Equilibrium

I have been trying to find a bright patch in this economic crisis.  My undergraduate degree is in economics so I often think a lot like an economist as well as an accountant.  I have been thinking about this crisis a lot in terms of an equilibrium.  This economy just got too out of hand for too long...spending too much, taking on too much debt, people getting into career fields and starting businesses in areas (real estate, mortgage lending) that they had no business getting into, investing in financial instruments (complex derivatives) they had no business investing in.  Things are just trying to equalize...revert back to the mean...become more in line with how they should be.  People buying homes that are more in line with their resources and saving money for a rainy day like they should be.  Those with strong balance sheets and fundamentals will survive this and we will all learn better habits in the process.  I truly believe that this is a good wake up call for everybody and hopefully we will all learn something from this.  How's that for making the best out of a bad situation?

There Is No Such Thing As Contract Labor!

That is what a retired IRS revenue agent told me a few months ago. He now operates a consulting practice assisting those on the “other side” with tax problems. I thought this was interesting and states very clearly the IRS position for the age old question of whether a worker should be classified as an employee or a “1099” vendor or contractor. What he means is that if you hire someone to work for you in your business and the only way to classify your payments to them is as “contract labor” then that person should probably be set up as an employee, having taxes withheld and you as the employer contributing half the social security and medicare. If the person fits more in the category of a consultant or professional service provider, then that implies most likely that person has other customers and his/her own business. The term “contract labor” assumes the person is under your control – you dictate how and when the job gets done. Many employers classify workers as contract labor to save money, but as in the case of paying a nanny as I discussed here, it could be an expensive decision and you could be liable for back taxes. Here is some official IRS guidance on the issue. However, if in doubt it is always best to err on the side of caution, do the right thing, and set that person up as an employee.

An Experiment in Socialism

I am not by any means implying that our country or leaders are “socialist”, free market principles and private ownership of property do still drive this country for the most part, but all the talk during this last election and the bailout fiasco got me thinking about the concept of socialism. My bachelor's degree is in economics and that is really my first love. Because I have had formal training in the subject, I think I approach it with a good background of knowledge. Just remember, what has made this country great and prosperous is not our government policies and programs, but FREEDOM. The freedom to pursue our own happiness as long as it does not encroach the liberty of others. as the Declaration of Independence so well stated. You just can't tax and re-distribute your way into prosperity, I don't care who is getting taxed. Yes, there are people who have a large piece of the pie, but the fact that they do have a large piece means that we all have a chance to obtain a larger piece ourselves. I know that the new administration will keep this in mind because we are still a center-right country in terms of our philosophy.

My clever husband has devised the following classroom socialism experiment. I really think it illustrates the concept of socialism in a way that is simple to understand. It would be cruel and unfair to implement...but that is exactly what socialism is...cruel and unfair.  I think it would work!  Here is his idea:

If I were a teacher or professor, I would first let the students take the initial exam. Then, I would tell those with the higher than average grades on the exam that it is unfortunate and unfair to those who made below average scores so I am going to take the extra points of the higher scoring students and give them to the lower scoring students so that essentially everyone would have an average score on the exam. Obviously, the students who scored higher on the first exam would no longer have the motivation to work and study for the subsequent exams and would thus score average or worse. The students who scored low to begin with would still not do well because they would be expecting those extra points, and certainly would not gain anything from this system because there would not be extra points to dole out on subsequent exams. Everyone would be worse off!

Taxpayer Question:Can I Claim My Grandchild As A Dependent?

The taxpayers have a 19 year old unmarried daughter who had a baby a few months ago.  She and her infant son are living with them while she attends college full-time and works a part-time job. They already know that they may claim their daughter as a dependent on their tax return, regardless of her income, because she is under the age of 24 and a full-time student.  They also realize that the daughter cannot claim her young son as a dependent on her own tax return because they are claiming  her as a dependent.  Their question is if they may claim their grandson on their own tax return.  My answer:  Yes, as long as the father is not in the picture and not eligible to claim the child as a dependent.  If the taxpayers are providing more than half of the support of their grandchild coupled with the fact that the baby is living with them, they may claim him as a dependent.

This Is Why....

This is why you should always live within your means in good times and in bad.

This is why you should not take on too much debt and pay cash for most purchases.

This is why you should have 6 months of living expenses in liquid funds saved up just in case.

This is why one of your major goals should be financial independence.

This is why....you know what I'm talking about...

Year End Payroll Filings

January is the fun month of quarterly payroll reporting along with year end payroll filings.  Lots of form printing, collating, envelope stuffing, etc.  Technology does make it so much easier and I just have to sing the praises of a form filler program that I have been using probably back as far as 2001.  It is called 1099-etc by Advanced Micro Solutions.  The interface of the program hasn't changed a lot since then.  It still looks like something that you would see running in Windows 3.1, but it is so easy to use and inexpensive.  I recommended it to one of my colleagues and she loves it too.  It does laser and preprinted form filling of all the federal and state payroll forms that you could possibly need.  It also has an after-the-fact payroll module that then transfers to the forms as well as e-filing capability.  The bulk of my clients use QuickBooks so I am able to print most of the forms from there, but I do have many clients who either do not use QuickBooks or they prepare their payroll manually.  1099-etc saves me so much time.  

Obama Proposing Tax Cuts as Part of Stimulus Package

Obama has proposed $300 billion in tax cuts for individuals and businesses as part of his stimulus plan.  It appears that he is leaning away from government spending to boost the economy and has warmed up to putting the funds in the hands of the people to decide what to do with their own money.  Do you think the government knows better than you how to spend your own money?  I think you know the answer to that!  I am relieved to see this direction because it would avoid all the unnecessary pork built in to any spending increases.  I'm sure everyone has been coming out of the woodwork to lobby for their own pet projects.