Surprise! You and Your Business Need to Pay More Taxes – This Year!

Surprise!  You and Your Business Need to Pay More Taxes – This Year!

April 15, 2012

If you’re a business owner, welcome, once again to Washington’s Target Zone.  Reports released by the nonpartisan Congressional Research Service (“CRS”) in February and March, suggest that Washington needs to further target businesses that are operated as LLCs, S-Corporations, Partnerships, and Sole Proprietorships for higher taxes.  These business structures, also referred to as Pass-Throughs, don’t pay corporate level taxes, but instead pay taxes on business income at the personal level.   Washington believes LLCs, S-Corporations, Partnerships, and Sole Proprietorships are unfairly escaping corporate level tax.

The Congressional Research Service’s Report from February seems to indicate tax increases for business owners in 2012 are imminent:

A number of proposed and scheduled tax changes would result in pass-throughs paying higher taxes. Several lawmakers and the Obama Administration, for example, have expressed interest in taxing large pass-throughs as corporations, which would subject some pass-throughs to an additional layer of taxation. Pass-through taxation could also increase if a tax reform that includes lower corporate tax rates that are paid for by the elimination or reduction of certain business tax benefits is enacted. Additionally, the scheduled expiration of the 2001/2003 tax cuts at the end of this year could increase taxes on pass-throughs by increasing individual tax rates. Lastly, a new 3.8% tax on passive income that was enacted as part of the Health Care and Education Reconciliation Act of 2010 (HCERA, P.L. 111-152) is set to take effect in 2013.

Scheduled tax changes that could potentially affect pass-throughs include the expiration of the 2001/2003 tax cuts, later extended in 2010, that is set to occur at the end of 2012. Specifically, barring congressional action, the current individual tax rate structure of 10%, 15% 25%, 28%, 33%, and 35% will revert to 15%, 28%, 31%, 36%, and 39.6%. Since ordinary pass-through income is taxed according to individual rates, some owners of pass-through businesses would likely experience an increase in taxes owed.

The March report continues the recommendations for higher taxes and provides an easy three step “How To” process to significantly increase your taxes.  Believe it or not, the Report suggested that by you paying more taxes, the amount of taxes paid by large, publically held corporations can be lowered.

What Industries are the CRS tax increase advocates targeting?

The CRS is not targeting the hedge fund companies or the big law firms, but companies in the manufacturing, wholesale/retail, mining and minerals, transportation, construction, and construction service industries.

What can you do?

Other than closing your doors, you have two options.  If you’re proactive, you’ll get a strategic tax plan in place to finally get out of Washington’s Target Zone.  A strategic tax plan will reduce your taxes now and provide options when the tax increases come.   If you are reactive and sit back and do nothing, your options will be limited.   If you like complaining versus action, just sit back and you’ll soon have a lot more to complain about.

Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

The Complexities Associated with the Purchase of a Corporate Aircraft

In response to your request for our input on the purchase or use of a corporate jet our opinion follows.

The purchase of an aircraft is perhaps the most complex transaction that business owners can undertake.  Unlike any other asset, not only do the ownership, use, and location options need to consider the legal and tax ramifications, but also the rules, restrictions, and implications of the Federal Aviation Administration (FAA).   This is NOT simply a matter of what type of entity should own the aircraft and in which state should that entity be established.  The manner in which the aircraft is funded, owned, and operated can determine which FAA regulations apply – Commercial Aviation Rules versus General Aviation Rules.

The main issue with private corporate ownership is that if you fall under the commercial aviation rules you are treated just like United, Delta, and American and can be subject to six and seven figure fines that may be assessed retroactively on a per flight basis.  The complexities associated with corporate aircraft ownership has created attorneys know as aviation attorneys that dedicate their legal practices to these issues.

The Complexities of the Governing Rules – FARs

The complex FAA rules know as Federal Aviation Regulations (FARs) must be analyzed carefully when purchasing and operating an aircraft.  Particularly, FARs Part 91 regulates General Aviation Rules that apply to business and personal use of aircraft and are generally much less restrictive than those found in FARs Part 135 – Commercial Aviation Rules, which apply to aircraft used commercially but also those classified as used “for hire.”

