may have to consider paying above-market wages and benefits if the job you want to fill is critical to the profitability of your business. That could be particularly necessary if your business is located in a region where the cost of living is higher than the national average.

Supply and Demand Issues

If you are located in a region where labor is plentiful, you may be able to pay the going rate for the workers you need. However, if the talent you need for your business is in short supply, you may have to get into a bidding war with other employers in your region.

The Candidate’s Value to Your Business

Ask yourself: What value will the job candidate bring to your business? How much revenue can you expect the candidate to generate in the first 12 months? What skills do they possess that can help move your business forward? You want to come up with an approximate salary that you can justify, one that aligns with your expectations of the candidate’s potential contributions to your business.

What Does the Job Candidate Expect?

Take the time to understand why a particular candidate is interested in working for your business. During the interview process, try to determine what it is that drives them: more responsibility, a salary increase, or a career path towards management. Their answers can help you formulate an offer that is acceptable to both sides. Clarify what their expectations are in terms of benefits and how important benefits are in their final decision about whom to work for. Many candidates who prioritize working remotely part-time or a solid health insurance package may be willing to take a smaller paycheck in return for the benefits they truly want.

The reality is that finding the right candidate for a critical job at a salary you can live with is tough. Your financial professional can help run some numbers so that you can have a better idea of what you can afford to pay an employee who will be a valuable asset to your organization.

A Checklist for Plan Sponsors

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task list is ticked off in detailOnce a retirement savings plan has been approved and is in place, it’s tempting to sit back and adopt an “I’m done,” hands-off attitude. However, to ensure that a plan will continue to operate effectively, employers should periodically review plan provisions and features. Here are some points to check.

  • How the plan is presented. The more convinced employees are of the wisdom of saving for retirement, the greater the level of employee participation. The greater the participation, the more the plan can benefit all employees — including highly compensated ones. Regular meetings, newsletters, and handouts are effective means of communicating plan advantages. Check to make sure printed materials are up to date and easy to understand, and distribute them frequently.
  • Plan investments. Employers that sponsor participant-directed plans can limit potential legal liability for losses caused by employees’ investment decisions if plan investment choices meet certain requirements under Section 404(c). Very generally, where 404(c) protection is sought, a plan should offer at least three “core” investment choices, allow employees to switch investments at least once each quarter, and provide participants with adequate disclosure of specified investment information.
  • Administration. Participants and beneficiaries must be given a copy of the Summary Plan Description (SPD) within 120 days after a plan is adopted or within 90 days after becoming eligible to participate in the plan or receive benefits. Review the SPD to make sure it accurately describes the provisions of your plan. If changes have been made to the plan document — which is likely, given the recent tax law changes — then all participants must receive a notification of these changes within 210 days after the end of the plan year in which the changes were adopted. Generally, all participants must receive a copy of the SPD every five years.
  • Summary annual reports (SARs). Summary annual reports must be distributed to participants within nine months after the close of the plan year. If a plan receives an extension to file its annual report (Form 5500) with the IRS, then the SAR must be distributed within two months after the end of the extension.
  • Plan rollovers. Qualified plans must allow a participant to elect direct rollover of any eligible distribution to an IRA or another employer-sponsored retirement plan. Your plan should have procedures in place to handle direct rollovers.
  • Bonding. Generally, plan fiduciaries and others who handle the assets of a plan must be bonded. The bond must be equal to at least 10% of the funds handled by the bonded individual, but cannot be for less than $1,000 and need not be for more than $500,000.
  • Loans to participants. Loans that are not properly administered may be treated as constructive distributions resulting in taxable income to the recipients. Review loans to make sure that loan balances do not exceed the maximum limitations. Unless used to finance the purchase of a principal residence, all loans must be repaid within five years. A plan may impose more stringent conditions on loans than the law requires.
  • Plan forms. All forms should meet current requirements. Forms that may need updating include beneficiary designation forms, benefit election forms, and the notice of distribution options.

Estate Settlement Services

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Home agents are using a calculator to calculate the loan period each month for the customer.Like most successful people, you want to be certain that what you have spent a lifetime building will be passed on to your heirs in the manner you desire. Retaining an attorney to draft a will is a critical first step in achieving this goal. It’s equally important that you carefully select a personal representative (or executor) to carry out the instructions in your will.

What Is at Stake

Your choice of personal representative may determine how effectively and quickly your estate is settled. Ideally, your personal representative should have the skills and experience to ensure that your estate will be administered properly under your state’s laws. Also, you should have a level of trust that your representative will carry out your instructions in a way that protects your heirs financially.

