Business saves $270K. The trick? No employees

Xan Hood, founder of clothing startup Buffalo Jackson, relies entirely on freelancers. It's part of a small business boom in the use of temp workers.

NEW YORK (CNNMoney)

He's got two artists, two accountants, a photographer, a web consultant and a customer service representative -- and they are all freelancers.

If they were on Hood's payroll, their combined salary would probably have cost him $300,000 last year. Instead, he paid closer to $30,000.

His cash-strapped startup, Buffalo Jackson in Charlotte, N.C., doesn't need them working full-time. At this point, there just isn't enough work to do.

"We need to be efficient and resourceful with the little we have," Hood said.

Related: Pot dealers get slammed by taxes

Relying on freelancers saves him time and money in all sorts of ways. There's less government paperwork. He doesn't have to pay the federal payroll tax that funds Social Security and Medicare, 7.7% of workers' wages.

And there are no worries about North Carolina's unemployment insurance rate, which ranges between 1.2% and 6.8% of employee salaries. Even with just a few employees, these taxes can quickly add up to thousands of dollars a year.

"That's how we've kept our company lean and mean," Hood said. "I'm watching every dollar coming in or out of the company."

Buffalo Jackson, which designs clothes and contracts with manufacturers to produce them, is expanding quickly and might make $1 million in revenue this year. But Hood, who pays himself a small salary, still says his enterprise is in "survival mode."

Buffalo Jackson is part of the boom in temporary work. After all, why take on the cost and risk of hiring an employee if you can get one without strings attached?

Some business owners are heading to online platforms, like Buffalo Jackson did with Elance, where they find freelancers who bid on jobs. Others avoid hiring an employee directly by paying a staffing agency to do it for them.

Both options are growing in popularity. On Elance alone, more than 1.6 million U.S. jobs have been posted since mid-2011. Labor Department statistics show that the number of workers provided by temp agencies has more than doubled since 1990.

Employees end up with temporary or unstable jobs, a classification known as "contingent workers" that makes up about a third of the workforce, according to the Government Accountability Office.

But it's not necessarily a raw deal.

Related: India's luxury chocolate craving

Melissa Simpson turned to Elance after a car crash left her unable to lift heavy loads at her retail clothing job. The mother of five in Colorado Springs, Colo., searched for administrative office work she could do from home. Her first gig was with Buffalo Jackson, where she now takes customer orders and answers phone calls.

"I enjoy having time with my family and a flexible schedule," she said. "It's been a lifesaver."

Lately, though, Simpson has entered something of a gray area. She's been working 30-hour weeks, sometimes more during the holidays.

Hood said he's now faced with a decision: keep Simpson as a freelancer or move her onto his payroll. He's not sure he's ready for the additional duties of a manager -- or whether it's even necessary.

"The next stage in our company is taking ownership of responsibilities of a traditional workplace," he said. "But I'm not at the point where I want people to be depending on us as a source of hours every month."

Simpson, however, welcomes the idea.

"It would give me a sense of stability," Simpson said. "I would feel so much more a part of his company."

First Published: February 26, 2013: 6:12 AM ET

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Workers over 50 are the new 'unemployables'

Mary Clair Matthews, Tony Kash and Jill Cummings are struggling to find jobs. Click the photo to read their stories.

NEW YORK (CNNMoney)

On one hand, they're too young to retire. They may also be too old to get re-hired.

Call them the "new unemployables," say researchers at Boston College.

Older workers were less likely to lose their jobs during the recession, but those who were laid off are facing far tougher conditions than their younger colleagues. Workers in their fifties are about 20% less likely than workers ages 25 to 34 to become re-employed, according to an Urban Institute study published last year.

"Once you leave the job market, trying to get back in it is a monster," said Mary Clair Matthews, 58, who has teetered between bouts of unemployment and short temp jobs for the last five years. She applies for jobs every week, but most of the time, her applications hit a brick wall.

Employers rarely get back to her, and when they do she's often told she is "overqualified" for the position. Sometimes she wonders: Is that just a euphemism for too old?

Her resume shows she has more than 30 years of experience working as a teacher, librarian, academic administrator and fundraiser for non-profits.

