The Internal Revenue Service allows taxpayers quick and easy solutions if they can’t file their returns or pay their taxes on time, and they can even request relief online. So don’t panic!
Tax-filing extensions are available to taxpayers who need more time to finish their returns. Remember, this is an extension of time to file, not an extension of time to pay. However, taxpayers who are having trouble paying what they owe may qualify for payment plans and other relief. Either way, taxpayers will avoid stiff penalties if they file either a regular income tax return or a request for a tax-filing extension by this year’s April 15 deadline. Taxpayers should file, even if they can’t pay the full amount due. Here are further details on the options available.
More Time to File
People who haven’t finished filling out their return can get an automatic six-month extension. The fastest and easiest way to get the extra time is through the Free File link on IRS.gov. In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic tax-filing extension on Form 4868.
Filing this form gives taxpayers until Oct. 15 to file a return. To get the extension, taxpayers must estimate their tax liability on this form and should also pay any amount due. By properly filing this form, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance, that applies to returns filed after the deadline. In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 15. The current interest rate is six percent for the first quarter if 2019, compounded daily, and the late-payment penalty is normally 0.5 percent per month.
Besides Free File, taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov. Of the nearly 10.7 million extension forms received by the IRS last year, almost 5.8 million were filed electronically.
Some taxpayers get more time to file without having to ask for it. These include:
- Taxpayers abroad. U.S. citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the U.S., have until June 17 to file. Tax payments are still due April 15.
- Members of the military and others serving in Afghanistan or other combat zone localities. Typically, taxpayers can wait until at least 180 days after they leave the combat zone to file returns and pay any taxes due. For details, see Extensions of Deadlines in Publication 3, Armed Forces Tax Guide.
- People affected by certain tornadoes, severe storms, floods and other recent natural disasters. Currently, parts of Mississippi are covered by a federal disaster declaration, and affected individuals and businesses in these areas have until April 30 to file and pay.
Easy Ways to E-Pay
Taxpayers with a balance due now have several quick and easy ways to electronically pay what they owe. They include:
- Electronic Federal Tax Payment System (EFTPS). This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online. To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
- Electronic funds withdrawal. E-file and e-pay in a single step.
- Credit or debit card. Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors. Though the IRS does not charge a fee for this service, the card processors do. For taxpayers who itemize their deductions, these convenience fees use to be claimed on Schedule A Line 23 prior to the TCJA change.
Taxpayers who choose to pay by check or money order should make the payment out to the “United States Treasury.” Write “2018 Form 1040,” name, address, daytime phone number and Social Security number on the front of the check or money order. To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.
More Time to Pay
Taxpayers who have finished their returns should file by the regular April 15 deadline, even if they can’t pay the full amount due. In many cases, those struggling with unpaid taxes qualify for one of several relief programs, including the following:
- Most people can set up a payment agreement with the IRS on line in a matter of minutes. Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months. Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. With the Online Payment Agreement, no paperwork is required, there is no need to call, write or visit the IRS and qualified taxpayers can avoid the filing of a Notice of Federal Tax Lien if one was not previously filed. Alternatively, taxpayers can request a payment agreement by filing Form 9465. This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice.
- Some struggling taxpayers may qualify for an offer-in-compromise. This is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay. To help determine eligibility, use the Offer in Compromise Pre-Qualifier, a free online tool available on IRS.gov.
Often, small legal firms opt for a SIMPLE IRA, only because there are no administrative costs associated with operating this plan. In some cases this can be a big mistake, especially if you have the ability to contribute significantly more to a 401(k) plan. While it is true that SIMPLE has no administrative cost, the biggest cost of using SIMPLE vs. a 401(k) is the income tax on the money that could be contributed to a 401(k) instead. For those in the highest tax brackets, this cost can be as high as 50 percent.
What are the advantages and disadvantages of SIMPLE IRA vs. the 401(k) plan, and how can you make an informed decision on selecting the best type of plan for your practice?
Breaking down the differences
SIMPLE IRA is easy to set up and terminate, and it can be opened at a discount brokerage such as Vanguard so you can have access to high-quality, low-cost investments. No third-party administrator (TPA) is required—operating a SIMPLE IRA is relatively straightforward and can be done by the law firm owner without much assistance. The 401(k) with profit sharing requires the services of a TPA, so there is an added administrative cost and higher complexity compared with SIMPLE. However, a 401(k) with profit sharing allows for a significantly larger contribution.
