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The Cost of New Hires

Hiring employees is fundamental to business. Whether looking to hire your first employee or expand your team, be sure to understand the total cost of hiring help.

RECRUITMENT

Employee recruitment can start with anything from the help wanted ad you place on job search boards to hiring a recruiter to handle the legwork. While the help wanted ad may cost you only a few hundred dollars, the professional recruiter will likely charge a percentage of the employee’s annual salary. But the recruiter will handle everything from placing the advertisement, pre-screening applicants, and checking references.

PRE-EMPLOYMENT SCREENING

Once you’ve offered the job to an applicant, you may choose to complete some pre-employment screening. The cost of criminal background checks, credit history, motor vehicle records, and drug testing can add up quickly.

EMPLOYEE BENEFITS

Another big cost will be for benefits you provide. If you contribute to the cost of medical insurance, provide a retirement plan and other benefits for employees, fact in these costs.

WORKERS’ COMPENSATION

Many states require employers to carry workers’ compensation insurance for employees. The requirements and rates vary by state. Some states require you to carry this insurance even if you have only one employee.

TOOLS & EQUIPMENT

Your new employee may need equipment to do their work. You may need to provide a computer, phone or uniforms. Besides physical supplies, there may be additional costs to add employees to software programs for time tracking or project manangement.

PAYROLL TAXES

In addition to salary, you’ll have to pay payroll taxes. FICA tax is 7.65% of your employee’s earnings.* The federal unemployment tax rate is 6% of the first $7,000 earned and you’ll have to pay state unemployment tax, too. Rates vary based upon state, industry and an employer’s history of unemployment claims.

*FICA tax includes 6.2% Social Security tax on the first $142,800 of wages and 1.45% for Medicare.

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Succession Planning

Don’t fail to plan for what will happen to your business when you retire. Perhaps your partner wants to buy you out or you want to leave the business to heirs. If you’re planning to sell your business to outside investors, you’ll need to complete a valuation so everyone can agree on the business’s value. Include your consultation fees if the new owner needs assistance through the transition.

Regardless of how you plan to transition your business to new owners, consider how you’ll receive payment for your ownership. Will it be one lump sum payment or will you receive monthly payments? You need to structure your payout in a way that allows you to enjoy the standard of living you desire in retirement and minimize your taxes.

Your succession plan is not just for retirement. It’s also useful in the event you become ill, injured or worse. And remember that your succession plan isn’t something you create and file away. Situations change that may require a tweak to your plan, so review it annually.

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Taxes in Retirement

Retirement is something almost all of us look forward to. But have you considered how your retirement income will be taxed? Not all retirement income is taxed the same, so it is important that you understand the details.

SOCIAL SECURITY

If your total income is more than $25,000 for an individual or $32,000 for a married couple filing jointly, you must pay federal income taxes on your Social Security benefits. The tax rate is based on your total income from all sources, maxing out at the rate of 85%. Some states also tax social security income.

401(K) AND IRA WITHDRAWALS

Withdrawals from tax-deferred retirement accounts, such as a 401(k), are taxed as ordinary income. The taxability of a traditional IRA depends on how you treated your contributions before you retired. If you took a tax deduction in the years you contributed, your withdrawals are likely taxable.

Qualified withdrawals from a Roth IRA are non-taxable. Since your investment was made with after-tax dollars, you won’t be taxed again when you withdraw it. Although these accounts are long-term assets, they don’t enjoy capital gains treatment.

INVESTMENT INCOME

You’ll pay taxes on dividends, interest and capital gains just as you did before you retired. The length of time you held an asset before selling it will determine your capital gains tax rate. It can be as low as zero if your total income for the year isn’t high.

SELLING YOUR HOME

If you’ve downsized and sold your home, you may be able to avoid paying tax on the gain. If you lived in your home for two of the five years prior to the sale, you may be able to exclude up to $250,000 in gain. The rules are a little more complex if you rented your home out, so consult with your tax professional to determine if you have taxable gains.

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February 2021 ClientLine

Taxes in Retirement – not all retirement income is taxes the same, so it is important that you understand the details.

Succession Planning – don’t fail to plan for what will happen to your business when you retire.

The Cost of New Hires – be sure to understand the total cost of hiring help.

February 2021 Client Profile – will gift tax be owed on amounts given or received.

How Business Losses Affect Your Tax Return – how losses from the pandemic-induced economic slowdown affect your business tax return.

Is Your Hobby a Business or Is Your Business a Hobby?

February 2021 Questions and Answers

February 2021 Short Bits

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January 2021 Short Bits

MORE DEDUCTIONS

According to the IRS, nearly 88% of taxpayers claimed the standard deduction in 2018. This is up from 68% in 2017. The increase is likely attributed to the increase in the standard deduction in 2018, thanks to the Tax Cuts and Jobs Act, which increased the standard deduction from $6,350 in 2017 to $12,000. Fewer taxpayers found enough itemizable deductions to overcome the hefty standard deduction.

WORK TENURE

The Bureau of Labor Statistics announced that employee tenure at January 2020 was 4.1 years and has barely changed from January 2018 when it was 4.2 years. Manufacturing employees remained with an employer the longest at 5.1 years and by contrast, employees in the hospitality sector had the shortest tenure at just 2.3 years.