"I've thought about taking 10 years off my resume," she said. "It's not like we're senile. The average age of Congress is something like 57. Joe Biden is 70. Ronald Reagan was in his 70s when he was president. So what's the problem?"

That's a question on the minds of many older workers.

Take Jill Cummings, 55, who has thought about dying her gray hair to improve her chances of landing a job. Then there's Tony Kash, 50, who wonders why his 30 years experience in manufacturing and management is no match for 25-year-olds fresh out of college with business degrees.

Nearly two-thirds of unemployed workers age 55 and older say they have been actively searching for a job for more than one year, compared to just one-third of younger workers, a recent survey by the Heldrich Center for Workforce Development at Rutgers University found.

Related story: Millions expect to outlive retirement savings

Older workers also have the longest bouts of unemployment. The average duration of unemployment for workers ages 55 to 64 was 11 months as recently as January, according to the Labor Department. That's three months longer than the average for 25- to 36-year-olds.

Given these circumstances, many workers can't help but think age discrimination is a factor. AARP's Public Policy Institute surveyed unemployed baby boomers in 2010 and 2011. While 71% blamed their unemployment on the bad economy, almost half also said they believed age discrimination was also at play.

About 23,000 age discrimination complaints were filed with the Equal Employment Opportunity Commission in fiscal 2012, 20% more than in 2007.

Proving discrimination is next to impossible, though, unless it's blatant.

"It's very difficult to prove hiring discrimination, because unless somebody says, 'you're too old for this job,' you don't know why you weren't hired," said Michael Harper, a law professor at Boston University.

Plus, employers may have rational qualifications that are inadvertently weeding out older candidates. Recent education and technological skills are two areas where older workers are more likely to come up short compared to the younger competition.

"When there's a large supply of unemployed workers, employers can afford to be choosier, and they're opting for workers they think are less expensive or more recently trained," said Sara Rix, senior strategic policy advisor for AARP's Public Policy Institute.

That's a hard reality for older job-seekers.

"When you're at 55 or 60, you've had a lifetime of work. You've played by the rules, and the rug has been pulled out from you," Rix added.

First Published: February 26, 2013: 6:18 AM ET

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Community college grads out-earn bachelor's degree holders

Nearly 30% of Americans with associate's degrees now make more than those with bachelor's degrees, according to Georgetown University's Center on Education and the Workforce

NEW YORK (CNNMoney)

That's 15% higher than the average starting salary for graduates -- not only from community colleges, but for bachelor's degree holders from four-year universities.

"I have a buddy who got a four-year bachelor's degree in accounting who's making $10 an hour," Omer says. "I'm making two and a-half times more than he is."

Omer, who is 24, is one of many newly minted graduates of community colleges defying history and stereotypes by proving that a bachelor's degree is not, as widely believed, the only ticket to a middle-class income.

Nearly 30% of Americans with associate's degrees now make more than those with bachelor's degrees, according to Georgetown University's Center on Education and the Workforce. In fact, other recent research in several states shows that, on average, community college graduates right out of school make more than graduates of four-year universities.

The average wage for graduates of community colleges in Tennessee, for instance, is $38,948 -- more than $1,300 higher than the average salaries for graduates of the state's four-year institutions.

Related: Colleges find a new way to get grads hired

In Virginia, recent graduates of occupational and technical degree programs at its community colleges make an average of $40,000. That's almost $2,500 more than recent bachelor's degree recipients.

"There is that perception that the bachelor's degree is the default, and, quite frankly, before we started this work showing the value of a technical associate's degree, I would have said that, too," says Mark Schneider, vice president of the American Institutes for Research, which helped collect the earning numbers for some states.

And while by mid-career, many bachelor's degree recipients have caught up in earnings to community college grads, "the other factor that has to be taken into account is that getting a four-year degree can be much more expensive than getting a two-year degree," Schneider says.

A two-year community college degree, at present full rates, costs about $6,262, according to the College Board. A bachelor's degree from a four-year, private residential university goes for $158,072.

The increase in wages for community college grads is being driven by a high demand for people with so-called "middle-skills" that often require no more than an associate's degree, such as lab technicians, teachers in early childhood programs, computer engineers, draftsmen, radiation therapists, paralegals, and machinists.

