There are many ways to set aside money for retirement in a tax-favored manner. Whether you are an employee or self-employed, you should consider taking advantage of the retirement savings options that are available.

Traditional IRA
Roth IRA
Home Office Expense Deduction for Self-employed
Payroll Taxed
What payments are reported on Form 1099?

401(k) Plans
401(k) plans, available to corporations, allow an employee to defer a percentage of his or her salary. The contributions and the earnings on those contributions are tax deferred. In some cases, employers will match a portion of an employee's salary deferrals. These matching
contributions, together with the income earned, are also tax deferred. The maximum that an employee can elect to contribute in 1999 is $10,000.

SIMPLE plans
The Savings Incentive Match Plan for Employees (SIMPLE plan) is a retirement savings plan available to small businesses. Employees who are eligible to participate can contribute up to $6,000 of pay a year to the plan on a pre-tax basis. Employers also contribute annually.

Traditional IRA
You can contribute up to $2,000 of compensation to an IRA each year. All investment earnings are tax deferred until the time of withdrawal. If one spouse earns less than $2,000 (or has no earnings for the year), a couple may contribute a total of $4,000 to their IRAs if a joint
return is filed, and together they have at least $4,000 in earnings.

Whether your IRA contribution will be tax deductible has become quite complicated. We suggest that you call us. However, for those of you that want to figure it out for yourselves, here goes.

Deductible IRA contributions are phased out for active participants in an employer-sponsored retirement plan if they have higher levels of income. For '99, the IRA deduction phases over
$31,000 to $41,000 of adjusted gross income as specially modified for single taxpayers, and over $51,000 to $61,000 for joint filers. You will not be treated as an active participant in an employer-sponsored retirement plan merely because your spouse is a participant. However,
this non-active-participant-spouse's IRA deduction phases out over $150,000 to $160,000 of adjusted gross income as specially modified

Roth IRA
This special type of IRA offers you the chance to earn investment income that is tax free rather than tax deferred. If you are eligible, you can contribute up to $2,000 of compensation to a Roth IRA each year on a nondeductible basis. You may access these annual contributions anytime without tax consequences. After you have had a Roth IRA for five tax years, the earnings in the account may be withdrawn tax free if you are 59-1/2 or older; disabled; or you are paying qualified first-time homebuying expenses (lifetime maximum of $10,000).

Tax-free distributions are also available to beneficiaries after the death of the account owner, provided the five-year requirement has been satisfied.

Contributions to a Roth IRA are phased out for single filers with adjusted gross income (AGI) between $95,000 and $110,000 ($150,000 and $160,000) for joint filers).

Simplified Employee Pensions
Simplified Employee Pensions (SEP) are intended as an alternative to 'qualified' retirement plans, particularly for small businesses. You may contribute the lesser of 15 percent of compensation, or $30,000, to an employee's SEP-IRA. Because of the limits on the amount of compensation that can be taken into account, the maximum contribution is $24,000 for '99. If you are self-employed, you can contribute to your own SEP.

Home Office Expense Deduction for Self-employed
The Taxpayer Relief Act of 1997 has altered some aspects of the 'principal place of business' test in favor of taxpayers, starting in 1999. A home office will now qualify as the taxpayer's 'principal place of business' if the taxpayer uses the home office to conduct administrative or management activities of the business, so long as the taxpayer doesn't have another fixed location where the taxpayer conducts substantial administrative or management activities of the business. However, according to the IRS, the office must be used exclusively, and on a regular basis, for the administrative or management activities.

Space for storing inventory or product samples. If you're in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly to store inventory or product samples. The space doesn't have to be used exclusively for business purposes, and you can do business at the fixed locations of your customers (e.g., retail stores, if you're a wholesaler), and non-fixed locations, such as flea markets or craft shows.

For example, a professional musician's home studio that's used only for rehearsal, recording demo tapes, etc., passes the exclusive use test. But a caterer's living room that's used to meet with clients and potential clients, but is also used for family entertainment and gatherings, won't pass the test. Neither will a spare bedroom that's used to work on and store business records, but that's also used to sleep occasional overnight guests.

The regular basis requirement means that you must use the home office in carrying on your business on a continuous, ongoing, or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick, but occasional, "once-in-a-while" business use won't do.

