With Christmas quickly approaching, I know some of you have seriously considered taking a distribution or loan from your retirement account. The only positive aspect to either option is the money you receive. There is a difference between taking a withdrawal and taking a loan.

When you withdraw funds from your retirement account and you're under age 59 1/2, you will be subject to a 10% penalty on the amount you take out. For instance, if you request $2000 there will be a $200 penalty when you file your tax return. In addition, the $2000 will also be added to your ordinary income and taxed at your ordinary income tax rate. So, if your ordinary tax rate is also 10%, then you will have to pay an additional $200 in taxes. This is a total of $400 you would not have to pay if you never took the withdrawal. But even worse (in my opinion) is that you will no longer have that money working hard for you as an investment.

Of course there are exceptions to the 10% penalty but they are difficult to come by and none of them are for buying Christmas gifts. The most common exceptions are medical, higher education and first home purchase.

If you must take money from your retirement account, requesting a loan is a better option if it is available to you. You will still be taxed for the additional income at the ordinary income rate, but you will not be assessed the 10% penalty. And, depending on the type of plan, the money will remain in your account to keep gaining interest and dividends until you retire. Just remember you will have to pay that money back and if you don't (or can't) it will be converted to a withdrawal, and you will be assessed the 10% penalty on the remaining balance of your loan.

Remember if you're considering either of these option please consult your tax professional to go over all your options and tax consequences.

This week's topic is one that I hear a lot about from my clients. Many are legitimate self-employed business owners but I have more than a few clients that are paid in cash and issued a 1099-Misc at the end of the year. For these people determining if they are actually an employee is crucial.

When my client tells me they are paid in cash and received a 1099, my first question is to ask what it is they do for a living. If the answer is anything other than I own my own business, I dig deeper. Here is the problem: being paid in cash means that payroll taxes are not paid and withheld on your behalf nor are they automatically reported to the Social Security Administration.

The IRS has clear rules for determining if a person is independent or employed. If you are employed, your employer is required to pay payroll taxes bases on your compensation. If you're an independent contractor you must pay self employment tax as discussed in a previous post. The IRS rules basically state that if the person your working for dictates where, when and how you do your job, you are an employee. It does not matter that they pay you in cash, they are still obligated to pay payroll taxes on those wages. If you are the person in control of who you work for, when you do your job and how you do it then most likely you are self-employed and you are responsible for your own taxes.

So what happens if you're an employee and your employer is paying you cash but doesn't withhold taxes? The first thing to realize is that when you file your tax return, you will be paying those taxes if you want it credited to your social security record. Is there a way to correct this? Yes there is.

The IRS allows employees to file Form 8919 to report uncollected social security and medicare taxes due on their wages. This form will ensure that the employee's uncollected SS and medicare taxes will be reported to the Social Security Administration and properly credited to their record. Remember, to be eligible for this form you must be an employee who was misclassified as an independent contractor. Please visit the link above for details.