HOUSING BOOM

The first half of 2020 saw a near record amount of mortgage lending thanks to record low interest rates. A total of $1.8 trillion was lent in the first six months of 2020, just off the record of $1.82 trillion, set in the first half of 2003, according to Black Knight, a mortgage data company. The average mortgage loan size has also increased. But due to the current economic situation, lenders are requiring more information and real-time employment verification making applying and qualifying for a mortgage tougher.

CREDIT JUMP

According to Experian, the average FICO credit score in 2019 was up 2 points to 703. And 1.2% of Americans held a perfect 850 FICO score. This is a result of Americans making better credit decisions and actively monitoring their credit for accuracy. By state, Minnesota consumers come in with the highest average rate of 733 in 2019 while Boulder, Colorado’s consumers hold the highest score for a city at 743.

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January 2021 Questions and Answers

Question:

I worked as a ride share driver for the first time in 2020. What will I have to pay tax on?

Answer:

Ride share drivers have to pay tax on the total income they receive from the ride share service, less all applicable deductions. You’ll be able to deduct your ride share mileage at the IRS (2020) rate of $0.575 per mile. And if you incurred parking fees or tolls while driving, you can deduct those too.

If you made more than $600 in 2020, you will receive a 1099-NEC form from the company. This form will tell you how much income you made that you need to report.

Question:

We sold our home last year. Will we have to pay taxes on the sale?

Answer:

If the home you sold is your primary residence and you lived in it for two of the last five years, up to $500,000 of the gain is excluded from your federal income tax, if your tax filing status is married filing jointly.

But if you sold a primary residence within the last two years, you can’t claim another exclusion for two years. There are some exceptions for events such as divorce or death of a spouse. Consult your tax professional if your situation is not straightforward.

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Building Lasting Relationships with a Loyalty Program

Do you know that it costs five times more to attract a new customer, than it does to retain an existing one?* That is just one reason why companies focus their efforts on customer retention.

THE VALUE OF CUSTOMERS

According to research conducted by Bain and Company, current customers are 50% more likely to try a new product of yours as well as spend 31% more than new customers. The study also revealed that increasing customer retention rates by 5% increases profits by 25% to 95%. Happy customers also send referrals your way and advertise your brand.

CUSTOMER LOYALTY PROGRAMS

A loyalty program does more than reward customer loyalty. It attracts new buyers and enables you to collect data about who is buying your products. This insight helps you to make informed decisions about marketing strategies that reach your target audience. The statistics also provide details about what products are preferred, which can assist when buying inventory.

LOYAL RELATIONSHIPS

Customer retention and referrals bring continued business while keeping costs to a minimum. There are many types of loyalty programs from which to choose. It all impacts your bottom line.

*Research by Fred Reichheld. Fellow at Bain and Company

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January 2021 Client Profile

Josh is starting a new landscape business. He’s heard bits of information about various business structures, including sole proprietor, LLC and an S-Corp. Which of these forms of business would offer him the most tax advantages?

Entity selection can be confusing. For tax purposes, limited liability companies with only one member are considered disregarded entities and are viewed the same as a sole proprietor. Although these two provide different legal protections, for tax purposes, there is no difference.

Regardless of whether Josh legally forms his business as a sole proprietor or a single member LLC, he can choose to be taxed as an S-Corp which would enable Josh’s business to take certain tax breaks not available to sole proprietors. Josh will be an employee of the the S Corp. and he’ll avoid paying self-employment tax by paying himself a reasonable salary. If he does that, he’ll be able to take distributions of the company’s profits tax-free since the IRS considers this a distribution of equity. Many factors, including industry and size of the company, will determine what is considered to be a reasonable salary.

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

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Estate Planning Checklist

Estate planning is the process that allows you to designate what happens to your assets when you become incapacitated or die. Using a checklist can help you get started.

1. TAKE INVENTORY

Make a complete list of all your assets. While you’ll want to include the obvious ones like your home and bank accounts, don’t forget about other valuables like jewelry and artwork. And if you have any recent appraisals for your home or jewelry, use those to estimate the value of your assets.

2. REVIEW YOUR NEEDS

Do you have children that you need to provide for and are they young enough that you need to name a guardian for them? Do you have enough life insurance to support your family, if needed? Take a careful look at what your family will need and talk with your financial professional to initiate a plan.

3. CREATE DIRECTIONS

You’ll want to ensure that all your directives are current, in writing and in compliance with your state’s laws. A trust can help you bypass the probate process and provide control of how your assets are distributed. A medical directive, also called a living will, lays out your medical wishes in the event you are unable to make decisions for yourself. And a durable power of attorney allows you to appoint someone to handle your financial affairs if you’re unable to do so for yourself.

4. REVIEW DESIGNATED BENEFICIARIES

It’s good to review your beneficiaries regularly and certainly after major life events, like having a baby or getting married. Ensure the beneficiary information on life insurance and retirement accounts align with your will. If there are differing beneficiaries, your state’s laws may dictate that designated account beneficiaries trump what your will says.