SIMPLE IRA vs. 401(k) rules of thumb
There is a good rule of thumb that can help you determine which plan might work better for you. A SIMPLE IRA might be a better plan for your law firm if (together with your spouse) you can contribute less than $40,000 a year and/or the cost of 401(k) employer contributions is high (with less than 70 percent of plan contributions going to the owner and spouse). On the other hand, a 401(k) with profit sharing might be a better plan if (together with your spouse) you can contribute close to the plan maximum (approximately $55,000 if both you and your spouse are under 50) and your 401(k) employer contribution is reasonable (with more than 70 percent of plan contributions going to the owner and spouse).
The decision can be straightforward if you fall into either extreme, but what if you are somewhere in the middle? What if you can contribute the maximum, but your employer contribution expenses are relatively high? For those in the highest tax brackets, higher plan expenses might still justify selecting the 401(k) over SIMPLE.
What you’d need to do first is to get a plan design illustration from the TPA that takes into account your firm’s demographics to see what your potential plan contributions and expenses would be. Once you have an illustration, your retirement plan adviser should do a 401(k) vs. SIMPLE side-by-side analysis that takes into account your specific situation so that you can select the right plan for your firm.
SIMPLE vs. 401(k) example
The biggest downside of SIMPLE is that it has a lower contribution limit than the 401(k) plan. When you are just starting your own law firm and have a significant amount of student and firm debt, SIMPLE might be a perfect plan for you. However, when your debt is mostly paid out and your firm profits grow, so does your highest marginal tax bracket.
For many attorneys, some of their income might fall into the highest federal and state tax brackets, 39.6 percent for federal and as high as 13 percent for state (if you are in CA). Thus the cost of keeping your money after-tax might be as high as 50 percent, so the key to successful tax planning will be to shelter as much of your highest tax-bracket income as possible, which can be accomplished with an appropriately designed 401(k) plan.
Some attorneys might even want to go an extra step and set up a Cash Balance plan together with the 401(k), to shelter even more of their income from taxes. Whether your spouse is working elsewhere or not, you can (and should) hire your spouse, provided that the numbers make sense—this can potentially give you tax and income benefits.
While the 401(k) employer contribution for a small large firm can be lower, it can also be higher for a larger practice with more employees and partners. However, if the law firm has several partners, employer contribution expenses will be shared among the partners, so per-owner expense for a large law firm can be lower than for a smaller one. Many smaller law firms with only two to four employees can have significantly lower employer contributions and when employees are significantly older than the owners, the profit sharing plan might not be a viable option.
If employees do not participate in a SIMPLE IRA, the owner does not have to match their contribution, and if they do, the owner will have to pay them a 3 percent match. Similarly, there is a 401(k) plan design that uses only matching—rather than profit sharing—that works the same way: employees get a match only if they participate, and get nothing if they don’t.
Even though the cost of having a 401(k) plan for this practice is higher than the cost of a SIMPLE, a 401(k) plan can provide the owner the means to save significantly more money for retirement while lowering his or her tax liability.
SIMPLE IRA can be a great startup plan, but eventually your law firm will need a 401(k) plan, as those in the highest tax brackets can benefit significantly from making higher 401(k) contributions, which translate into larger retirement savings. There are a number of other reasons why a 401(k) plan might work better for some practices.
A 401(k) plan design can be customized, which can afford advantages over the SIMPLE’s standard design. For example, you can exclude some highly compensated employees from a 401(k), but you can’t do that with SIMPLE. If you hire a highly paid associate, he or she will have to participate in a SIMPLE, but he or she can be excluded from participating in a 401(k) plan. A SIMPLE IRA has a single hard-coded design, while your 401(k) plan can be custom-designed to minimize your employer contribution while maximizing your own.
The 401(k) will also give you the ability to make backdoor Roth contributions, Roth salary deferrals, or in-plan Roth conversions, and accept incoming rollovers—none of which are allowed with the SIMPLE IRA plan. If you are 50 or older, a 401(k) also allows a $6,000 catch-up contribution, while a SIMPLE’s catch-up is only $3,000. If you are not an expert at investment management, a 401(k) can be a great platform through which you can get personalized investment management advice and services from an ERISA (Employee Retirement Income Security Act) 3(38) fiduciary adviser.