So on the surface at least it would seem that to avoid the complexities and cost of complying with the Commercial Aviation Rules, the ownership and operational structure should be set up to avoid the “for hire” usage.  Sounds simple, but the IRS regulations complicate and seem to be at odds with this strategy.

IRS Complexities

The FARs and IRS Code Sections 61 and 274 create a tangled and at times conflicting set of rules for a business that wants to limit liability and minimize taxes.   To avoid or limit income restrictions and adverse tax consequences including the disallowance of operating deductions, the IRS has advised businesses to have their owners and employees reimburse the company for the value of the aircrafts use on non-business flights.  Although this alleviates tax issues, it unfortunately puts the business in the “for hire” provisions (even if done at cost, a lack of profit doesn’t matter) and therefore classification as a commercial carrier.

Other tax considerations that are beyond the scope of this initial analysis include sales and use tax on the purchase and use of the aircraft, depreciation rules that vary by the use of the aircraft, and Section 1031 rules that provide a tax friendly way to “trade-up” to your next aircraft.  Note: Sales tax rules apply generally based on where you accept delivery of the aircraft.  Use taxes still would apply in other states.   Sales tax issues should be considered before the purchase of the aircraft.

Insurance Issues

The FARs also creates potential issues regarding insurance.  Given the complexities of the rules, insurance coverage that was purchased as a non-commercial operation that unwittingly operates under FAA commercial status could be flying the plane without insurance for the plane, passengers, or crew.  This could result in potentially large legal liability issues to the business entity and owners.  A careful examination of insurance coverage and usage is critical.

The Single Asset Issue – This is Important

Under the FARs, an entity whose only asset is an aircraft is deemed to be in the business of providing air transportation service for compensation, and as such, must operate under the stricter commercial standards of Part 135.  Undoubtedly, the FARs create complexities unlike the more traditional tax and legal asset planning strategies.

So now that you better understand the complexities, here are a few of the options for ownership:

Ownership Option 1 – Exclusive Ownership

A new LLC is formed “JetCo” to purchase and own the aircraft.  However, to avoid the Commercial Aviation Rules, JetCo should not operate the aircraft.  Instead JetCo should “dry lease” the aircraft to the current business entity.  A “dry lease” is the lease of an airplane without a captain and crew.  The current business entity, the lessee, provides the captain and crew.  This structure should allow you to operate under the more desirable General Aviation Rules but care must be taken to ensure that the lease payments do not exceed the permissible amounts.   It may also be prudent to carry additional liability insurance to cover operator negligence or error, given that the business entity provides the captain and crew.  The company must employ the pilot and crew as employees or independent contractors.  This should be explored in greater detail.  The single asset issue must also be considered.

And of course, complexities are also created with any guest passengers.

Ownership Option 2 – Purchase and Enrollment in a Charter Service

A new LLC is formed “JetCo” to purchase and own the aircraft.  However, the aircraft is then enrolled in a charter service.  Under this arrangement, JetCo owns and “dry leases” the aircraft to the current business entity as well as the commercial charter service.  The charter service uses the aircraft to transport third parties.  This option helps to defray ownership costs, but the aircraft will not be available 24/7 and may not be available for last minute or unplanned trips.

FAA Regulations that pertain to charter services must also be analyzed and considered before committing to this option.

Option 3 – Fractional Ownership

FAA Rules permit multiple individuals or entities to jointly own a corporate aircraft.  Fractional ownership is essentially equivalent to an “aircraft timeshare.”    This option is generally less complex and less expensive than exclusive ownership.   The fractional sponsor generally deals with regulatory compliance, aircraft management and scheduling, and liability insurance.

Option 4 – Jet Cards or Air Taxis

A company can pay a fee in advance and have the ability to fly a set number of hours per year.  Jet card programs do not provide ownership benefits, but do avoid the complexities and capital investments of private ownership.

Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

The forgoing should not be construed as legal advice, and should merely be used for preliminary discussions.  You should consult with an aviation attorney before taking any action.

CIRCULAR 230 DISCLOSURE:  In compliance with the requirements imposed by the IRS pursuant to Circular 230, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Can you believe a Tax Increase of 30% over the next two years? The Congressional Budget Office says – Yes!

Can you believe a Tax Increase of 30% over the next two years?  The Congressional Budget Office says – Yes!

Could the battle to minimize taxes and maximize the profitability of your business get any more challenging?  You may not think its possible, but the Congressional Budget Office (“CBO”) answer this question with a resounding “YES!!”