With a two-year community college degree, air traffic controllers can make $113,547, radiation therapists $76,627, dental hygienists $70,408, nuclear medicine technologists $69,638, nuclear technicians $68,037, registered nurses $65,853, and fashion designers $63,170, CareerBuilder.com reported in January.

Related: How does your community college stack up?

"You come out with skills that people want immediately and not just theory," Omer says.

The Georgetown center estimates that 29 million jobs paying middle class wages today require only an associate's, and not a bachelor's, degree.

"I would not suggest anyone look down their nose at the associate's degree," says Jeff Strohl, director of research at the Georgetown center.

"People see those programs as tracking into something that's dead end," Strohl says. "It's very clear that that perception does not hold up."

The bad news is that not enough associate's degree holders are being produced.

Only 10% of American workers have the sub-baccalaureate degrees needed for middle-skills jobs, compared with 24% of Canadians and 19% of Japanese, the Organization for Economic Cooperation and Development reports.

Over the last 20 years, the number of graduates with associate's degrees in the United States has increased by barely 3%. And while the Obama administration has pushed community colleges to increase their numbers, enrollment at these schools fell 3.1% this year, the National Student Clearinghouse Research Center reports. Graduation rates also remain abysmally low.

Related: Community colleges: How to avoid 'dropout factories'

Meanwhile, many people with bachelor's degrees are working in fields other than the ones in which they majored, according to a new report by the Center for College Affordability and Productivity.

"We have a lot of bartenders and taxi drivers with bachelor's degrees," says Christopher Denhart, one of the report's coauthors.

Still, the salary advantage for associate's degree holders narrows over time, as bachelor's degree recipients eventually catch up, says Schneider.

Although these figures vary widely by profession, associate's degree recipients, on average, end up making about $500,000 more over their careers than people with only high school diplomas, but $500,000 less than people with bachelor's degrees, the Georgetown center calculates.

As for Omer, he's already working toward a bachelor's degree.

"Down the road a little further, I may want to become a director or a manager," he says. "A bachelor's degree will get me to that point."

This story was produced by The Hechinger Report, a nonprofit, nonpartisan education-news outlet based at Teachers College, Columbia University. It's one of a series of reports about workforce development and higher education.

First Published: February 26, 2013: 6:23 AM ET

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Marijuana dealers get slammed by taxes

Denver Relief, one of the largest marijuana dispensaries in Colorado, has an effective tax rate of around 50%, according to co-owner Kayvan Khalatbari.

NEW YORK (CNNMoney)

The hefty levy is the result of a 1982 provision to the tax code, known as 280E, that stemmed from a successful attempt by a convicted drug trafficker to claim his yacht, weapons and bribes as businesses expenses, according to 280E Reform, a group working to overturn the statute.

Enacted in the wake of that PR debacle, the rule bars those selling illegal substances from deducting related expenses on their federal income taxes.

It may have been effective against cocaine dealers and smugglers of other hard drugs, but the law now means purveyors of medical marijuana in the 18 states that have legalized the drug can't can't take typical things like rent or payroll as a business expense. That's taking a heavy toll on this new field.

"I'd personally love to give my employees a raise," said Kayvan Khalatbari, co-owner of Denver Relief, a medical marijuana center in its namesake city. "But because of the industry we're in, that's not always possible."

Related: Newest government job - expert pothead

Khalatbari said Denver Relief does just over $1 million a year in sales, and that not being able to take some standard business deductions costs him tens of thousands of dollars annually. He estimates his effective federal tax rate is about 50%.

For Denver Relief -- one of the largest marijuana dispensaries in Colorado, with a full-time staff of 15 -- the burden isn't killing the business. But for others, it's been lethal.

Jim Marty, an accountant in Colorado specializing in medicinal marijuana tax law, said he has one client that didn't turn a profit in 2009, 2010 or 2011. In 2012, though, she was handed a $300,000 tax bill from the IRS for those three proceeding years.

Entrepreneurs whose businesses are legal under state laws are getting hammered by outdated federal tax rules.

"If you have a license from the state hanging on your wall, that doesn't fit the definition of trafficking," Marty said. "Yet the IRS is aggressively auditing this industry."