If your home office is your principal place of business under the rules noted above, the costs of traveling between your home office and other work locations in the same trade or business, regardless of whether the other work location is regular or temporary, and regardless of its
distance, are deductible transportation expenses, rather than nondeductible commuting costs.

If your use of your home office qualifies under any of the rules discussed above, you may take business expense deductions for the following: the 'direct expenses' of the home office -- e.g., the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and the 'indirect' expenses of maintaining the home office -- e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and
casualty losses.

There are limitations on the amount of home office deductions that can be claimed. The amount you may deduct as home office expenses is subject to limitations based on the income attributable to your use of the home office. Any home office expenses that can't be deducted
because of the above amount limitations may be carried over and deducted in later years.

You should be aware that, if you claim any home office deductions with respect to a portion of your principal residence, when you sell the residence, any profit attributable to the portion used as a home office may not be eligible for the otherwise available $250,000/$500,000
exclusion for gain on the sale of principal residences.

Payroll Taxes

FICA Tax Rate | Effective for all payrolls paid after 1/1/99, the social security withholding rate and the employer tax rate are 7.65% on wages up to a limit of $72,600 per employee. Wages in excess of $72,600 will be taxed at 1.45% for employers and employees.

SDI Withholding Rate | The employee tax rate for 1999 is .5% of wages to a maximum wage amount of $31,767 per employee for a maximum contribution of $158.84.

FUTA Tax Rate | The FUTA wage base per employee remains at $7,000 and the tax rate is .8%.

Quarterly Payroll Tax Reporting | Forms 941 (Federal) for the fourth quarter ended 12/31/98 are due by 1/31/99. If we do not already prepare your quarterly payroll tax returns and you would like our assistance in preparing these returns, please call us.

Annual Payroll & Wage Reporting | Form 940 (Federal FUTA tax) and W-2s for employees must be completed by 1/31/99 for the year 1998. If we prepare your quarterly payroll tax returns, we will automatically prepare these forms as well. If you would like our assistance in preparing these returns, please call us.

A Form W-3 is used for submitting appropriate copy of the W-2 Forms to the Internal Revenue Service. These are due by 2/28/99.

Annual Information Returns

Individuals, partnerships, corporations, or other organizations engaged in a trade or business are required to file information returns (Forms 1099). These forms are required to be sent to payees by 1/31/99.

What payments are reported on Form 1099?

• Payments of $10 or more, relating to interest, stock dividends or distributions, royalties, unemployment compensation, state tax refunds or original issue discount
• Payments of $600 or more, for non-employee services, rent, providers of health and medical services, or liquidation distributions
• Payments (regardless of the amount) for acquisition or abandonment of property secured for debt, broker or barter transactions, pension proceeds, proceeds from the sale or exchange of real estate or distributions from an IRA are reportable

Payments made to corporations (other than payments for medical/health services) are not reportable.

Banks and other businesses administering escrow accounts, including construction accounts are required to issue 1099-MISC for payments made on construction loans.

A Form 1096 is used for submitting appropriate copies of the various types of informational returns to the Internal Revenue Service. These are due by 2/28/99.

There are severe penalties for failure to file any of these returns, as well as substantial penalties for incorrect filings. We urge you to comply with these requirements and, as always, we are available to assist you in any way to comply with the requirements.

Health Insurance for Self-Employed

Self-employed individuals and employee-owners of 2% or more of the stock of an S corporation may deduct (as an adjustment to gross income) 45% of the premiums paid for health insurance coverage of the individual and his or her spouse and dependents for 1998 and 1999; 50% for 2000 and 2001; 60% for 2002; 80% for 2003 through 2005; 90% for 2006; and 100% for 2007 and thereafter.

Expensing Equipment Purchases

Instead of claiming a depreciation deduction, you may elect to expense (deduct currently) up to $19,000 ($18,500 in 1998) of the cost of equipment and other tangible personal property used in a trade or business. A depreciation deduction provides a recovery over a period of
years, while expensing provides for a more immediate recovery. Note, an immediate expense is not available for real property or property held for investment.

The amount of the expenses claimed can't be greater than the net profit of the business, without regard to the property expensed. Disallowed amounts can be carried forward. In addition, the maximum allowable amount is reduced by $1 of property placed in service in a tax year exceeding $200,000.

The immediate expenses amount increases to $20,000 for the year 2000; $24,000 for the years 2001-2002; and $25,000 for the year 2003.