According to the Budget and Economic Outlook published by the CBO last week, the amount of money the federal government takes out of the U.S. economy in taxes will increase more than 30% between 2012 and 2014.  At the same time, logic and the CBO suggest the economy will remain sluggish – partly because of the higher taxes.

The CBO report states: “In particular, between 2012 and 2014, revenues in CBO’s baseline shoot up by more than 30 percent,” said CBO, “mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the alternative minimum tax (AMT), and the imposition of new taxes, fees, and penalties that are scheduled to go into effect.”

“The pace of the economic recovery has been slow since the recession ended in June 2009, and the Congressional Budget Office (CBO) expects that, under current laws governing taxes and spending, the economy will continue to grow at a sluggish pace over the next two years,” said CBO. “That pace of growth partly reflects the dampening effect on economic activity from the higher tax rates and curbs on spending scheduled to occur this year and especially next. Although CBO projects that growth will pick up after 2013, the agency expects that the economy’s output will remain below its potential until 2018 and that the unemployment rate will remain above 7 percent until 2015.”

According to the CBO report, federal tax revenues equaled $2.302 trillion in fiscal 2011, and will increase to $2,523 trillion in fiscal 2012, $2,988 trillion in fiscal in 2013, and $3,313 trillion in 2014.

In dollar terms, the anticipated increase in federal tax revenue from fiscal 2011 ($2.302 trillion) to fiscal 2014 ($3.313 trillion) is $1.011 trillion. That is an increase of 43.9 percent.

From just 2012 to 2014, the increase in federal tax revenues from $2.523 trillion to $3.313 trillion equals $790 billion—or 31.3 percent.

What’s the answer for you, your family, and your business – better and more proactive tax planning!  Finally learn how to keep more of the money your business earns!  Call us for help or with your questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Tax Deferral and Income Deferral Strategies

Tax Deferral and Income Deferral Strategies

Tax Deferral – Increase Your Cash Flow

Big corporations understand and practice the following concept.  Does YOUR business?  Use strategic Tax Planning to minimize all current taxes including income, payroll, excise, and sales taxes.  Next, legally defer or delay as much tax as possible. Why pay $10,000 in taxes now if it can be deferred to later years?  Why not use that additional cash flow to create substantially more business income?  Finally, pay the taxes that can’t be reduced or deferred. This will ensure you are paying the minimum amount of tax each year and giving your business the cash flow it needs to survive.  Strategic tax planning sounds simple when you understand it.  Most importantly, with the right professional help, it is very achievable.  If you don’t believe deferred taxes are great for business cash flow and personal wealth building please read this.

http://www.businesswealthpreservation.com/einstein-tax-planning.html

Income Deferral – The Time Value of Money

Comprehensive tax planning should include a plan for the methods of accounting and the timing of expenses and revenues.  Planning may permit a business to delay income recognition and accelerate expenses and deductions.  Tax is a cash outlay.  By reducing income subject to tax in a tax year and increasing deductions in a tax year, you reduce the cash outlay for taxes that year.

Depreciation – Knowledge and Planning creates Cash Flow

Have you purchased, built, or modified a building, office, warehouse, or manufacturing facility?  A review of the depreciation method that you are using could significantly reduce your taxes this year and create substantial cash flow.  Read the Cost Segregation Section of our Blog for a detailed explanation.

http://businesswealthpreservation.com/blog and select Cost Segregation

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Critical Areas of planning for Medical Practices and Physicians include:

1.  Asset Protection – Studies suggest that one out of every four physicians will be sued this year and six out of ten have been sued at least once in their careers.  While statistics can be manipulated and misleading, the statistics clearly indicate in our litigious society, physicians get sued a lot.  Contingency fee arrangements with law firms, coupled with runaway jury awards, mean no risk and great reward for a patient to go after a lottery type award.  Physicians are always deemed to have deep pockets, and litigation against them is very attractive.

As with all asset protection, or litigation liability limitation planning, physicians need to proactively protect the family home, personal savings, investments, real estate, rental property, vacation homes, life insurance, retirement plans, personal property, and future inheritances.  However, unlike other business owners, physicians need asset protection planning for the accounts receivables of the medical practice. The leveraging of the practice’s receivables can provide opportunities for planning in the areas of asset protection, retirement planning, and Estate planning.