He said he often sees clients facing effective tax bills of 65% to 75%. That compares to 15% to 30% for businesses in general.

The Internal Revenue Service did not respond to a request for comment. In a letter to a congressman in 2011, the agency said it was merely enforcing the law, and that Congress needs to change the law if it does not want medicinal marijuana dealers caught up in the provision.

Several groups are working on just that, though it's unclear if the law will be changed anytime soon. The Obama administration has so far not expressed much interest in weighing in on the matter.

Until then, those in the industry will keep looking for crafty ways to minimize their tax bill, and pay the tax man when they can't.

"An emerging industry that can provide hundreds of thousands of jobs is being held back by these crazy tax rates," said Betty Aldworth, deputy director of the National Cannabis Industry Association. "We're like any other small businesses, that just happens to be illegal in some states."

First Published: February 25, 2013: 6:09 AM ET

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Adoption tax credit for same-sex couples

Sharon McGowan, left, and her wife Emily expect to receive an adoption tax credit of more than $2,000 after Sharon legally adopted their daughter.

NEW YORK (CNNMoney)

The adoption tax credit grants qualifying taxpayers up to $12,650 per child for qualifying expenses. Opposite-sex married couples can claim it when they adopt a child together, but when one spouse adopts the child of his or her spouse, they don't qualify.

But under the Defense of Marriage Act, same-sex couples aren't recognized as married in the eyes of the federal government and therefore can qualify for the credit when adopting a partner's child, known as a second parent adoption.

Qualifying expenses include legal fees and court costs, which typically run from $1,500 to $2,500, along with a fee of around $1,200 for a home study -- a screening process that entails home checks and interviews. Altogether, second parent adoptions can cost up to $5,000, said Gideon Alper, a Florida adoption attorney who regularly counsels same-sex couples.

Related: Businesses band together to support gay marriage

And since same-sex couples are hurt by the tax code in many other ways -- they can't file jointly and owe estate and gift tax that opposite-sex couples don't, for example -- it's an important credit to know about.

"Same-sex couples face a big disadvantage tax-wise through the rest of the system by not being married [at a federal level], so this is like a saving grace that lets them save a little money," said Alper.

Sharon McGowan, from Takoma Park, Md., went through a second parent adoption late last year, after her wife, Emily, gave birth to their daughter, Sadie.

While Sharon and Emily are married at a state level, the federal government doesn't recognize their union and many other states don't either. So to guarantee Sharon has full parental rights wherever she goes, the couple spent over $2,000 in legal fees and other costs to adopt Sadie.

"I never wanted to have the risk of someone refusing to let me see Sadie in hospital or make medical decisions for Sadie," said Sharon. "I wanted to make sure my relationship with Sadie was airtight."

Related: 'What legalizing gay marriage means for our money'

The couple made sure to complete the adoption before the end of the year so they could qualify for the credit -- which was originally scheduled to expire on Dec. 31, but ended up being permanently extended under the fiscal cliff deal. They're hoping the tax credit this year will cover the adoption expenses they incurred.

The credit is nonrefundable, so it will offset some of their overall tax bill. And the extra money they don't have to put toward taxes this year will go toward Sadie's daycare.

The couple says they are lucky their state even allows second parent adoptions, since some don't. But they don't think the credit should be considered a "benefit," because they wouldn't have had to go through the second parent adoption process and incur those costs at all if their marriage had been federally recognized in the first place.

Along with second parent adoptions, the adoption credit is also available for joint adoptions where neither parent is the birth parent -- and both same-sex and opposite-sex couples can claim the credit in this case. Since same-sex couples can't file their taxes jointly, however, only one partner can claim the credit, or they must each claim a portion of it.

Related: Financial benefits at stake in gay marriage case

If DOMA is overturned, which is a possibility since the Supreme Court is expected to weigh in on the constitutionality of the law for the first time this year, same-sex couples who are married at the state level would also be considered married for federal tax purposes.

This means they would be able to file jointly, but they would no longer receive a credit for a second parent adoption.

It's up in the air whether couples in civil unions or domestic partnerships would still be allowed to take the credit, however. It will depend on whether the federal government's definition of marriage would encompass those relationships, said Patricia Cain, a law professor at Santa Clara University in California.

