If you’re not sure how to classify your new hire– whether Employee or Independent Contractor, the IRS lists these rules:
The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.
An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.
Here are two key points for small business owners to keep in mind when it comes to classifying workers:
1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:
The extent of the worker’s investment in the facilities or tools used in performing services
The extent to which the worker makes his or her services available to the relevant market
How the business pays the worker, and
The extent to which the worker can realize a profit or incur a loss
2. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:
Written contracts describing the relationship the parties intended to create
Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
The permanency of the relationship, and
The extent to which services performed by the worker are a key aspect of the regular business of the company
The extent to which the worker has unreimbursed business expenses
The IRS can help employers determine the status of their workers by using form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer’s Supplemental Tax Guide, is also an excellent resource.
NOTE: If you have deemed the new hire to be an Independent Contractor, make sure you have he or she sign an Independent Contractor agreement listing and agreeing to all the specifics. That way, there are no issues in the future.
If you’re a Schedule C Sole Proprietor and are looking for some extra help, think about hiring your own kids. If you have minor-age children (17 and under), you can add them to your payroll without having to pay the employer payroll taxes or Workers Compensation. In addition, if they earn under the Standard Deduction ($6,350 in 2017), and they are your dependent, they won’t have a tax liability. The kicker here is that your business gets to deduct your kids’ payroll, and your kids don’t have to pay taxes on the money earned (as long as it stays under the Standard Deduction).
You still have to treat them like any other employee– have them fill out a time card, pay them via payroll and issue them a Form W-2 at year-end.
If you do this correctly, it’s a great way to put away funds for college, as well as teach your children responsibility and important skills.
As we’re just a few days away from the April 18 deadline for filing tax returns, and both taxpayers and tax preparers are gearing up for the final showdown, I am asked “what’s wrong with just filing an extension?” Unless your tax firm shuts down after the April deadline, my response to the extension question is “Why not?”
Let me preface this by saying that an extension, which will give you until October 15 to file your tax return, is NOT an extension to pay your taxes. If you believe you owe taxes, pay them by April 18, or you will incur penalties and interest. With that out of the way, I personally LOVE extensions. Here are some of the advantages:
You now have more time to gather your tax documents. If you’re missing a document, you can take your time retrieving it to ensure that you’re reporting the correct amounts on the tax return. Rushing to estimate certain amounts can risk reporting incorrect numbers (and possibly inviting an IRS notice).
You also have more time to come up with tax-saving deductions. I can’t tell you the amount of time a tax client left out charitable deductions, Vehicle License Fees, additional property taxes, etc., simply because they ran out of time to pull up those numbers! It’s even more important if you’re a business owner or landlord. An extension gives you time to go through your calendar to make sure you’re not missing tax-deductible mileage, meals or travel expenses.
If you have investments in securities, like mutual funds, stocks, etc., it is NOT uncommon for the financial adviser to issue an amended 1099– sometimes as late as mid-March or later. If your investments include Limited Partnerships, your K-1 forms may not even come in until April or May, so in those cases, you don’t have a choice but to file an extension. Nothing is more frustrating (and costly) than receiving an amended 1099 AFTER you’ve filed your return. Then you have to pay your tax preparer to file an amended return.
After the crunch season, your tax professional will be more relaxed and will be able to spend more time on your return. That reduces the possibility of error, as well as increase the possibility of finding more deductions (and of course, reducing your taxes).
And finally, after tax season is when we tax accountants like to take our continuing education classes and attend various tax law and strategy seminars to maintain our licenses. I know after I return from a tax seminar, I am totally pumped, excited and ready to take on whatever new tax challenge the client brings before me!
A tax extension is NOT a bad word, or an admission of failure. If you need more time to make sure your tax return is accurate, complete, and that you only pay the taxes you’re legally obligated to pay, then “Extend On!”
Estimated Tax. Self-employed taxpayers generally need to make quarterly estimated tax payments. IRS Publication 505, Tax Withholding and Estimated Tax, has details on making those payments.
Schedule C or C-EZ. Self-employed taxpayers must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040. For expenses less than $5,000, use Schedule C-EZ. Each form’s instructions provide the rules for which form to use.
SE Tax. For those making a profit, self-employment and income tax may need to be paid. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax.
Allowable Deductions. Taxpayers can deduct expenses paid to run a business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and proper for a trade or business.
When to Deduct. In most cases, taxpayers can deduct expenses in the year paid or incurred. Some costs must be ‘capitalized,’ however. This means deducting the cost over a number of years.
All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity.
Taxpayers with disabilities or parents of children with disabilities may qualify for the Earned Income Tax Credit (EITC). The EITC could put an extra $2 or up to $6,269 into a taxpayer’s pocket. Nevertheless, the IRS estimates that as many as 1.5 million people with disabilities miss out on this valuable credit because they fail to file a tax return (their income may fall under the threshold). Many of these taxpayers may be concerned that the EITC would count as income and impact their ability to get government benefits, but that is not the case.
Important Tax FYI for taxpayers claiming either the Earned Income Tax Credit, Child Tax Credit or Education Credit beginning for tax year 2016: The IRS is requiring tax preparers to perform additional due diligence for all 3 of those items by asking more questions and requesting additional documentation, or be faced with substantial penalties. In addition, refunds from those returns won’t be released until after February 15, and won’t be direct-deposited until the week of February 27.
Why the additional work and hassle? Refundable Credits (a tax credit where you get a refund above and beyond what you paid) are a hotbed for fraud and errors: In 2015 alone, $15.6 BILLION in refundable credits were INCORRECTLY paid out, of which 24% was for the Earned Income Tax Credit alone. That being said, the IRS wants to make sure that those credits are awarded to those who are legitimately entitled to them.
Another reason I love real estate: If you rent your vacation home LESS than 15 days in a year, you do not have to claim the rental income. Of course, you cannot claim the rental expenses either.
So what does this mean to a vacation homeowner whose business is incorporated? If your corporation utilizes your second home for board meetings, employee conferences, etc., you can charge your corporation rent for the use. Make sure it’s a REASONABLE amount by getting quotes from local hotels for their boardroom use. Also make sure it’s truly a business use and that you provide documentation as such.
As long as you rent the home LESS than 15 days in the tax year, you do not have to claim the rental income that you collected from your corporation. However, your corporation will be expensing the rent that it paid you for the business use of the property.