No one likes surprises from the IRS, but they do occasionally happen. Here are some examples of unpleasant tax situations you could find yourself in and what to do about them.
An expected refund turns into a tax payment. Nothing may be more deflating than expecting to get a nice tax refund and instead being met with the reality that you actually owe the IRS more money.
What you can do: Run an estimated tax return and see if you may be in for a surprise. If so, adjust how much federal income tax is withheld from your paycheck for the balance of the year. Consult with your company’s human resources department to figure out how to make the necessary adjustments for the future. If you’re self-employed, examine if you need to increase your estimated tax payments due in January, April, June and September.
Getting a letter from the IRS. Official tax forms such as W-2s and 1099s are mailed to both you and the IRS. If the figures on your income tax return do not match those in the hands of the IRS, you will get a letter from the IRS saying that you’re being audited. These audits are now done by mail and are commonly known as correspondence audits. The IRS assumes their figures are correct and will demand payment for the taxes you owe on the amount of income you omitted on your tax return.
What you can do: Assuming you already know you received all your 1099s and W-2s and confirmed their accuracy, verify the information in the IRS letter with your records. Believe it or not, the IRS sometimes makes mistakes! It is always best to ask for help in how to correspond and make your payments in a timely fashion, if they are justified.
Getting a tax bill for an emergency retirement distribution. Due to the pandemic, you can withdraw money from retirement accounts in 2020 without getting a 10% early withdrawal penalty, but you’ll still have to pay income taxes on the amount withdrawn. If you don’t plan for this extra tax you will be surprised with an additional tax bill. And you may still get an underpayment penalty bill from the IRS because you did not withhold enough during the year. You may also still receive an early withdrawal penalty in error because the IRS is still scrambling to update their systems with all of this year’s tax relief changes.
What you can do: Set aside a percentage of your distribution for taxes. Your account administrator may withhold funds automatically for you when you request the withdrawal, so check your statements. Your review should be for both federal and any state tax obligations. If the withholding is not sufficient, consider sending in an estimated tax payment. And if you are charged a withdrawal penalty, ask for help to correspond with the IRS to get this charge reversed.
No one likes surprises when filing their taxes. With a little planning now, you can reduce the chance of having a surprise hit your tax return later.
Too often you find yourself in a situation and aren’t sure what to do. Here are some everyday tips that could come in handy!
Chew the aspirin. Taking an aspirin at the outset of a heart attack could save a life. But for an aspirin to save your life during a heart attack, you need to chew it. Aspirin, which inhibits platelets that speed blood clots, works fastest if chewed.
Celsius to Fahrenheit conversion: Degrees in Celsius x 1.8 plus 32. Only 5 countries measure temperature using Fahrenheit, so it is good to know how to convert from one to another. C to F: Take the temperature times 1.8 and add 32. F to C: Reverse the math. Subtract 32, then divide by 1.8.
Cats like milk, but it often does not like them. It’s not healthy for your cat to eat or drink anything that contains dairy. Cats have a degree of lactose intolerance and can get sick from large quantities of milk.
Miles to kilometers? Use the 3-5 method for an approximation.
Kilometers to Miles: Divide by 5, multiply times 3
Miles to Kilometers: Divide by 3, multiply times 5
Never fear calls from the IRS. Don’t be afraid of a phone call from the IRS – because they will never call without mailing you first. If you owe money to Uncle Sam, the IRS will always initiate communication via mail.
Should you have any questions regarding your situation, feel free to call.
Raising prices can be fraught with risk during good economic times. So what happens if you try to raise prices during bad economic times?
As Hamlet would say, “Ah, there’s the rub.” If you raise prices, you risk losing clients to competitors. If you don’t, decreasing revenue or rising costs can capsize your company. So what’s a small business supposed to do?
The Art of Pricing
Raising (and, sometimes, even lowering) prices can be a balancing act. As with any major business decision, pricing should take into account various factors. Here are several to consider.
Analyze costs. First, you need to carefully analyze the costs needed to bring your products or services to market. Such expenses might include raw materials, storage, personnel, advertising, delivery, rent, equipment, taxes and insurance. Failure to cover all these costs in your price will inevitably lead to shrinking profits.
Establish profit margin. Next, it’s important to establish an acceptable profit margin. This is where the art of pricing begins. To find your company’s sweet spot with regards to pricing, consider researching competitors in your region to determine their pricing for comparable products, raising your finger to the wind to discern the business climate and asking your customers about their preferences.