The goal of an effective asset protection plan should be to render the physician and the practice “unattractive” to litigation because no assets are at risk to satisfy a litigation award.  An asset protection plan MUST be in place and practiced before the event that is the cause of action of the litigation clam.

2.  Choice of Entity and the Optimal Multiple Entity Structure – The utilization of the optimal combination of S-Corporations, C-Corporations, LLCs, and other entities can create the best personalized structure for full utilization of tax planning and minimization, payroll tax planning, compensation options, fringe benefit planning, retirement planning, and tax and income deferral opportunities.  Strategies and plans vary based on practice size and practice areas, personal and business assets, existing practice agreements and outside contractual relationships, and other specific facts and circumstances of the practice and its physicians.

3.  Advanced Tax and Business Planning – Specific consideration needs to be given to the individual costs to the practice of individual physicians.  How should asset protection planning or the utilization of a captive insurance company impact the ever increasing cost of insurance and malpractice insurance.  Advanced retirement plans and how the legal structure of the practice and its doctors can open up tremendous opportunities in the area of qualified and nonqualified retirement planning and funding.  Taking advantage of these plans can have a tremendous impact on the wealth building capacity of each individual doctor and take the place of a portion of the taxes paid in Congress’ attempt to redistribute wealth.

401(k) Early Withdrawals

We are receiving a lot of question regarding withdrawals from a 401(k) account.  Unfortunately, most of the questions seeking our advice come after an action has already been taken.  We can’t emphasize this enough – Tax planning must be proactive – ask before not after.

401(k) Early Withdrawals

First, a withdrawal from your 401(k) account is subject to income tax.  The money was deposited pre-tax and grows on a tax deferred basis.  Meaning you pay tax later, when you withdraw the money.  The benefit is the growth on $100 pretax dollars, than $60 after tax dollars. (Please refer to the Einstein example on our website.) And generally 60 year olds are in a lower tax bracket than when they were working.  Obviously this thinking is Pre-Obama.  So pretax deposits will always be subject to tax on withdrawals regardless of your age.

The 10% Penalty

The issue is the 10% withdrawal penalties.  Usually, any withdraw, before age 59 1/2, is subject to the 10% penalty unless you meet one of the hardship exceptions such as:

- Separation from employment after age 55

- Medical expenses that exceed 7.5% of adjusted gross income

- To prevent eviction or foreclosure

- To pay for college

- Court ordered divorce settlement

Taking a 401(k) Loan

You can avoid the penalty and tax by taking a loan from your 401(k) account.  Most plans permit a loan of up to 50% of the vested amount in your plan.  The drawback with the loan is the lost value of the 401(k) account and the fact you repay the loan with after tax dollars.  Your loan payments include a repayment of “lost” interest back into your account.

401(k) Withdrawals to Start a Business

We have gotten many questions regarding a 401(k) withdrawal to start a business and its qualification as a hardship withdrawal.  The IRS does not permit this transaction free from tax and penalty.  Many articles discuss the fact that it is “worth the risk” or “investing in yourself.”  If your business venture is successful and your sources of capital are limited, the 401(k) withdrawal income tax and penalty may be well worth it.

FYI – A strategy does exist  that involves a complex transaction for someone starting a business and using a 401(k) rollover into a newly established 401(k) plan and having the plan “invest” in the new business to cover wages and operating expenses.  This transaction is complex and will be scrutinized by the IRS so a knowledgeable ERISA attorney is a must.  If drafted correctly, the strategy does work.

Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Accumulated Earnings Tax – C Corporations

Accumulated Earnings Tax – C Corporations

The C-Corporation, as an entity, is subject to corporate level tax on its net income or profits.  Once taxed at the corporate level, the remaining “after tax” profits can be distributed as dividends, paid as bonuses, or retained by the company.  Excess profits re-invested back into the company are referred to as retained earnings.  Generally, a reasonable amount of retained earnings, or retained earnings specifically ear marked for future company expansion or major equipment purposes are not scrutinized by the IRS.  If the IRS deems accumulated earning to be excessive as compared to the reasonable needs of the company, the IRS can take the position the dollars represent unpaid dividends.  The accumulated earnings tax of 39.6% (individual rate) will apply in addition to the regular corporate tax. Remember unlike a salary or bonus, a dividend is not deductible by the company.  But be cautious, before you get the idea of clearing the retained earnings account by paying large salaries or bonuses to the owner(s) read the excessive compensation article elsewhere in our Blog.

