Every day people go into small businesses with the hope of making enough money to enjoy life, save for retirement, and gain financial security.  But one big barrier stops them from making enough money to achieve their goals - it’s called “payroll taxes.” otherwise known as Social Security and Medicare.

Joshua Kennon, who writes the Investing for Beginners GuideSite for About.com, says,

The single biggest threat for those who want to move from the lower or middle class to the “capitalist” class, as some academics have called it, is the payroll tax….[which] effectively serves as a barrier that makes it nearly impossible for the average American to accumulate wealth, especially if he or she is self-employed and forced to pay the entire 15.3% themselves.

A friend told me a story that illustrates this problem. She started her small catering business a couple of years ago and until this year she never had a profit.  This year, her CPA tells her, she will have a profit.  But she won’t see much of that money, because she will have to turn around and give it back in both income taxes and payroll taxes on the profits.  By “payroll taxes” I mean Social Security and Medicare, which business owners must pay at the rate of 15.3 percent on the profits of their businesses.  So if my friend has a $10,000 profit, she must pay income tax on that profit, plus $1530 in payroll tax.

You might say that’s good, because she is building up credits toward her retirement.  Sure, but if she had a capital gain of $10,000, she would not have had to pay the $1530 payroll tax on it.  (The short-term capital gains tax rate is the ordinary income tax rate; the long term capital gains tax rate is currently 15%.) If she had a profit of $10,000 on rental income, she would not have to pay payroll tax on it.  If she earned $10,000 as an employee, she only has to pay half (her employer must pay the other half.)

So how does a small business owner get ahead?  The only way to avoid payroll taxes is not to make a profit, or to shelter some of that profit in qualified benefit plans, like SEP IRA, 401k, or other plans. If your small business is going to make a profit this year for the first time, run, don’t walk, to a reputable financial planner and start talking to this person about what you can do to legitimately and legally get into a qualified plan.

Image: sxc.hu

Regularly, my dad has to go through my grandpa’s mail and discard the many offers and “awards” that he receives. Additionally, scams (including one that is aimed at seniors receiving a bonus through Social Security ) are often aimed at our elders. It is vital that you pay attention to what is going on in your own family . The California Society of CPAs points this out about the desirability of seniors for scam artists :

Con artists can use hard-core social influence tactics to take them in, both on the phone and in person. The oldest generation in any family is vulnerable to scammers for a variety of reasons , none of which necessarily have to do with their mental competence. They’re typically home during the day - a prime time for con artists. Once they give up the financial security a paycheck provides, and begin living off the wealth they’ve accumulated for retirement, they are naturally mindful that the money has to last. This makes them more susceptible to investment schemes and the con artists who sell them on this fear. In addition, con artists target seniors because that’s where the cash is.

And, of course, one can’t forget scams and other schemes that come through the mail. One of the most blatant is one in which a check appears in the mail and is cashed. Unfortunately, cashing this check constitutes entering into an agreement that a certain amount of money will be removed from your account , either all at once, or in monthly installments. Investment schemes are also worrisome, since it preys on seniors’ concerns about how long the money will last.

Protecting your elders from these kinds of schemes can be difficult, especially since you do not want to seem patronizing or distrustful of your parents’ or granparents’ abilities with money at this point. Before you talk to your elders about money, consider these good points offered by Money Energy :

1. Understand that their decisions are their own . You can warn your elders about scams, and help them with their finances, but unless they are declared incompetent, you have to realize that it is still their money.
2. Make sure you understand the line between “helping” and “controlling” .
3. Respect others’ boundaries .
4. Examine your own position . Are you really in a place that qualifies you to be giving this sort of help?

Image source: U.S. government via Wikipedia.

The economic situation has left much business in shambles, but the consequences of the recession may strike at those who rely on government programs like Social Security and Medicare. With more and more people leaving the workforce, these programs will eventually become so encumbered that they will collapse.

Image: Flickr

Congress has recently been mulling over proposals to fix the forthcoming crisis situation for Social Security and Medicare. One of these plans of action is to create a bipartisan commission that will preemptively tackle the problems facing government benefit programs. This commission would then assemble a package of adjustments for Congress to approve, with no options left off the table.

President Obama has called for action to avoid the problems that the government benefits programs face but has not yet thrown his support behind the commission idea. Instead, Obama would prefer that Congress continue to focus on his health care and global warming initiatives.

RetireSafe.org, a grassroots organization that advocates for nearly 400,000 American citizens, recently called on President Barack Obama and the United States Congress to make steps towards improving Social Security.