For Sharon and Emily, the inequities same-sex couples face under DOMA far outweigh the couple thousand dollars they will get that a married couple won't.

"We would be very, very happy to give up the adoption credit to have our marriage recognized," said Sharon.

First Published: February 25, 2013: 6:28 AM ET

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U.K. vows to stick with austerity

LONDON (CNNMoney)

Moody's cut its rating to Aa1 late Friday, saying growth would remain weak into the second half of the decade, making it harder for the government to deliver on its debt-cutting targets and undermining the ability of the U.K. to withstand future shocks.

"Britain has to stick to the course, and we will," finance minister George Osborne wrote in The Sun newspaper on Sunday.

"For we've had a stark reminder this weekend of the single most important truth about our economy -- Britain has a debt problem, built up over many years, and we have got to deal with it."

Moody's said it expected the U.K.'s debt to peak at 96% of gross domestic product in 2016, up from around 90% today.

A downgrade had been talked about for months, against the backdrop of a deepening recession in Europe and Osborne's acknowledgment late last year that borrowing would remain higher for longer than expected.

But it still served as a reminder of the poor growth prospects for the world's sixth biggest economy, and added fuel to speculation that the Bank of England will have to compensate for the lack of growth -- and the government's hawkish stance on fiscal policy -- by easing monetary policy still further.

Related: Eurozone economy to shrink again in 2013

Investors took the downgrade as another reason to sell sterling, extending a slide which began at the start of the year. The currency dropped 0.1% to its lowest level since July 2010 against the dollar, and 0.6% against the euro to levels last seen in October 2011.

Yields on 10-year government bonds have been rising for about six months and they ticked higher again Monday to 2.1%, still low by historical standards.

The Bank of England has signalled recently that it may be prepared to tolerate above-target inflation for longer, while growth remains weak. Three members of its monetary policy committee -- including outgoing Governor Mervyn King -- voted at its last meeting to expand its bond-buying program.

They were outvoted, but the previous time the committee split 6-3, the bank followed up at its next meeting with more monetary stimulus.

Related: Europe: No retreat from austerity

Osborne said Germany and Canada -- the only big economies still with AAA-ratings from all three major agencies -- had taken advantage of better times before the financial crisis to reduce deficits and make their economies more competitive, while Britain had built up the biggest structural deficit of all.

"Now we have no choice but to continue the hard work of putting our house in order," he wrote.

First Published: February 25, 2013: 7:23 AM ET

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Judge rules against Apple in Einhorn cash fight

NEW YORK (CNNMoney)

Einhorn's Greenlight Capital filed a lawsuit earlier this month seeking to "unbundle" a number of shareholder proposals that would have been voted on as a group, including one that would have made it difficult for the company to issue preferred stock. The vote on this, known as Proposal No. 2, was scheduled to be voted on at Apple's annual shareholder meeting on February 27.

Judge Richard Sullivan of the Southern District of New York ruled that bundling four different items in one proposal violates Securities and Exchange Commission regulations.

"Given the disparate, material nature of the items in Proposal No. 2, it is probable that Apple has improperly bundled four 'separate matters' for a single vote," the ruling states.

Apple (AAPL, Fortune 500)shares rose 1% on Friday. News of the ruling came just a few minutes before the market closed.

Einhorn has launched an activist campaign to get Apple to unlock some of its $137 billion in cash by issuing preferred stock, or iPrefs, as he calls them. He argues that allowing the cash to sit idle on Apple's balance sheet is bad for the company and its shareholders.

A spokesman for Greenlight said that the ruling "is a significant win for all Apple shareholders and for good corporate governance" and added that "we look forward to Apple's evaluation of our iPref idea and we encourage fellow shareholders to urge Apple to unlock the significant value residing on its balance sheet."

Related: Einhorn takes aim at Apple's cash hoard

But another big Apple shareholder was not pleased with the judge's ruling.

California's powerful pension fund, CalPERS, supported Apple's proposal, which it said would give shareholders more voting power over the issuance of Apple stock.

"We encourage Apple to reintroduce these measures as soon as is practical so that all investors can be heard," said Anne Simpson, a CalPERS senior portfolio manager and director of global governance. "We applaud the company's commitment to strengthening shareholder rights."