What’s the answer – better and proactive tax planning!

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Retained Earnings – S Corporations

Retained Earnings – S Corporations

Although an S-Corporation does not have the excessive earnings tax issues that a C-Corporation, we do see many businesses, taxed as S-Corporations, that have large retained earnings.   Do you know why the IRS doesn’t have a problem when an S-Corporation has large dollars, or strike that, large numbers in the retained earnings account?  It’s simple.  You, the business owner, have already paid all the taxes due.   The S-Corporation has no corporate level tax, and you have already paid the individual income taxes on the one time business profit.

If you don’t remember, it went like this.  In 2007, your S-Corporation business had taxable net profits of $100,000, that number was reflected on your personal return, and you paid taxes on it.  But, because of cash flow issues, you only paid yourself $60,000.  The other $40,000 was reflected as retained earnings.  The concept of paying tax on $100,000 even though you only received $60,000, is clearly one of the negatives of being taxed as an S-Corporation.  As a side note, this situation can be avoided with better tax planning.

If the above situation sounds familiar, you might be staring at a financial statement that indicates you have hundreds of thousands of dollars in retained earnings.  The positive side is you have hundreds of thousands of after-tax dollars that is yours for the taking – tax free.  The cruel reality is you don’t have the “actual” cash to take it out.  Try putting $100,000 of retained earnings in your personal bank account without the check to go with it.

The good news, with better tax planning, in addition to better business revenue and profitability, you can develop a plan to get these tax free dollars out of the business over time.  The plan must include the payment of a reasonable salary amount in addition to the tax free distributions.

What’s the answer – better and proactive tax planning!

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Excessive Business Owner Compensation – C Corporation

Excessive Business Owner Compensation – C Corporation

The IRS permits a business to deduct as a business expense, a “reasonable” salary, as compensation for services performed by employees and business owners.  For obvious reasons, the owner’s salary if deemed to be excessive in relationship to services performed, industry standards, and geographical location, could potentially be reclassified by the IRS as a partial dividend.  One of the significant differences of how a C Corporation is taxed, is the potential for double taxation.  Corporate profits are taxed once at the corporate level, and taxed again when they are paid to the owner(s).  Hence the double tax concept.

In an ill-advised attempt to avoid this double taxation, business owners and their advisors pay all “excess” money out to the owners as salaries.  Salaries paid to owners are 100% deductible by the company as an ordinary and necessary business expense.  Dividends on the other hand are not deductible by the company.  Hence the desire to pay salary in lieu of  dividends.  This however, is exactly why this issue is attractive to the IRS.  The portion of the salaries deemed to be excessive would be reclassified as a dividend.  As a dividend, the expenditure is not deductible, so the company would have additional income, resulting in additional taxes, penalties, and interest.  The payroll tax previously paid by the company would be forfeited.  The penalties generally are equal to the tax due.  Obviously, not a good situation for the company and a very expensive lesson.

So how can this be avoided?  Strategic, and proactive tax planning, entity structuring, and choice of entity planning can avoid these problems by creating other acceptable and tax friendly owner compensation options.

Finally learn how to keep more of the money your business earns!  Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.

www.BusinessWealthPreservation.com
Call Us Toll Free: (888) 938-2975 (888-WE-TAX PLAN)
Email: tfoster@wetaxplan.com

Employee vs. Independent Contractor – Tips for Business Owners

Employee vs. Independent Contractor – Tips for Business Owners

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

IRS Guidelines

Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

1. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

2. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.

3. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

It is critical that you, the business owner, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Think of it like this:

To be classified as an independent contractor:

  1. Business owner can specify “what” is to be done not “how”  (Control Test)
  2. Does the person in question have their own tools, business cards, and invoices?
  3. Best Answer – Have the independent contractor set up an LLC.

Advantages of having the independent contractor set up a separate LLC

- Separate legal entity

- Contractor can now benefit from business tax planning

- Contractor can set up compensation, fringe benefit, and retirement planning

- Significantly reduces audit risk for both parties


Copyright 2010 The Business Wealth Preservation Group, LLC.