Expert Advice with Lupe salmerón, CPA
EXPERT SMALL BIZ ADVICE
from our friend and partner, Lupe Salmerón, CPA
Today we interview Lupe about some of the most frequent small business + tax questions we receive throughout the year.
RETIREMENT ADVICE What is your advice about retirement vehicles, annuities + other tax shelters for tax payers? What are the best retirement vehicles for freelancers?
SEP (self employed) IRA’s are best for:
small business owners with few employees
and side-hustlers who are already contributing to a 401(k) at work
Solo 401(k)’s are best for:
Self-employed individuals and businesses run by a married couple, with no other full-time employees
Simple IRA’s are best for:
Self-employed individuals or small business owners with 100 or fewer employees
What is a SEP IRA and what are the thresholds?
It’s a Self Employed Pension (SEP) plan. Contributions are made to an Individual Retirement Account or Annuity (IRA) for each plan participant. For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $57,000 (for 20200; $56,000 for 2019.
What is the difference between a Roth IRA and regular IRA?
Roth IRA: you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. For 2019, the limits are the same as 2020 which is $6000. Traditional IRA: you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½. For 2019, the limits are the same as 2020 which is $6000.
What is the difference between a 401K and 403B?
401(k) plans are offered by for-profit companies to eligible employees who contribute pre or post-tax money through payroll deduction.
403(b) plans are offered to employees of non-profit organizations and government entities.
I have kids, do you recommend a 529? What is a 529.
Yes! A 529 plan is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans.
Are there are any other tax deferred vehicles that I should know about?
HSA (Health Savings Accounts)
Pre-tax benefits such as:
Flexible Spending Accounts
What is the difference between the following formations: Sole Prop, LLC, SCorps, Corps and Employee? Sole Proprietor: means just that — a business with one owner. If there is more than one owner, you will not be able to qualify for a sole proprietorship. The sole proprietorship and the owner will be legally considered the same entity. The benefit is that there are no forms to submit or additional costs. Sole Proprietor's are subject to self-employment taxes on net income of business. A sole proprietorship is an easy way to start a business because you are simply required to file a schedule C on your personal return. There is moderate bookkeeping and 1099’s are required for issue if any of your contractors make more than $600. Additionally, sole proprietors are required to report all earnings issued to them in the form of 1099.
LLC: is a Limited Liability Company and provides a business owner or owners with the liability protections of a corporation and the tax benefits of a partnership. The benefit is that the LLC's partners are not generally held personally liable. There is no tax at the LLC level, however, income flows through to its members. The tax implications for LLC's are that they must file with the state, pay annual fees, file form 1065 return (a separate return from taxpayer personal return), and each partner receive K-1. Bookkeeping and 1099 required.
S- Corp: is a Sub-Chapter S Corporation. It’s a corporation that elects to be taxed as a “flow-though” which means the profit/loss incurred in such a business 'flows through' to a taxpayer's personal return. The benefit is that the S Corp's shareholders partners are not generally held personally liable. There is tax at the corporate level, however, income flows through to its shareholders. Tax implications for S Corps are that they must file with state, pay annual fees, file form 1120S return (a separate return from taxpayer personal return), shareholders receive K-1. Bookkeeping, Payroll and 1099’s required.
C- Corp: is a Sub-Chapter C Corporation. Unlike the S-Corp, a C-Corp is taxed on its profits and separate from its owners. The benefit is that the C Corp's shareholders partners are not generally held personally liable. C-Corp – Taxed at the corporate rate and possible double taxation. Corporations are taxed at the corporate rate and there is possible double taxation. Tax implications for C Corps are that they must file with the state, pay annual fees, and like an S Corps, file form 1120 return. Bookkeeping, Payroll and 1099’s required.