Apple has said it is reviewing Einhorn's proposal, but CEO Tim Cook has called the lawsuit a "silly sideshow."

Spokespeople for Apple could not immediately be reached for comment.

First Published: February 22, 2013: 5:01 PM ET

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Moody's downgrades United Kingdom from AAA

God save the AAA rating.

NEW YORK (CNNMoney)

The U.K. was knocked down one notch to Aa1, with its ratings outlook at stable. Moody's said the key drivers of the downgrade included the country's rising debt burden and tepid growth outlook over the next few years.

"[A]lthough the U.K.'s debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other AAA-rated issuers," Moody's said.

The U.K. had held AAA status since Moody's first began rating the country in 1978.

In December, the U.K.'s budget monitor projected that the country's economy would grow by just 1.3% this year. The government has been pushing a much-criticized austerity program, and finance minister George Osbourne said he remained committed to those efforts, even after the downgrade.

"This is a stark reminder of the debt problems that Britain faces and the clearest possible warning to anyone who thinks we can run away from dealing with those problems," he said. "Far from weakening our resolve to deal with our debts, this should redouble our resolve."

Related: U.K. risks new recession

The British government has said its belt-tightening will have to continue until 2018.

In announcing the downgrade, Moody's said it expects the U.K.'s debt to peak at 96% of GDP in 2016, up from around 90% today.

A year ago, Moody's switched the outlook on the U.K.'s AAA rating to negative, in a prelude to Friday's downgrade. At the same time, the firm cut the ratings of half a dozen European countries.

The other major rating agencies, Fitch and Standard & Poor's, still have the U.K. rated AAA, though with negative outlooks.

Elsewhere in Europe, France lost its AAA rating from Moody's in November, after a similar downgrade from S&P in January.

The United States maintains its AAA rating from Moody's and Fitch, though it was downgraded by S&P in August 2011 following the debt ceiling standoff in Washington.

Steven Englander, a foreign exchange strategist with Citigroup (C, Fortune 500), said in a research note following the downgrade that the move was unlikely to raise borrowing costs for the U.K., as bond yields in the United States, France and Japan had remained stable following similar downgrades. But it increases pressure on the country to pursue growth by weakening the pound, he added.

"[W]hile by itself the announcement merely accelerates what was expected to happen at some point, the need for weakness [in the British pound] will become more apparent to policymakers and investors," Englander said.

Among Europe's other major economies, Germany, Switzerland and the Netherlands maintain their AAA ratings from Moody's. France sits at Aa1, while Italy is down at Baa2 with Spain at Baa3.

First Published: February 22, 2013: 5:01 PM ET

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Samsung stuffs a phone in new Galaxy Note 8.0 tablet

NEW YORK (CNNMoney)

It runs Android 4.1, has a 1.6 GHz quad-core CPU, 2 gigabytes of RAM, and an 8-inch, 1280 x 800 display that you can control with Samsung's S-Pen stylus. But on the international version of the device, there's something quite strange lurking near the top.
Yes, it's an earpiece. Yes, it's meant for you to make calls. Yes, Samsung expects you to hold an 8-inch tablet up to your face.

Samsung expects you to hold an 8-inch tablet up to your face.

The decision to imbue an 8-inch tablet with a phone very much seems like a reaction to the success of Samsung's Galaxy Note phones, which checked in at 5.3 and 5.5-inches, opening up some of the functionality of tablets. (Ugh, phablets).

I joked before about the day when we'd see a 7-inch phone. Turns out we got an 8-inch one sooner than we thought. But it is worth mentioning that it's undecided if a phone-enabled version of the Galaxy Note 8.0 will see the light of day in the U.S.

The device itself is suitably thin and light (more or less comparable to the iPad mini, it's closest known competition), and is responsive enough for most tasks. The stylus works pretty well, introducing a new feature that lets you activate preview panes of apps such as email and Flipboard, without ever touching the the screen (instead, you hover above the area you want to preview).