Both SIMPLE IRA and 401(k) have a number of advantages and disadvantages, and without a complete analysis it can be difficult to decide which one would be better for a specific law firm (unless you happen to fit neatly into the examples discussed above). To make the right decision, you will need to do an accurate cost vs. benefit analysis, which includes a 401(k) plan design study and side-by-side comparison of the best 401(k) plan design with a SIMPLE IRA for your specific situation.
This is the first year-end season when employees with stock compensation must consider the tax changes introduced in 2018 by the Tax Cuts & Jobs Act (TCJA). Fortunately, the new tax law doesn’t make any huge changes in the usual year-end steps that you and your financial advisor should consider when you have stock options, restricted stock/RSUs and company stock holdings.
“Tax reform” is the blanket term often applied to the TCJA, which made two major types of changes in the tax laws for individuals. In some areas, the TCJA made straight-up tax cuts. In others, it restructured or eliminated tax provisions. Each of those two categories affects your year-end strategies differently, as explained below.
The TCJA modified the income tax rate and income ranges of each tax bracket, including the reduction of the top income tax rate from 39.6% to 37%. However, we still have the same number of tax brackets (lucky seven), and the capital gains tax and the Medicare surtaxes remain unchanged.
What this means: Whenever you consider exercising stock options or selling shares at year-end (or recognize any extra income), you need to know your tax bracket. Even with the lower tax rates that took effect in 2018, you still want to consider the income thresholds that would trigger a higher tax rate and the Medicare surtax on investment income.
In general, you want to do the following multi-year planning, just as you did before the TCJA.
1) Keep your yearly income under the thresholds for higher tax rates and know the additional room you have for more income in your 2018 and 2019 tax brackets.
2) Recognize income at times when your yearly income and tax rates may, according to your projections, be lower.
The flat withholding rates for supplemental wages, including stock compensation, are tied to the seven income tax brackets, so those changed too. For income up to $1 million in a calendar year, the withholding rate is now 22%. For amounts of income in excess of $1 million during a calendar year, the withholding rate is 37%.
What this means: The 22% rate of withholding may not cover all of the taxes you will owe on income from an exercise of nonqualified stock options (NQSOs) or a vesting of restricted stock or restricted stock units. You must therefore know the tax bracket for your total income and assess the need to (1) put money aside to pay the additional taxes with your tax return, (2) increase the withholding on your salary, or (3) pay estimated taxes.
The checklist below summarizes what you need for comprehensive year-end planning with stock compensation.
– Exercises, vestings, and ESPP purchases in current year
– Holdings of NQSOs, ISOs, restricted stock/RSUs, and company shares
– Scheduled vestings in the year ahead, including the end of the cycle for a performance share grant and when payout occurs
– Salary contributions allocated for ESPP purchases
– Deadlines for option or SAR exercises and the expiration dates of option grants
– Expected new grants in year ahead and ESPP enrollment/change dates
– Trading windows and blackouts, company ownership guidelines, and any post-vest holding-period requirements
– Your ability to spread the recognition of income from certain sources over 2018 and 2019
– Your new marginal tax rate after tax reform and whether the flat rate for federal supplemental withholding covers it
– Your situation, including short-term cash needs that may prompt you to sell company stock and/or exercise options
– Whether your decisions should be entirely tax-driven
– Your outlook for both your company’s stock price and your job
– How comfortable you are with your concentration in company stock and whether you should diversify
– Multi-year projections for your income and taxes
– Donations in company shares instead of in cash
Company and brokerage firm statements, whether online or in print. You will need them for tax-return reporting.
Many couples will end up paying for childcare in one form or another. This is especially true for households where both spouses are working and almost certainly true for dual attorney households. At attorney levels of income, especially for partners, most people avoid the second income trap (producing low net income after taxes, child care, maid, transportation, etc) and especially in duel attorneys’ homes it usually makes financial sense for both parents to work. Aside from being a stay-at-home parent or having relatives watch your child, the two most popular childcare choices are enrolling your child in a daycare center or hiring a nanny to watch your child in your home. Here are some tips and tricks to consider if you currently have a nanny or are considering one:
Follow the IRS Rules
Many attorneys pay their nanny in cash. This is a bad idea and clearly not consistent with IRS rules. Having a nanny means you are an employer. You should keep your nanny “on the books” and then pay taxes on your nanny’s salary. You can also take advantage of tax breaks via the Child Care Tax Credit and/or dependent care flexible spending accounts.