Listen to your customers. Your customers will tell you if you raised prices too high. They’ll either continue to buy your product or seek out a competitor.
Consider incremental price increases. Small, incremental price increases tend to be more palatable to customers than a few large changes. We see this every day in the rising cost of gasoline, utilities and taxes. Many customers can handle incremental inflation…just don’t shock them with a huge increase all at once.
When considering pricing, it’s important to take a long, hard look at both your costs and the quality of your products and services. Customers will generally pay a premium for goods and services that provide greater value. Successful business owners endeavor to increase both the actual quality of their products and the perception of that quality in the minds of customers. Do both well, and a price increase may be in order.
As an owner of a small business, you’ve proven that you’re a self-starter by operating a successful private enterprise. Of equal importance is applying your skills towards saving for your future. Here are some of the most popular tax-advantaged retirement vehicles for small business owners in 2020 and some tips on saving for retirement.
Options if you’re not currently enrolled in a plan
For small business owners not currently enrolled in a retirement plan, here are three of the most popular retirement account options:
Simplified Employee Pension (SEP) IRA Account. Contribute as much as 25% of your business’s net profit up to $57,000 for 2020.
401(k) Plan. Contribute up to $57,000 of your salary and/or your business’s net profit.
Savings Incentive Match Plan for Employees (SIMPLE) IRA Account. You can put all your business’s net profit in the plan, up to $13,500 plus an additional $3,000 if you’re 50 or older.
Which plan should you choose? SEP and SIMPLE IRAs are ideal for either sole proprietors or really small businesses (no more than one or two dozen employees). Due to higher administrative costs, 401(k) plans are usually more suited for larger small businesses (more than one or two dozen employees).
Tips to maximize your retirement contributions
For small business owners who are currently enrolled in a retirement plan, here are some suggestions for maximizing your annual contributions into your retirement accounts:
Pay yourself first. Instead of funding your retirement account with whatever is left over after paying your monthly bills, decide at the beginning of each month how much you want to set aside to fund your retirement. Make funding your retirement each month as important as your other bills. Then assume that you pay your retirement bill first. If you run out of money before paying all your bills, decide if there are any expenses that can be pared back for subsequent months so you can meet your monthly retirement savings goal.
List your retirement contributions on your income statement. It is easy to forget about retirement planning when running the day-to-day operations of your business. To keep retirement contributions top-of-mind, record these as a separate line item on your business’s income statement.
Review your tax situation at least twice a year. Tax planning is now more important than ever with the uncertainty caused by the recent pandemic. So review your tax situation at least twice every 12 months to see how to maximize each year’s retirement contributions.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
Estimated average Social Security retirement benefits starting January 2021
All retired workers in 2020 $1,523/mo
All retired workers in 2021 $1,543/mo
Did you know? You can increase your Social Security retirement benefits by 5-8% when you delay applying until you’re age 70.
1.6% cost of living adjustment for Social Security retirement benefits and SSI payments begins with the December 2020 benefits (payable in January 2021).
The 2021 maximum Social Security retirement benefits a worker retiring at full retirement age is $3,148/mo.
Did you know…
97% of U.S. citizens over age 60 either receive Social Security or will receive it in the future.
1 in 4 seniors expect Social Security to be their primary source of income.
Social Security pays benefits to more than 70 million people including retirees, children and surviving spouses.
2021 Social Security and Medicare tax rates
If you work for someone else…
your employer pays 7.65%
you pay 7.65%
If you’re self-employed…
you pay 15.3%
Note: The above tax rates are a combination of 6.2% for Social Security and 1.45% for Medicare. There is also 0.9% Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures.
Maximum amount you can pay in Social Security taxes
2020: $8,537.40
2021: $8,853.60
165+ million people work and pay Social Security taxes.
Social Security has provided financial protection for Americans since 1935.
Maximum earnings amount Social Security will tax at 6.2%
2020: $137,700
2021: $142,800
How does Social Security work?
When you work, you pay taxes into Social Security.
The Social Security Administration used your tax money to pay benefits to people right now.
Any unused money goes to the Social Security trust funds.
Later on when you retire, you receive benefits.
Social Security payments explained
SS Social Security retirement benefits are for people who have “paid into” the Social Security system through taxable income.
SSD or SSDI Social Security Disability (SSD or SSDI) benefits are for people who have disabilities but have “paid into” the Social Security system through taxable income.
