Tax and financial planning strategies for freelancers

Jonathan Medows for Freelancersunion.org writes: While many people equate a freelancing career with a constant struggle to make ends meet, for some professional freelancers, quite the opposite is true—being self-employed allows them to unlock their true earning potential. However, successful freelancers and entrepreneurs tend to fall into one of two categories: those who made money, made a difference for others, and remain financially stable; and those who “live in the moment” and never achieve long-term financial security. The difference between these two groups is planning–tax planning, asset protection planning, and retirement planning.

Put More Money in Your Pocket with Effective Tax Planning

As a freelancer, your financial picture becomes more complex than the average employed individual, and once you hit high-income earning territory (defined as making $200,000 or more as an individual or $250,000 if you are married and filing your taxes jointly), things can get even more challenging. This is when tax planning can pay serious dividends—allowing you to put more money in your pockets—instead of those of the IRS.  

For example, if your business is growing and changing, tax planning can help you reduce your tax burden through proper entity selection (i.e. LLC, Sub-S, C Corp, FLP, or Trust) as well as taking into consideration where your business is located and where your tax home is, which might be different. In addition, tax planning can help you avoid (or at the very least soften the impact of) the special taxes levied on high-earning individuals including the Alternative Minimum Tax, investment taxes, the Medicare surtax, and hefty estate taxes.

Make Sure You Cover Your Assets

If you have created and own marketable assets such as IP addresses, patents, trademarks, and the like as part of your freelance career, asset protection planning can help you avoid issues that could impact your ownership and/or control of them, as well as the right to use or profit from them in the future. In essence, asset protection planning can allow you to release legal title of your assets (protecting you from legal action related to them or seizure of your personal assets from creditors), while still allowing you to continue controlling and enjoying the economic benefits of them.

Rev Up Your Retirement Accounts

Even if you’re 40 years away from retirement age, it’s time to get serious about saving for your golden years. When you work for a company, it’s easy to contribute to a 401(K) where you can stash pre-tax dollars—and easily cut your taxable income. However, as a freelancer you are responsible for establishing your own retirement savings plan such as a SEP (Simplified Employee Pension), IRA, or a one-individual 401(K). You can contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $51,000 for 2013, and $52,000 for 2014 in these types of plans. The benefit to you is two-fold: You save for retirement and you reduce your taxable income.

Consider Alternative Retirement Income Vehicles

In addition to standard retirement savings plans, as a high-income earner, you may want to consider purchasing life insurance inside of a 401(K) or a defined benefit plan for several reasons such as providing for your family if you do not make it to retirement age, funding a buy sell agreement with business partners, or paying a non-taxable death benefit to your heirs.

The annual tax-deductible contributions to these plans range from approximately $90,000 for a 30-year old individual to about $300,000 at age 60. These plans retain the cash value or your basis in the policy at your death, and the death benefit beyond that amount is paid to the beneficiary that you select. 

Start Today to Protect the Fruits of Your Freelancing Success

Engaging in proactive tax, asset protection, and retirement planning is the key to preserving and growing your hard-earned freelancing income and assets over the long-term. Many of the strategies outlined above offer significant financial benefits, however, they also involve becoming intimately familiar with the IRS tax code, so you may wish to consult a tax or financial professional for additional guidance.

Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers across the country. His website, www.cpaforfreelancers.com, has a resource section with how-to articles and information for freelancers.

Tax-Efficient Investing Through Private Placement Annuity and Life Insurance Investment Accounts

Aaron Abrahms for WealthManagement.com writes: Wealthy families and individuals interested in tax-efficient investing are increasingly drawn to the benefits associated with Private Placement Variable Annuity (PPVA) and Private Placement Variable Universal Life (PPVUL) Investment Accounts.  This article seeks to give an overview of these investment account structures.

