Author: Suzanne Watson

If you hire a nanny, housekeeper or other household worker who will earn at least $2,100 from you in 2019, you will have to pay employment taxes. Here’s what you need to know, courtesy of the Internal Revenue Service.

Paying Taxes

Workers will generally pay 6.2% for social security and 1.45% for Medicare taxes (for a total of 7.65%) from all cash wages, although you have the option to pay these taxes for your nanny, housekeeper or other household employees. You must, however, pay your employer’s share, which is another 7.65% for the same taxes on income earned by these home workers. While it’s unlikely, you will have to withhold an additional Medicare tax of 0.9% on any home worker who earns more than $200,000. The tax is on the excess over the amount.

Other Requirements

You also need to complete Form W-2, the Wage and Tax Statement, for each employee, and a Form W-3, the Transmittal of Wage and Tax Statement. You are required to get an employer identification number, which you can do online, and get your employees’ social security numbers.

While not required, you have the option at the employee’s request to also withhold federal income taxes, for which you’ll have to get a completed Form W-4 from the employee. To learn more about these and other related taxes, talk to your tax professional.

It’s one thing to be thrifty if you own your own business, but you’ll need to open your company wallet if you want to grow your business. Here are some ways to find the working capital you’ll need.

Look Ahead

You monitor your receivables regularly to make sure you have enough to reimburse for supplies, pay vendors and deliver paychecks on time to your employees. You forecast your costs for rent or a mortgage, insurance, marketing, accounting and employee benefits. Strictly speaking, working capital is simply assets minus liabilities, and it’s sometimes hard to find those extra assets.

Seize Opportunities

Working capital is what’s left over after you pay your bills. Having enough of it can help you maximize opportunities and grow your business. One way to increase working capital is by matching inventory to sales more closely, thus lowering inventory costs.

You can do the same by reducing or eliminating debt, reducing expenses, lowering taxes and either increasing sales or raising prices on popular items. If you would rather not take on additional debt, an angel investor or a partner to grow, these and other steps can help your firm increase working capital. Your tax professional can help you identify more ways to increase working capital.

Jean and Bill are snowbirds who spend half the winter in a Sunbelt state. They heard that they can establish their residency in that state and pay lower taxes because the warmer state has no income tax. How do they establish residency?

Where they live most of the year may be a key requirement of residency, but Jean and Bill should keep a record of where they are each day in case tax authorities question it. In some states, simply spending most of the year there may not be enough.

Jean and Bill may need to complete and sign a declaration of domicile, or residency, in their state of choice. They should also consider changing their address in all areas of their lives, from Social Security and Medicare to life insurance policies, retirement plans and even voting and car registrations.

Before they make a permanent move, they should reconsider how much taxes play a role in where they want to live. Then they should consider what states tax. Retirement income, real estate, estates and even everyday items they buy contribute to a total tax picture.

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you.

Paying for college or university has become increasingly expensive. Outstanding student loan debt in the fourth quarter of 2018 rose to $1.46 trillion, an increase of $15 billion, according to the New York Federal Reserve. Higher education may be expensive, but even if high school graduation is only two years away, you have five years to save for senior year of college. A 529 plan and Coverdell Education Savings Account (ESA) are two tax-advantaged ways to save.

529 Plan

States administer 529 plans, and their contribution limits are as high as six figures. Additionally, there are no income restrictions on who can contribute, so anyone can put money into these plans. This combination, plus tax-deferred potential growth, tax-free distributions for qualified expenses and donor ownership of the account, makes a 529 plan ideal for building college savings quickly.

If grandparents or other relatives want to gift money for their grandchildren’s college, they can each give up to $15,000 per year (in 2019) free of federal gift tax. Not only that, but any individual can bunch five years’ worth of contributions into one year. That’s $75,000 in Year 1. In this case, you can’t contribute anything else in the subsequent four years.

Coverdell ESA

Unlike a 529 plan, an ESA has income limits, but they are fairly generous. The income limit is $110,000, or $220,000 for taxpayers filing jointly. Contribution limits, however, are small at $2,000 annually. Still, every little bit adds up over time, and potential growth is tax-deferred and withdrawals for qualified expenses tax-free.

Both a 529 plan and ESA affect potential financial aid differently, so talk to your tax and financial professionals to chart your best course.

If you turn 50 this year, the federal tax code offers a few ways to contribute more tax-deferred money to your retirement accounts. Here’s a look at how much you can save in some popular plans.

Company Plans

Saving in a 401(k) or 403(b) plan just got a whole lot more exciting. At age 50, you can contribute an extra $6,000 annually. That makes a total of $25,000 a year allowed, which can help you catch up more quickly. Or if your company has a SIMPLE plan, you can put in another $3,000 for a total of $16,000 annually.

Individual IRAs

If you meet income qualifications, you can take advantage of a traditional or Roth IRA’s tax deferral to the tune of an extra $1,000 annually. That makes the total $7,000 you can contribute each year (as long as you have at least that in earned income).

If you plan to sell your business within a few years, there are a number of ways to do so. Here are a few scenarios you might consider before selling.