“With unfunded liabilities of up to $100 trillion and the Social Security Trust Fund scheduled to pay out more than it takes in by 2016,” said Michelle Plasari, the President of RetireSafe. “America’s seniors deserve to know that the Social Security benefits they rely on to make ends meet will still be there for them.”

Among the improvements RetireSafe wants to see are guaranteed benefits, fair cost of living adjustments and the repeal of double taxation. Addition, the grassroots organization wants the government to prohibit totalization and to abolish the earnings limit for early retirees.

For more information on RetireSafe and what they are all about, visit their official website at RetireSafe.org.

RetireSafe.org Screen Shot

The government warned on Tuesday that Social Security and Medicare will be insolvent sooner than previously expected. The trustees’ annual report revealed that Social Security will be paying out more money than it receives by 2016 (a year sooner than prior projections). Medicare is already doing the same.

Image: istockphoto

Unless changes are made, the Social Security retirement fund will be depleted by 2037 and the Medicare trust fund will be insolvent in 2017. Additionally, Social Security recipients are not expected to get cost-of-living increases in 2010 or 2011. Cost-of-living increases have happened each year since 1975.

“We should neither be casual nor hysterical about the revised insolvency dates,” Social Security Commissioner Michael Astrue said. “The Social Security system will weather this recession. However, the sooner we get on with the task of reforming the system, the easier it will be to make the tough choices.”

When planning for retirement, your finances are almost always your chief worry. Most of your planning should be regarding how you will financially stay afloat once you transition into retirement. Here are the top five financial mistakes you can make when planning for retirement:

5) Relying on Stocks
As we’ve seen in this current global financial crisis, stock markets are extremely volatile. A fortune in stock can be gone tomorrow. Many people lose their retirement money when the stock market went south. Part of your savings should be in stocks but not the majority.

4) Not Having Proper Insurance
As we age, insurance becomes more and more important. Health insurance, in particular, is vital. An illness prior to retirement can quickly eat away all the money you had planned to spend in retirement.

3) Not Being Patient
When planning for retirement, you shouldn’t panic. If some of your money is lost in the stock market, weather the storm. If your current finances get weaker, find ways to continue without borrowing against your retirement fund.

2) Accounting for Social Security
Will social security be there when you retire? None of us know that answer. When doing the math, you shouldn’t assume social security will still be around. It could disappear or the rates could be altered.

1) Not Starting Now
No matter your age, if you are working, you should start saving for retirement. Even if you think you are “too old” to start, starting right now will put you in a better position than if you keep procrastinating.

Where is your retirement money? (Image: Flickr)

Because of the scope of the economic stimulus bill passed last month, it is practically impossible to find a succinct summary of everything offered in the bill. However, it is possible to find out in bits and pieces. One of the more interesting stimulus measures includes payment to those on Social Security right now. If you are receiving Social Security Income or Supplemental Security Income, you will receive $250 without doing anything. There is more information on the official Social Security Administration Web site — including a video.

This is a nice bonus for seniors and others already receiving Social Security. I know my grandparents will be pleased. It is still unkown how the payments will be distributed: Check or additional amount in the regular deposit. Personally, I think a check with an enclosed explanation would be the best way; an extra amount in the regular deposit could cause confusion.

Watching out for scam artists

This recession has spawned a number of scams, and this Social Security stimulus will probably be no exception. There is nothing that recipients need to do in order to receive their stimulus payments, so be wary of anyone telling you that you need to fill out some paperwork. Fine Tuned Finances offers this about one scam possibility:

This benefit from the American Recovery and Reinvestment act will almost certainly attract con-artists that prey upon seniors. The most likely scenario is that a con-artist will send a fraudulent form to a social security recipient and request personal information so that the payment can be processed. If a victim were to fill out one of these fake-forms, the con-artist could use that information to steal the identity of the victim. It would be well worth it to remind any senior adults in your life that they will not need to do anything to receive this benefit and should not fill out any special paperwork to receive it.

The SSA expects that payments will be made during the month of May, but details are not all worked out. Even though the government hopes these will be spent to help the economy, I suspect that most seniors will save the money — or use to help offset rising health care costs. And this is probably wise. When you’re on a fixed income, and when inflation seems likely, your best bet is to set any extra money aside in some sort of an interest bearing account.

Projectmanagement411 had a fantastic February with lively discussion on a plethora of business project topics. Those who participate make me better for it- hopefully they feel the same as we all grapple with the thorny business issues of the day.