Private Placement Variable Annuity Investment Accounts

A PPVA Investment Account permits investors to defer income tax on investment gains.  Investors can make deposits and take distributions from these accounts with the same flexibility as they would from any investment account (however, there is a 10 percentexcise tax levied on any gains that are distributed from the account before the annuitant’s age 59½).  After age 59½, any gains from the PPVA Investment Account will be taxed as ordinary income on distribution.  The owner of the PPVA Investment Account remains in full control of the assets within the account.  The owner can make deposits, adjust the asset allocation among various investment options and change the beneficiary designation at any time.  Unlike a traditional retail annuity, a PPVA Investment Account doesn’t have features such as income guarantees or principal protection.  As a result, PPVA Investment Accounts generally have substantially lower fees than a traditional retail annuity.  Additionally, PPVA Investment Accounts allow individuals to invest in non-registered investment offerings, such as hedge funds.

PPVA Investment Accounts are often utilized by ultra-affluent individuals and families who intend to leave assets to a public charity or private foundation at their passing.  If a charitable entity is named as the beneficiary of a PPVA Investment Account, all the deferred gains pass tax-free to the charity.  However, unlike other charitable strategies that are irrevocable in nature, PPVA Investment Accounts provide flexibility for the individual or family if there’s ever a desire to access the assets during the owner’s lifetime.  The PPVA Investment Account owner also retains full control during its lifetime to change the beneficiary from one charitable entity to another.

Private Placement Variable Universal Life Investment Accounts

PPVUL Investment Accounts are similar to retail Variable Universal Life insurance contracts in that they both contain a death benefit and an investment account.  The cash value in PPVUL Investment Accounts is invested at the policyowner’s direction among a variety of available registered and non-registered fund options.  As long as the life insurance policy remains in force, the investment gains within the account are not subject to income tax.  The policyowner can access the account value in one of two ways, both of which are income-tax free.  He or she may:(1) withdraw the cost basis of the policy, which is equal to the cumulative premium amount deposited into the PPVUL Investment Account; or (2) take a low-cost loan from the account.  When the insured passes away, all the deferred investment gains are paid to the beneficiaries of the policy as an income tax-free insurance benefit.

PPVUL Investment Accounts are often owned by large trusts where a portion of the assets in the trust would otherwise be invested in tax-inefficient investment strategies (for example, hedge funds and other alternative asset class investments).  The trustee will often utilize a PPVUL Investment Account to locate the tax-inefficient investments.  If the trustee needs to make a distribution to a trust beneficiary during the insured’s lifetime, he or she simply withdraws (or borrows) from the investment account value.

Basic Process

PPVA and PPVUL Investment Accounts are available through a licensed insurance broker and are offered by multiple insurance companies.

PPVA Investment Accounts can be set up with basic paperwork similar to a typical hedge fund subscription.  PPVUL Investment Accounts also require the insured to go through a simple life insurance underwriting process, including providing evidence of insurability through an insurance physical.

The owner of the PPVA and/or PPVUL Investment Account will need to choose how the assets will be invested among a variety of registered and non-registered investment vehicles.  Each life insurance company offers a list of the funds that are available on their platform.  In some cases, with larger deposits to these structures (typically $50 million or greater), the policyowner may request that the insurance company add a fund manager that is not currently available on their roster of investment vehicles.

While sophisticated investors and family offices select the Insurance-Dedicated Fund (IDF) in which the account will be invested, they are prohibited from influencing the fund manager’s investment decisions.  If this doctrine isn’t followed, the tax benefits of the structures may be lost.

What are the downsides of these vehicles? 

One of the largest considerations with PPVA Investment Accounts is that all the deferred gains are taxed as ordinary income on withdrawal.  This means that even if an investment would normally qualify for some Long Term Capital Gain treatment, on withdrawal from a PPVA Investment Account all the gains are taxed at ordinary income tax rates.  Because of this status, PPVA Investment Accounts are generally utilized for the most tax-inefficient portion of a high-net-worth individual’s overall portfolio.  For example, a municipal bond fund wouldn’t be a strong candidate for a PPVA Investment Account.