Related: Samsung overtakes Apple in 'smart connected devices'

But aside from the stylus, it also has a couple of tricks the iPad Mini does not. For starters, It has an IR remote which lets you enter the codes for most television sets and control your TV with your tablet, much like you would with any other remote. But sweetening the deal is the use of the media guide software from Peel Technologies, allowing you to seek out and directly jump to specific shows and movies without resorting to the channel up/down buttons.

It also supports a dual-window mode, where you can run two apps side by side, and without the loss of functionality. For now it only works with a handful of optimized apps, but includes a calendar app, a note-taking app, Chrome, Gmail, YouTube and more (adding up to more than 20 in all).

And while it's expected to arrive sometime in the next few months, there was not so much as a whisper about price. Judging from the year-old guts inside the Galaxy Note 8.0, it's possible Samsung made the necessary moves to offer it at a mainstream price point. If it falls anywhere under the $330 price tag of Apple's iPad Mini, it might just have what it takes to steal some of Cupertino's thunder.

But why...why does it have to have a built-in phone?

First Published: February 23, 2013: 9:57 PM ET

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Fed officials: Don't worry if we lose money

NEW YORK (CNNMoney)

But that's okay, Fed officials say.

After years of record profits, the Fed is likely to be saddled with losses starting in 2017 or 2018, economists predict in a paper that was presented Friday at the U.S. Monetary Policy Forum, a New York conference organized by the University of Chicago Booth School of Business.

Here's the scenario they think will play out: As the economy improves, the Fed will eventually tighten monetary policy. The central bank will stop buying mortgage-backed securities and Treasuries by the end of this year, they believe, and start raising interest rates in 2015.

Eventually, the Fed will have to start selling off the massive collection of bonds it acquired in its stimulus efforts.

And when that time comes, even the Fed admits that it will probably incur losses.

Inside the Fed's finances

Unlike most government agencies, the Federal Reserve funds itself. Its expenses are not paid for in by U.S. federal budget.

Each year after paying its own bills, the central bank hands over all its remaining profit to the Treasury Department. Most of the money comes from interest earned on holdings like Treasury bonds and other debt.

Those payments have ballooned in recent years. The Fed is earning huge profits from the large bond portfolio it amassed (and continues to amass) during its stimulus efforts.

In the decade preceding the Great Recession, the Fed paid out an average of $25 billion a year to the Treasury. In the last three years, its remittances have averaged $81 billion.

Based on those numbers, you could call the Fed the most profitable bank in the world. It's generating more income than America's top five banks -- JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and Goldman Sachs (GS, Fortune 500) -- combined.

Once the economy improves to its liking -- which could still be years away -- the Fed will have to start shrinking its portfolio, to ward off rapid inflation.

As the economy gets better, the Fed will raise interest rates. At the same time, bond prices will probably fall as the Fed sells off massive amounts of them.

That means the central bank is likely to lose money.

That's not necessarily a problem. A relatively new accounting rule would allow the Fed to pay for its operations and make interest payments basically on credit, deferring its losses and paying them off later in profitable years.

The situation could easily become a public relations nightmare, though -- especially in the current political environment.

"We're in a period where the attacks on the Federal Reserve system are the worst I've seen in 40 years," said Frederic Mishkin, a former Fed governor who is now a professor at Columbia University.

"In any year where the Fed is not giving remittances back to the Treasury, this is going to come up big time in Congress," he added.

St. Louis Fed President James Bullard also calls it a "recipe for political problems." During the same period that the Fed will incur losses, the government will be paying billions of dollars in interest to foreign governments.

The Fed seems to be trying to get ahead of the PR blow-up.

The central bank put out a research paper on the topic last month, and minutes released earlier this week show the issue was discussed at the Fed's January meeting.

Since then, several officials have spoken about it quite openly.

"There is a chance that we could go through a period of time in which our income falls, and we could even take losses," said Janet Yellen, vice-chair of the Federal Reserve Board, in a speech last week.

Her colleague Jerome Powell, a Fed governor, reiterated that point Friday.

Some Fed watchers expect Fed Chairman Ben Bernanke to discuss the topic when he speaks before Congress next week in his semi-annual testimony.

He's stuck in a "damned if you do, damned if you don't" position. If the economy improves, great -- but when it does, the Fed has big losses and a PR crisis to look forward to.

First Published: February 22, 2013: 2:27 PM ET

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