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By Marvin L. Powell, Financial Professional MONY Life Insurance Company, New York, NY (MONY)
In a small business, if an employee is out of the shop, that generally means those who are left must scramble to keep up with the workload. Under such conditions, the last thing a small-business owner or manager needs is an unexpected tax bill. But without proper precautions, that is exactly what could happen.
The problem is that most successful small-business owners would want to continue to pay an employee or owner (as an employee) if that person suffered a long-term disability. But that payment, however well-intentioned-, could create a tax problem for the employer.
One solution is to set up a wage continuation plan before a disability strikes. That way, the small business owner or manager can feel more comfortable that ongoing paychecks for a disabled employee generally will not be treated unfavorably by the Internal Revenue Service.
A wage continuation plan is simply a written compensation program for disabled employees. The plan, if prepared in accordance with IRS guidelines, can allow the business owner to deduct the compensation as a business expense and avoid adverse income tax consequences.
When considering a wage continuation plan, a small business owner should also consider setting up a business continuation arrangement to help guard against the financial risk that an owner¹s disability presents to a small business. A man age 35 has a 50% chance of a extended disability of 90 days or more before the retirement age of 65, based upon the 1985 Commissioner¹s Individual Disability A Table so the risk is real.
If a business has two or more owners, a disability buy-out arrangement should be considered. This program provides that if one owner is permanently disabled for a given period of time, the business or the other owner(s) will purchase his or her interest for a specified price. Such an agreement can allow the business to continue with a minimum of interruption. In addition, an overhead expense program can help a business owner to continue paying ongoing business expenses despite his or her absence because of sickness or disability. Without business continuation arrangements, successful businesses run the risk of having to be sold in order to pay the bills of disabled owners.
MONY Life Insurance Company provides life insurance nationwide and annuities in New York. Life Insurance and annuities are issued outside of New York by MONY Life Insurance Company of America. MONY does not provide legal or tax advice and recommends that legal and tax issues be reviewed with counsel or your tax advisor.
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