CASH

You can sell your entire business, its assets or an equity share. In any case, cash is king. A cash deal may involve the entire sale price upfront, an initial sum plus annual payments, or only annual payments. No matter how the sale is structured, only cash will change hands.

Seller financing via installment payments is riskiest because it depends on the new owner’s continuing success. Combining upfront and annual payments could include an earn-out agreement for after-sale payments, where the seller receives bonuses or consultant fees annually. Full payment in cash upfront eliminates many risks, but could increase your tax liability.

EQUITY OR ASSETS

If you will gradually leave your business, you might give a new partner partial equity in return for payment now and at your agreement’s conclusion. This entails some risk — you haven’t fully divested yourself, and bringing on another person is always risky — but you could earn more over time. Work with an attorney to create an ironclad agreement.

Selling your business assets could be an option if you will dissolve the company. This typically is least risky, but price the assets fairly and act before you need to have a fire sale.

LAYING THE GROUNDWORK

Valuing your business requires a bit of pre-sale work, which includes comparing your business to peer competitors and creating a succession plan (if applicable). The more work you complete up front, the better your sale prospects will be.

However it’s structured, a business sale generally has tax consequences that may include capital gains, gift, generation-skipping and estate taxes. You may want to consult a valuation expert, in addition to working with tax, legal and financial professionals, before you begin the process.

Ways To Structure A Business Sale – If you plan to sell your business within a few years, there are a number of ways to do so.

Supercharge It – If you turn 50 this year, the federal tax code offers a few ways to contribute more tax-deferred money to your retirement accounts.

Saving For College – Paying for college or university has become increasingly expensive.

Profile – How to establish residency in a lower tax state

Working Capital And Your Company – You’ll need to open your company wallet if you want to grow your business

Nannies, Housekeepers and Taxes – If you hire a household worker who will earn at least $2100 in 2019, you will have to pay employment taxes.

Questions and Answers

Short Bits

PPI SLOWING.

The Producer Price Index (PPI) for final demand for the year ending February 2019 rose just 1.9%, calming inflation fears. When adjusted to eliminate foods, energy and trade services, the PPI increased 2.3% for the same period. When the annual price increases experienced by producers are relatively low, consumers typically can expect prices they pay to stay stable.

EARNINGS UP.

Real average hourly earnings for all employees increased 1.9%, seasonally adjusted for the year ending February 2019, according to the Bureau of Labor Statistics (BLS). The change in real average hourly earnings, combined with a 0.3% decrease in the average workweek, created a 1.6% increase in real average weekly earnings. Production and nonsupervisory employees, who are typically among the lower paid, saw real average hourly earnings increase 2.2%. After factoring in the 0.6% decrease to their average workweek, real average weekly wages rose 1.5%.

WHAT’S UP?

. . . and what’s down? According to the BLS, lettuce (14.5%), tax prep and accounting services (13.8%), laundry equipment (8.9%) and health insurance (7.7%) showed some of the biggest price increases for the year ending February 2019. The price of televisions dropped 16.8%, followed by telephone hardware and calculators (-15.1%), infants’ equipment (-11.5%), and dishes and flatware (-9.1%).

MORE CONFIDENT.

Americans in January 2019 were feeling more confident about their finances than a year prior, according to a recent Gallup Poll. More than two-thirds of respondents said they expected to be better off in the year ahead. Half said they were better off than the year before.

Question:

I didn’t enroll in Medicare when I was eligible at age 65, even though I wasn’t working at the time. Now I want to enroll, but heard I can only do this during certain times. Is this true?

Answer:

You can sign up for Medicare Parts A and B during the general enrollment period, which is January 1 – March 31 each year, if you didn’t sign up when first eligible and you weren’t eligible for a special enrollment period. If you didn’t have health insurance through your employer or spouse’s employer and you didn’t take Medicare when eligible, you may have to pay higher premiums for late enrollment.

Question:

Last year, I lost some principal in a mutual fund that invested only in U.S. Treasury securities. How could I lose money with them when there are federal guarantees?

Answer:

Treasury bills, bonds and notes held until maturity are guaranteed. Not so for these securities if you sell them before maturity or a fund manager sells them within a mutual fund. When interest rates go up, your lower-rate bonds aren’t as attractive if you try to sell them before maturity. Mutual funds, including those with bonds, can lose money at any time if they buy and sell these securities at less than peak values.

If your business has grown or you are constantly looking for qualified employees, setting up an internship program may help both your business and interns who seek valuable job experience. An internship program is not, however, free labor. Federal law prohibits it in most cases, requiring most interns be paid at least the federal minimum wage.

PROGRAM BENEFITS

A successful internship is one that works for your company and your interns. A mutually beneficial relationship will include job duties beyond getting coffee and tasks unrelated to business. It will include clearly stated duties and goals, and a feedback mechanism that helps your interns review any progress or challenges.

Your business benefits because an intern can fill in as a temporary employee would, helping to meet work demands during summer vacation schedules, while also potentially becoming a candidate for future full-time employment.

KNOW THE RULES

Talk to an attorney experienced in the area of employment law to ensure you run a successful internship program.