Here is what we talked about. Just click on the topics to gain immediate access to some of the most lively, and at times meaty, business conversation on the web:

Social Security- Tied to Financial Services Industry Failures? Privatization Is a Ruse?

Knowing Yourself and Communicating It

Green Business- Can Result in Green Anxiety, Green Anxiety? Apply Business Basics First, Green Hype Can Distract

Barriers to Strategy Development- Admitting You Need Help and Issue Prioritization, Willingness of Management to Embed Processes

Talent Management- A Strategic Priority, Talent Management Projects: Are They An HR Function?, Are HR Projects Like IT Projects, Customer Segmentation Applied to Talent Management, HR’s Focus on Service and Culture Transitions

Use of Consultants- Consulting Customers! Get Your Act Together, Facilitating Action Through a PMO, Achieving the “Wow Factor” in a Consulting Firm

Crisis Management- How Do You React?

CIO “Brand” Consistency- Hurting Innovation with Financial Criteria and Poor Internal Marketing, Developing Your Commercial Instincts

Top IT Trends in MANAGEMENT and STRATEGY- MANAGEMENT Sum Up, Grad Shortage, Source of Inspiration and Master Data Management, CIO Role and IT Metamorphosis, “The Death of Hardware”?; STRATEGY Sum Up, Processes Improve in a Flatter World, Slow Downs, E-Services, and M-Commerce; Trend Analysis Results in Prescriptions and Cautions

Partnering with China Businesses Demands IT Assessment

The Role of Media in Innovation

Which topics are you interested in? Let me know your top three and tell me why.

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My last post talked about the possible political “ruse” of slamming redeeming of US Treasury Securities by the social security system while at the same time advocating redemption by foreign governments. This ruse of creating a problem where there is none has nothing to do with whether or not social security SHOULD BE a government program. So, I asked one of my commenters to my original social security post, Alan Lidstone, what he thought about this. He responded by asking “who do you trust?”:

“The question you have to ask, [is this:] would you rather rely on the full faith and credit of the United States Government to guarantee retirement programs that can span 60–70 years, or the Financial Services industry that has had multiple large scandals affecting the life savings, personal investments, pension plans, retirement benefits, and now home mortgages of millions of Americans.”

While I think that at least the financial services alternative gives people a choice, many feel that people in general are just not smart enough to distinguish between a good and a bad investment, and, if they are, dishonest corporations are out to fleece people anyway.

THIS gets to the heart of the issue- how much of a role should the government have in making sure that we live comfortable lives until we die? Alternatively, how much government oversite (SOX, etc.) is required to make companies honest enough to be invested in? I’m all for regulating certain aspects of the credit industry, who are allowed to make ridiculous sub-prime offers and charge usurious interest rates; I’m not so sure when it comes to heavy handed requirements like Sarbanes-Oxley.

Tough questions- but I’m sure you will be enlightened by the complete set of comments on the post. Check it out! You’ll learn something and possibly be entertained.

Are we smart enough to do our own investments that provide us income until we die? Should companies be more regulated or less regulated in terms of their reporting? All of this affects personal as well as business projects- let me know how you are impacted.

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My post on social security drew an amazing response . While I simply, and innocently, introduced differences in two presidential candidate’s approaches to social security, the discussion opened many doors and, I’m sure, many retirement planning projects.

Most felt, as do I, that social security is a failing system that should not be depended on. Talk of “cultural mindshifts” to get people to take care of themselves and how changing demographics require a change in the system, were followed by a stunningly detailed response by Alan Lidstone (who didn’t leave a link or way to get back to him, sorry).

Alan wrote well of how the system REALLY works revealing that movements towards privatizing are really designed to make the system fail by those who don’t like social security. He discussed the hypocritical willingness of politicians to slam the idea that social security will begin redeeming US Treasury Securities soon while seemingly advocating their redemption by foreign governments:

“The “full faith and credit” of the US Treasury securities applies to Saudi Arabia and China, and anyone else who buys US Treasury securities, and they are perfectly free to redeem their US Treasury securities and bonds when they come due. Unfortunately, far too many people feel that the “full faith and credit” of the U.S. Government does not apply to the US Treasury securities and bonds amounting to $1.844 Trillion Dollars held in Social Security Trust Fund and the $338 Million Dollars held in various Medicare Trust Funds.”

What do you think of Alan’s analysis? Are we being set up for social security’s failure by those advocating privatization? How does this affect your thinking on whether social security ought to be a government program in the first place (more on this in my next post!)?

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