FEDERAL PAYROLL TAX CUT EXTENSION FOR 2012.
On December 23, 2011, the Temporary Payroll Tax Cut Continuation Act of 2011 was signed into law. This provides a two month extension for the two percentage point reduction in the Social Security portion of FICA taxes paid by employees. It also provides the same deduction in the employee equivalent portion of self employment taxes. Employers are supposed to implement the tax cut as soon as possible in 2012, but no later than January 31, 2012. If any Social Security tax has been over withheld, an off-setting adjustment should be made in the employee’s pay no later than March 31, 2012. The cut applies only to the first $18,350 in wages received in January and February. If an employee earns more than this amount, there is an additional income tax on the excess wages. In 2012, the wage base for the Social Security tax has been increased to $110,000.00, up from $106, 800 in 2011.
RETIREMENT SAVINGS: 401K VERSUS SEP.
The two most popular retirement plan choices for small business owners are a 401K and a SEP. Either can be used whether your business is incorporated or unincorporated and whether you work alone or have employees.
A SEP is funded based on a percentage of the participant’s earnings. The maximum deductible amount for 2012 is $50,000.00. However, in order to achieve the maximum contribution, the employee must earn around $200,000.00 (the maximum contribution is 25% of wages). A SEP is funded entirely by employer contributions. The same percentage of compensation must be used for rank and file employees as is used for owners. A SEP can be set up and funded until the extended due date of the company’s tax return. There is no annual reporting necessary for a SEP. A SEP cannot permit loans to participants. Purported loans are treated as taxable distributions.
A 401K plan can provide the greater retirement savings through a combination of employee elective deferrals and employer contributions. For 2012, the total contribution limit is $50,000.00 (the pre-tax maximum contribution is $17,000 or $22,500 for people over 50). A 401K plan is funded primarily through employee elective deferrals. Employer contributions are not required unless the company chooses a safe harbor 401K plan to simplify compliance with complex tax rules. Employer contributions can be modest so this plan is more cost effective as the size of the staff grows. A 401K must be set up by the end of the calendar year in order to permit contributions for the year. In small businesses, employees’ elective deferral amounts must be deposited within seven business days of payroll. A 401K plan can permit participants to take loans from their account within a set limit.
In comparison, a 401K permits greater savings at the same income level. A 401K may be less costly from a contribution perspective than a SEP. A SEP has lower administration costs than a 401K. A 401K can permit borrowing and a SEP cannot.
WHAT IS THE DIFFERENCE BETWEEN AN ESTATE PLAN AND A SUCCESSION PLAN?
An estate plan is a comprehensive plan for administration and distribution of your assets when you die. It entails such things as bequests and estate tax projections. A succession plan governs what happens to your business at your death and it may involve transferring ownership of the business or planning for a sale of the business at death. A succession plan may be part of an overall estate plan.
It is advisable to put a succession plan in place if you run your own business to ensure the long term viability of the business after the death of the business’ owner(s).
WHAT ARE THE BENEFITS OF A COMPANY HAVING A DBA?
Registering a DBA or “doing business as” certificate allows a company to transact businesses under an assumed name. With a DBA, a company can open bank accounts, accept payments and advertise using the business name rather than the corporate name. DBAs can provide major cost savings to companies that plan to pursue more than one type of business venture. Companies can maintain their original structure and distinguish among their businesses with DBAs, instead of creating a separate corporate entity for each individual business.
Prepared by Kristen B. Degnan