SSI Supplemental Security Income (SSI) benefits are for adults and children who have disabilities, plus limited income and resources.
Maximum SSI payments
2020
2021
Individual
$783/mo
$794/mo
Couple
$1,175/mo
$1,191/mo
Here’s how to qualify for your retirement benefits
When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born.
If you were born in 1929 or later, you need 40 credits (10 years of work) to receive Social Security retirement benefits.
The earnings needed for a credit in 2021 is $1,470.
4 credits maximum per year.
Did you know you can check your benefits status before you retire?
You can check online by creating a my Social Security account on the SSA website. If you don’t have an account, you’ll be mailed a paper Social Security statement 3 months before your 61st birthday.
It shows your year-by-year earnings, and estimates of retirement, survivors and disability benefits you and your family may be able to receive now and in the future.
If it doesn’t show earnings from a state or local government employer, contact them. The work may not have been covered either by a Section 218 agreement or by federal law.
Corn might be the king of U.S. crops, but pumpkins are always in demand this time of year by kids and others celebrating fall’s festivities.
Here are several interesting tidbits about one of America’s favorite fall gourds.
Germany boasts world’s largest pumpkin. Mathias Willemijns showed off the world’s largest pumpkin in 2016 at the Giant Pumpkin European Championship, officially weighing in at a stout 2,624.6 pounds. Steve Geddes of New Hampshire is the owner of the largest U.S. pumpkin, weighing 2,528 pounds at the 2018 Deerfield Fair.
Illinois is the U.S. pumpkin leader. Pumpkins are grown in all 50 states, but Illinois is by far the leader with about 600 million pounds of pumpkins harvested every year. Runner-up honors go to California, Indiana, Michigan, New York, Ohio, Oregon, Pennsylvania, Texas and Virginia. Each of these states annually produce approximately 100 million pounds of pumpkin.
Pumpkin beer has plenty of fanfare. Pumpkin beer was actually a thing hundreds of years ago when the Pilgrims arrived in America as pumpkins were plentiful and provided an easy source of fermentable sugar. Who knew?
Pumpkin carving started with the Irish. Jack-o’-lanterns were first carved by the Irish and Scottish using turnips and potatoes. They used the carved vegetables as part of their Celtic celebrations. Immigrants brought their carving traditions to America, but found that pumpkins were an easier vegetable to carve.
There are more than 40 varieties of pumpkin. The best pumpkins to use for cooking are Bab Pam, Autumn Gold, Ghost Rider, New England Pie Pumpkin, Lumina, Cinderella and Fair Tale. Most of the pumpkins you see on roadside stands and farms are for decoration only and not very tasty.
Your company’s online presence leaves a lasting impression—positive or negative. When people check out your homepage, will they stick around? Will they buy? Will they return? Make your website easy to use and current, and new orders may be just a click away. Annoy visitors and they’ll flee to a competitor.
Steer clear of the following website mistakes:
Designing the website for you—not the customer. Studies have shown that online visitors form an opinion of a company’s brand in about three seconds. If your home page is well designed, they may stick around for another ten to twenty seconds. Don’t waste these precious moments spouting details about the firm’s stellar history and the owner’s credentials. Consumers are visiting your website to get answers. Provide these answers quickly or they’ll click elsewhere.
Heavy graphics, poor load time. Many consumers are surfing the web from smart phones and tablets. Don’t make them waste valuable time waiting for a fancy webpage to load. Consider projecting a professional image with text-based content that answers the most pressing questions about your products and services. Graphics can work well, but only if size and load times are fully vetted to ensure a seamless load experience.
Unfriendly navigation. If your homepage looks cluttered, potential customers will become frustrated. Make it easy for users to navigate your site from home page to supplemental pages and back again. Use a handful of clearly-labeled tabs in a top level menu. Deliberately design each page to have the same look and feel.
Stale data. When you visit a webpage and note that it was last updated five years ago, do you sense a vibrant, cutting-edge enterprise? Keep your site up to date. Consider subscribing to content services that will keep your information fresh. Remember, developing a web presence is not an event, it is an ongoing journey. Your site must display current prices, merchandise that’s available right now, with up-to-date details about new product offerings.
Sloppy content. A website riddled with typos, grammatical mistakes and industry jargon will turn customers away. Visitors may ask themselves if your business doesn’t care about the quality of its website, how can they trust your products and services?
A carefully crafted website can draw customers in, enhance their buying experience and leave a lasting impression of professionalism and quality.
