Finance 4 Employee or Independent Contractor?

If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors.

 

As a business owner, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay Federal and state unemployment tax on wages paid to an employee. You do not have to withhold and pay any taxes on payments to independent contractors.

 

To make a determination, you must know the business relationship that exists between you and the person performing the services. In determining whether the person performing the services is an employee or independent contractor, all information that provides evidence of the degree of control and independence must be considered.

 

Facts that provide evidence of the degree of control and independence fall into three categories:

 

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his/her job? Generally, if the answer is yes, the person will be classified an employee.

 

Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provided tools and supplies, etc.) Generally, if the answer is yes, the person will be classified an employee.

 

Type of Relationship: Are there written contracts or employee type benefits, and will the relationship continue? Generally, if the answer is yes, the person will be classified as an employee.

   

The keys are to look at the entire relationship, and to consider the degree of control or extent of the right to direct and control, and finally, to document each of the factors used in coming up with a determination.

 

If a business owner is unclear whether a worker is an employee or independent contractor, they can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS. The IRS will review the facts and circumstances and officially determine the worker's status.

 

This  article was written by  Donald M. Scherzi, CPA, CFP, LLC

 

Mike Lupo, SCORE Counselor

Visit us at: www.scoresouthflorida.net

 

Entrepreneurship by Harvard Alumni

News from the Kauffman Foundation:

 

A recent survey of Harvard Business School alumni pointed to entrepreneurship as the strongest element of the national economy -- and it is still improving. Capital markets, universities and innovation were noted as significant strengths in the U.S. 

The opposite end of the spectrum: The tax code, politics, health care and education.

 

The report, "The Challenge of Shared Prosperity," also showed that it is easier to start a new firm today than it was ten years ago. The elements needed are more available in the U.S. than elsewhere.

 

Now, that is good news.

 

Steve Koenig, SCORE Counselor

Visit us at: www.scoresouthflorida.net

Most Favored Customer

Who is your Most Favored Customer (MFC)? What is his/her value to your business?

 

When you do business with large clients (e.g. governments), they will often have you certify that they are the MFC. The definition they use is that no other customer will get more favorable terms, conditions and prices then they are being offered. You violate this at your own risk.

 

However, if your client purchases your products or services with some regularity they provide you with a cash flow your business needs. Another client may be a first time or irregular purchaser. Which one is the MFC? Which one do you offer something special?

 

Some businesses believe they should provide the “special deals” to the first time purchaser under the assumption that they may become “a regular”. So it is the “regular” that pays a penalty. It is the “regular” that may move to the competition where he/she gets the deal of a new client. If the new client becomes a “regular” he gives up the benefits.

 

The business therefore must incur the time and cost needed to replace the regulars that leave just to keep even.  Hopefully you know how much that is for your business.

 

What would it have cost to keep the “regulars”?

 

So, who should be the MFC?

 

 

Steve Koenig, SCORE Counselor

Visit us at: www.scoresouthflorida.net

 

 

 

 

Finance 3 Federal Taxation of Limited Liability Companies

 

The federal taxation of a limited liability company depends on whether the LLC is a single member LLC or a multiple member (having at least two members) LLC.

 

By default, a single member LLC is taxed as a disregarded entity. This means the LLC income and expenses are reported on the taxpayer's Schedule C, and Schedule SE, Form 1040. The taxpayer is deemed self employed subject to self employment tax and will be required to make quarterly estimated tax payments to the IRS.

 

A single member LLC may elect to be treated an as S corporation by timely filing Form 2553. This means the LLC must file Form 1120S. The owner (LLC Member) is deemed an employee of the S corporation and not a self employed individual. As an employee, the owner (LLC Member) is required to take reasonable compensation and file and pay all reportable federal and state payroll taxes.

 

By default, a multiple member LLC is taxed as a general partnership. This means the LLC must file  Form 1065. The owners are not deemed employees of the LLC. Each general partner owner (LLC Member) is subject to self employment tax on their ratable share of the net profits of the partnership and required to make quarterly estimated tax payments to the IRS.

 

A multiple member LLC may elect to be treated as an S Corporation by timely filing Form 2553. This means the LLC must file Form 1120S. The owners (LLC members) are deemed employee's and not self employed individuals. As an employee's, the owners (LLC members) are required to take reasonable compensation and file and pay all reportable federal and state payroll taxes.

This  article was written by  Donald M. Scherzi, CPA, CFP, LLC

 

 

Mike Lupo, SCORE Counselor

 

Visit us at: www.scoresouthflorida.net