If you pay a domestic employee more than $2100 a year the IRS says you need to treat them like an employee, not a contractor. You will need an Employer Identification Number (easy to get from the IRS) and a way to calculate payroll. You’ll need to produce an I9 form proving that the nanny is eligible to work in the United States. You will be responsible for employer taxes and unemployment insurance. You will need to file a Schedule H with the IRS. None of this is particularly complicated but it all needs to be done and there can be consequences for those who ignore these rules. There are online services like HomeWork Solutions figures this all out, cuts your nanny a paycheck with a paystub and retains all of the tax information.
I know it’s easy to just cut a check and Venmo payment and it’s definitely the better route for the nanny looking to maximize their take-home pay. It’s just not legal after certain thresholds. Plus, the cash arrangements are bad for the nanny if they are trying to build employment history, get injured on the job, file for unemployment assistance, or want to collect a nice Social Security check in retirement.
Seek Help for Finding Nannies
Many sites like Care.com and SitterCity can perform background checks on the nannies they list for a low cost. In some cities, there are nanny placement services although these can be fairly expensive. There also exist some higher-end websites and placement agencies. The nannies coming through these services are the type who are going to perform full-service house management and have a gourmet dinner on the table when you get home in addition to having Junior in a clean romper. Expect to pay a significant premium if you enter these waters but for some very high-income attorneys, this may be money well spent.
Establish Clear Expectations and Have a Contract
Want your nanny to do dishes and household laundry? What about dog walking and grocery shopping? Will he or she be willing to work when your toddler is puking her brains out? These are all things to decide before the first day on the job. When hiring a nanny, you should discuss sick time and vacation days and create an agreement or a nanny contract. Also, as the employer, you should give your nanny feedback and have open conversations about her work. Simple nanny contracts are available online and you can edit these to suit your needs. Review by an attorney doesn’t seem to be necessary but would likely be relatively inexpensive. Be clear and straightforward, be as specific as possible. “Nanny will perform 3-5 household errands a week as requested” is far better than “Nanny to help as needed.” “Dishes done and countertops clean each day” is superior to “Light housekeeping expected.” Expect some negotiation especially if you are hiring an experienced nanny. It is better to that before work starts than to try to change gears in the middle of the race.
Use Technology for Ease and Convenience
Do your scheduling through a shared google calendar with hours sketched out well in advance. This allows you to track hours and our nanny to plan her life. Have your nanny carry a credit card for household purchases rather than petty cash. You can immediately reimburse them electronically for any expenses. All of the financials are online as well; your nanny experience is paperless and seamless. While there are surely many lovely people out there who do great child-care and are still using flip phones and pocket calendars, enjoy the added convenience of a smartphone system.
Weighing the Pros and Cons of Daycares
Daycare helps build social skills that can help your child in school and throughout life. Day care centers must follow state regulations around safety, staffing, sanitation, and space issues. Ask about the center’s most recent state license and if they have been accredited by the National Association for the Education of Young Children (NAEYC). The price of daycare tends to be more affordable than a nanny since you are sharing the cost with other families. The price varies based on location and type of facility. An in-home daycare center, also known as family care, is usually less expensive than a traditional daycare.
While there are many daycare pros, every pro comes with some sort of con. Daycare centers run on specific hours so if you are late picking up your child, it is probable that you will be subject to an extra charge. If you have a job where you cannot leave at a specific time each day, you may need more flexibility than daycare can offer. Daycare centers have strict sick policies so if your kid falls into their “sick” category, you have to take off from work or find other childcare arrangements when your child has an illness. Further, if your kid gets sick at daycare, you will have to pick them up and keep them home until they are free of the illness.
The right nanny makes your life work. There is nothing quite like getting home from a tough deposition and seeing your baby giggling with delight as a caring, professional nanny sings and plays with her. When choosing a childcare situation for your family, sit down and make a list of what is most important to your family. Be honest with yourself about your needs and wants and think about things that may upset or frustrate you. Remember that no decision is permanent and you can always change your situation based on your needs or your child’s needs.