Estate Settlement Is a Complex Undertaking

A qualified personal representative will:

  • Locate your will
  • Consult with your attorney
  • Obtain court authority (probate the will)
  • Determine your family’s immediate needs and arrange for support and maintenance payments to be made to dependents while your estate is being settled, as allowed under the terms of your will

Once the estate administration process starts, he or she will:

  • Keep estate assets secure
  • Contact life insurance companies
  • File claims for any retirement, Social Security, and veterans benefits
  • Collect outstanding debts
  • Inform creditors of your death
  • Pay bills
  • Sell property as you have directed or that needs to be sold within the executor’s discretion to meet estate taxes or debts or to facilitate bequests under your will
  • Maintain timely and accurate records of all estate-related transactions
  • Record and inform your heirs and the probate court of all estate transactions
  • Prepare and file all required federal and state income and estate tax returns
  • Distribute probate property to your beneficiaries

Another Option

Given the complexity of all that’s involved in settling an estate, it may make sense to name an institution as your personal representative. If, however, you are more comfortable with the thought of a relative or friend settling your estate, you have the option of naming the individual and the institution as co-personal representatives. The person you’ve selected will be involved in all estate-related decisions but can leave the administrative and asset management duties in the hands of the institution.

A Comprehensive Guide to Small Business Taxes

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Finance, accounting and fintech, a man on a computer and calculator working out his business budget strategy. Businessman at his office desk, laptop, money management and financial investment online.Running a small business comes with a multitude of responsibilities, and one crucial aspect is managing taxes. Small business owners often find themselves grappling with the complexities of the tax system, from understanding different tax obligations to maximizing deductions. In this article, we’ll delve into the world of small business taxes, offering insights and tips to help entrepreneurs navigate the tax landscape more effectively.

Different Types of Small Business Taxes

Small businesses are subject to various types of taxes, each with its own rules and regulations. Some common types of taxes that small business owners need to be aware of include:

  1. Income Tax: Business income is generally subject to federal, state, and sometimes local income taxes. Sole proprietors report their business income on their personal tax return, while other business structures have separate tax filings.
  2. Self-Employment Tax: If you’re self-employed or a sole proprietor, you’re responsible for paying both the employee and employer portions of Social Security and Medicare taxes, known as self-employment tax.
  3. Employment Taxes: If you have employees, you’ll need to withhold federal and, in some cases, state income taxes, Social Security, and Medicare taxes from their wages. You’re also responsible for paying the employer portion of these taxes.
  4. Sales Tax: Many states impose sales tax on the sale of goods and some services. Small businesses that sell taxable items need to collect and remit sales tax to the appropriate state authorities.
  5. Property Tax: If your business owns real estate or tangible property, you may be subject to property taxes levied by local governments.
  6. Excise Tax: Certain goods and services are subject to excise taxes, such as gasoline, alcohol, and tobacco products.

Tax Deductions and Credits for Small Businesses

Understanding tax deductions and credits is vital for minimizing your tax liability. Some common deductions and credits for small businesses include:

  1. Business Expenses: You can deduct ordinary and necessary business expenses, such as rent, utilities, office supplies, and employee salaries.
  2. Home Office Deduction: If you operate a business from your home, you may be eligible for a home office deduction.
  3. Startup Costs: New businesses can deduct a portion of startup expenses in their first year of operation.
  4. Health Insurance Deduction: Small business owners who provide health insurance for themselves and their employees may qualify for a deduction.
  5. Section 179 Deduction: This allows you to deduct the cost of certain property (like equipment) in the year it’s purchased, rather than depreciating it over time.
  6. Research and Development Credit: Businesses engaged in qualified research activities may be eligible for a tax credit.

Seeking Professional Assistance

Given the complexity of small business taxes, seeking professional assistance can be a wise investment. Enlisting the help of a certified public accountant (CPA) or tax advisor can help ensure that you’re compliant with tax laws, taking advantage of all eligible deductions, and making informed financial decisions.

Staying Organized and Prepared

Maintaining accurate and organized records is crucial for managing small business taxes effectively. Keep track of all income, expenses, receipts, and relevant documentation throughout the year. This will make tax preparation and filing smoother and more accurate.

Small business taxes are an integral part of entrepreneurship that demands attention and careful planning. By understanding the different types of taxes, leveraging deductions and credits, seeking professional advice, and maintaining organized records, small business owners can navigate the complex world of taxes with confidence. Remember, staying informed and proactive about tax obligations can help your business thrive financially while remaining compliant with tax laws.