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Arranging Household Help – “Nanny Tax” Law

It’s challenging enough to find the right person to care for your child in the home without having to worry about the tax complications of becoming a household employer. Although the rules have been liberalized in some ways, other requirements are just as stringent as they’ve always been. Here’s a snapshot of what you must do to steer clear of trouble with the IRS when you hire someone to take care of your children in the home. Social Security and Medicare tax (FICA). If you have household workers, you are required to withhold and pay FICA taxes if cash wages paid during the year total $2,000 or more. There is one limited FICA exception for wages paid to household workers who are under 18 (t

Archer Medical Savings Accounts and Health Savings Accounts

Archer Medical Savings Accounts (also called Medical Savings Accounts or MSAs for short) are similar to IRAs. Like IRAs, special rules govern when your money can be withdrawn, for what purpose the funds can be used and the deductibility of contributions. If you have an MSA, a decision should be made whether to continue to operate as an MSA. Is the MSA adequate for your needs or should it be rolled over into a new health savings account (HSA)? Administrative costs for setting up an HSA are generally a good reason not to convert to an HSA. A greater degree of flexibility in certain business settings may be another good reason. Like an MSA, an HSA is a tax-exempt trust or custodial account to w

Advantages of a Roth IRA

Roth IRAs are tax-favored accounts to which qualified taxpayers can make after-tax contributions. Contributions to the account can grow tax-free, and neither the contributions nor the earnings on them are subject to tax when a Roth IRA owner receives a qualified distribution from the account. Although a Roth IRA is designed to help a taxpayer save for retirement, it is inaccurate to characterize a Roth IRA as just a retirement savings vehicle. A Roth IRA can offer tax, estate planning, and financial planning advantages that are not available with respect to a traditional IRA. Roth IRAs offer several advantages over traditional IRAs. First, an individual can make contributions to a Roth IRA r

Advantages and Disadvantages of a Roth 401(k)

The biggest advantage of a Roth 401(k) is that appreciation on the contributions are never taxed. However, this comes because of the main disadvantage of Roth 401(k)s - contributions are elective contributions under a qualified 401(k) plan that, unlike pre-tax 401(k) elective contributions, are currently includible in gross income. Therefore, contributions are from after-tax dollars. Another advantage is that contributions can be made to a designated Roth 401(k) account even if income is too high to be eligible to contribute to a Roth IRA. Similar to a Roth IRA, an individual can begin distributions tax-free after age 59½ provided the individual has been in the plan for at least five tax yea

Additional 0.9 Percent Medicare Tax

The Patient Protection and Affordable Care Act (PPACA) imposes an Additional 0.9 Percent Medicare Tax on earned income above specified dollar amounts. The 0.9 percent tax is imposed on individuals and does not apply to corporations, estates, or trusts. The tax on earned income is in addition to the existing 1.45 percent Hospital Insurance (HI) tax on earned income; thus a combined tax of 2.35 percent may apply to the employee’s earned income. Existing employer contributions of 1.45 percent also apply to earned income, for an overall combined rate of 3.8 percent. The Additional Medicare Tax applies to an individual’s total wages, other compensation, and self-employment income for the tax year