Suppose you’re switching jobs if you were furloughed because of the pandemic or you’re simply searching for greener pastures. If you have a 401(k) from your soon-to-be former employer, you must decide what to do with your retirement account when you leave. Here are your four options:
Leave the money in your previous employer’s pension plan.
Roll over the money to your new employer’s pension plan.
Roll over the money into an IRA.
Take the money and run.
So which of these options should you choose? Here are some things to consider as you think about what to do with your 401(k) account:
Keep the borrowing option open. If you want to borrow money from your employer-sponsored 401(k) account in the future, consider rolling the money into your new employer’s 401(k) plan. While you can borrow money out of your 401(k), that option is not allowed with an IRA. And if you leave your 401(k) at a former employer, they often will not let you borrow funds if you are not currently employed.
Take the money. This year may be the best time to make a withdrawal from a retirement account. In a normal year, when you make an early withdrawal from a retirement account, you owe income taxes on the amount of the distribution plus a 10% early withdrawal penalty. In 2020, this 10% penalty has been suspended. So while you’ll still pay taxes on the distribution, you may be able to avoid the early withdrawal penalty.
Invest the money. While it might be tempting to borrow or take an early distribution from your retirement account, you’ll also be depleting future earnings intended for your retirement years. So consider whether you truly need the money now to pay for an emergency or if you’re ok leaving it in your 401(k).
Whatever you decide, it is always best to transfer the funds directly from one retirement account to another. This direct transfer eliminates the possibility of your fund movement being characterized as a distribution subject to income tax. If in doubt, ask for help.
Is your net paycheck larger than it used to be for no known reason? If so, it could be the result of less taxes being withheld – and it may not be a good thing.
The Problem
President Trump signed an executive order on September 1 allowing taxpayers to defer Social Security and Medicare taxes that are typically withheld through payroll. While this may give you more net pay right now, it will have to be repaid later unless legislation is passed forgiving the tax. This means that after the first of the year you might find that the withholding resumes AND you have to start repaying the taxes that were not withheld in 2019. This may be an unwelcomed surprise.
What you need to do
Compare your pay stubs. Get your last pay stub from August and your current pay stub. Did the amount of Social Security and Medicare taxes withheld from your August paycheck change? If so, you may be looking at a tax repayment bill in early 2021.
Keep an eye on each paycheck. Payroll departments are struggling to figure out if they are required to comply with the presidential executive order, payroll providers are trying to figure out how to comply, and everyone is wondering whether the tax obligation will be permanently forgiven.
Be prepared to pay it back if necessary. If Social Security and Medicare taxes have not been withheld from your paycheck through the end of 2020, be prepared to write Uncle Sam a check to pay these taxes in early 2021.
Students can earn college credits while still in high school
With the cost of college rising rapidly, it can be overwhelming to think about how to pay your way through school for either yourself or your kids. Fortunately, saving hundreds, even thousands, is possible. Teenagers can help keep down the cost of their future college tuition by taking the following classes and exams while in high school:
Advanced Placement (AP) classes and exams provide the opportunity for high school students to take college-level classes at their high school and an exam at the end of the school year. Many colleges will accept AP credits as placement and/or college credit. Most will accept a passing grade of 3, but some universities may require a score of 4 or 5 to earn college credit. (AP exam scores range from 1-5.)
College Level Examination Program (CLEP) tests also offer the opportunity to earn college credit by passing an exam. However, instead of taking a class, you must study on your own and schedule an exam at a testing center when you’re ready. CLEP exams receive a score between 20 and 80. A score of 50 is typically the passing score to obtain college credit, but each university sets its own requirement. It is important to note that while many colleges accept CLEP credits, some top schools do not accept CLEP credits.
Dual enrollment classes allow high school students to take college courses at a local college or university and earn both high school and college credit. You must be a high school junior or senior to qualify for the program. Dual enrollment credits are widely transferable.
Cost of Exams and Potential Savings
AP exams cost $94, CLEP tests cost $85 plus an additional administrative fee while dual enrollment programs pay for tuition, fees and books. According to the College Board, the average cost of a 3-credit class at a four-year college ranges from $942 to $3,243, meaning for each 3-credit class you test out of, you save hundreds—potentially thousands–of dollars!
Additionally, earning college credit in high school can enable you to finish college in less than four years. Just make sure that when you’re choosing a college, you pay attention to whether or not the schools accept AP and/or CLEP exam scores as credit.
