- The fourth common small business tax issue relates
to distinguishing between employees
and independent contractors.
According to the IRS in the United States, an employee
an employee is a person who performs work
is a person who performs work that is controlled
that is controlled anddirected by the employer.
and directed by the employer.
It is considered tax evasion when one falsely classifies
when one falsely classifies a controlled
a controlled and directed employee as an outside,
and directed employee as anoutside, independent contractor.
independent contractor.
Now, one reason an unethical employer does this
does this misclassification
misclassification is to avoid paying payroll taxes.
is to avoid paying payroll taxes.
An easy way to get into big trouble with the taxing
with the taxing authorities
authorities is to fail to properly pay payroll taxes.
is to fail to properly pay payroll taxes.
The possible penalties for going down that road are
are paying the payroll taxes
paying the payroll taxes, plus penalties up to $100,000
plus penalties up to$100,000 plus possible prison
plus possible prison for up to five years.
for up to five years.
I know a married couple who went to prison, a married
couple, because of the failure to pay payroll taxes.
because of the failureto pay payroll taxes,
So be careful and don't get clever in trying to classify
in trying to classify an employee
an employee as other than what she or he is.
as other than what she or he is.
If the person performs work that is controlled and directed
that is controlled anddirected by the employer,
by the employer, than the person is an employee
then the person is an employee
and should be treated as such for tax purposes,
and should be treated assuch for tax purposes,
especially for payroll tax purposes.
A fifth common tax issue for small businesses relates to
to carefully planningyour business structure.
carefully planning your business structure.
The most common choices are sole proprietorship,
partnership, corporation.
The choice makes a difference for tax purposes.
In the case of a sole proprietorship, all business income
all business income flowsthrough to the individual owner
flows through to the individual owner, and income tax
and income tax is computed using
is computed using the individual's tax return.
the individual's tax return.
In a case of a partnership, all business income flows
all business income flows through
through to the individual partners, or at least their share
to the individual partners
or at least their share of the income
of the income, and tax is computed using each partner's
and tax is computed using
each partner's individual tax return.
individual tax return.
In general, S corporations, which you may have heard of,
and limited liability companies, LLC's, are taxed
are taxed just likepartnerships for tax purposes.
just like partnerships for tax purposes.
If the choice is made to form a regular corporation,
now there's the issue of double taxation.
Corporate income is taxed at the company level and any
and any dividends paid to the shareholders
dividends paid to the shareholders are taxed again
are taxed again at the individual level.
at the individual level.
Now there are good reasons for forming a corporation
that may outweigh this penalty of the double taxation.
But when it comes to the business structure, selected
by a small business, keep in mind that there are
keep in mind that thereare tax consequences.
tax consequences.
Issue number six facing small business owners,
is that you need to be prepared to pay
for professional help.
Tax issues can get rather complicated.
For example, what about issues related to depreciation?
How 'about a simplified employee pension plan or an SEP?
What if your primary business facility is in Utah,
is in Utah, your majorcustomers are in Wyoming
your major customers are in Wyoming, and most of
and most of your employees live in Idaho?
your employees live in Idaho?
What are the tax implications then?
There are a lot of tax issues to worry about, unrelated to
to just running your business.
just running your business.
It might serve you well to spend a few dollars to get
to get some expert tax advice.
some expert tax advice.
Remember the old saying,
an ounce of preventionis worth a pound of cure.
a pound of cure.
It might be worth it topay a little money up front
to a tax adviser
as opposed to paying a lot of money later
later because you didn't know the tax rules.
because you didn't know the tax rules.
Pay somebody who does know.