Investors utilizing PPVUL Investment Accounts must consider the upfront, premium-based charges, such as Federal and State premium taxes.  In most cases, investors utilizing a PPVUL Investment Account should adopt a time horizon that’s longer than 10 years. 

Another consideration is that, while both PPVA and PPVUL Investment Accounts have numerous investment choices, there are still fewer options than are otherwise available outside of these structures.

Conclusion

PPVA and PPVUL Investment Accounts may be beneficial for tax-sensitive investors, especially those seeking to invest in hedge funds or funds of hedge funds. 

PPVA Investment Accounts can be a beneficial vehicle for families or individuals looking to maximize their charitable giving.  The tax-free compounding associated with a PPVA Investment Account will result in larger donations to public charities or private foundations.  By designating a private foundation or public charity as the beneficiary, assets within PPVA Investment Accounts become income and estate-tax free as well.

While PPVUL Investment Accounts are more complicated to implement than PPVA Investment Accounts, they do allow for income tax-free access to the accumulated value within the account during the lifetime of the insured and an income-tax free insurance benefit at the insured’s death.  PPVUL Investment Accounts are often owned within large, dynastic trust structures which further increases the benefit of this particular investment structure.

Netcom PaySystem's New Quickbooks Plug-in Is the Result of Efforts with eProcessing Network

Netcom PaySystem, a well-known provider in the merchant payment service industry, recently unveiled its latest plug-in: the ePN PlugIn for Quickbooks. The newest plugin, which was created in conjunction with eProcessing Network, gives merchants the ability to attend to credit card, debit card, and check transactions directly through Quickbooks, one of the accounting industry’s leading software.

The ePN PlugIn, which is compatible with QuickBooks (R) Pro, QuickBooks (R) Premier and QuickBooks (R) Enterprise Solutions 2008 – 2014, offers the user many useful features. According to Netcom PaySystem, merchants can take advantage of processing transactions and applying payments to open invoices in one easy step. This can save time and money by avoiding double entry in addition to reducing the amount of accounting errors. 

“Whether you process customer payments face-to-face or through invoices, the Accounting Plug-in for use with QuickBooks provides you with the tools and support to make the sale,” noted an article on the mCommerce company’s website.

For over 27 years, Netcom PaySystem has provided its customers with some of the most-in depth and comprehensive Payment Processing solutions in the industry. Netcom PaySystem works tirelessly to bring its customers simple and fair marketing programs that give their businesses an advantage. The company’s dedication to providing outstanding customer service and support to its clients has made it a leader in the electronic payment solutions field.

“The first inkling that this ISO has a decidedly personal slant on customer relations comes when the client calls the company's location in Roswell, GA, and a live operator greets them,” stated a representative of the company. “It is a pleasant departure from working their way through the gauntlet many corporate automated phone systems have become.”

Individuals interested in learning more about Netcom PaySystem and its new EPN PlugIn for Quickbooks can visit the company’s website for more information. Customers can also subscribe to Netcom PaySystem Twitter, Facebook, and YouTube accounts for frequent updates from the company.

About Netcom PaySystem
Netcom PaySystem prides itself on being as eager to practice good, old-fashioned customer care as it is to pioneer new products. Netcom PaySystem is proud to provide the most up to date and innovative product such as m-Commerce Mobile Solutions, and Virtual Terminal solutions. In addition, the company offers the merchant access to POS Systems, ACH Check Services, Check Guarantee, Recurring Billing, Check21, BOC, Credit and Debit Card Processing, Gift and Loyalty Cards, and Merchant Working Capital. To better serve their merchants, Netcom PaySystem has offices located in Roswell, GA; Columbus, Ohio; Covington, LA; and Biloxi, MS. Consequently, Netcom PaySystem’s attrition rate is one of the lowest, if not the lowest in the industry. Netcom PaySystem can proudly boast that that only two to four percent of its clients ever leaves the company, and out of that; close to 50% return within the first year. For more information, please visit http://netcompaysystem.com