There are many factors that should be considered when choosing the structure of your business, but the three primary factors are liability protection, taxation, and cost of formation and administration.
A sole proprietorship is the easiest type of entity to form, and all income and deductions are reported and taxed on the sole proprietor's individual income tax return. However, the sole proprietor is liable for all debts and losses of the business.
A partnership involves two or more owners who agree to share in the profits and losses of a business. A partnership files an informational tax return, and the income and loss is "passed through" to the partners to report on their individual tax returns. Each general partner is personally liable for all debts and losses of the business.
A C Corporation is a separate legal entity that is created to conduct business, and it files its own income tax return. The main advantage of a C Corporation is the avoidance of personal liability by its owners. However, C Corporation owners are subject to double taxation. First, the corporation is taxed on its profits and then the owners are taxed on the dividends they receive.
While, an S Corporation has the liability protection of a C Corporation, the income and loss is reported on an informational return and is "passed through" to the shareholders, which avoids the double taxation issue. However, there are limitations placed on the number of owners allowed and types of entities and individuals who can be owners.
A Limited Liability Company, or LLC, allows business owners to take advantage of the liability protection of a Corporation, but is generally treated as a partnership for income tax purposes. Depending on the type of structure you choose, you may be considered self employed and the income you earn may subject to self employment taxes as well as federal and state income taxes.
A business may be subject to various state and local taxes depending on the jurisdictions in which it operates. Although this list is not exhaustive, below are common types of taxes for which a business may be liable.
- Income taxes: income taxes are calculated based on a business’s net income.
- Franchise taxes: some jurisdictions have a franchise tax rather than an income tax. A franchise tax is calculated based on something other than net income, such as gross receipts or capital.
- Personal property and real property taxes: these taxes are based on the value of a business’s personal or real property, and are generally owed to the jurisdiction in which the property is located.
- Business, professional, and occupational license (BPOL) taxes: these taxes are often based on a business’s gross receipts or gross purchases. The tax rate can vary depending on your business or profession and taxing jurisdiction.
- Payroll taxes: payroll taxes are based on the amount of wages that a business pays to its employees. They include taxes owed by the employer and taxes withheld by the employer on behalf of its employees. Both quarterly and annual filings are often required.
- Sales and use tax: Sales taxes are collected by businesses on sales of tangible personal property and, depending on the jurisdiction, on sales of certain services. Use tax is charged to businesses that use tangible personal property purchased from sellers that were not required to collect sales tax by the jurisdiction where the business is located. The returns may be due monthly, quarterly, and/or annually. If you are an online retailer. this can be a especially tricky area.
State and local tax laws are not uniform amongst different jurisdictions, and the required method of filing can vary.
A federal employer identification number (FEIN) is a nine digit number assigned by the IRS that is used to identify a business entity operating in the United States.
There are several methods you can use to apply for an FEIN. You can apply online through the IRS website, by fax, by mail, or by telephone (if you are an international applicant). Many taxpayers prefer the online application method, as the information is validated during the online application and the FEIN is issued immediately, while the fax, mail, and telephone applications require the taxpayer to complete Form SS-4. All of the forms and instructions to apply for an FEIN can be found on the IRS website at www.irs.gov.
Employers are required to make payroll tax payments to the government, as well as file the appropriate informational returns, for compensation payments made to employees. The employers must also provide employees with a W-2 and independent contractors with a 1099 form that reports the compensation paid. In addition to Federal payroll filing requirements, there may also be requirements for state and local jurisdictions, as well. The individual rules can be complex and the penalties for noncompliance can be severe, so many small businesses outsource payroll tax administration to third party payroll providers.
Employment tax laws are very complex and vary between jurisdictions. Whether you are starting a new business, expanding into a new jurisdiction, or just hiring new employees, you will need to ensure that you are complying with all applicable laws. Although this list is not exhaustive, here are some of the things that you should consider:
- Whether you qualify as an employer, and are liable for payroll taxes
- Whether your workers are employees or independent contractors
- Whether your employee’s services are exempt from employment taxes
- The types of compensation and benefits that are exempt from taxation and subject to ERISA laws
- The types of employment taxes and tax rates applicable for each jurisdiction where you operate or where your employees live
- The quarterly and annual filings you need to prepare for each jurisdiction where you operate or where your employees live
- The amount of any penalties for noncompliance
As a business owner, you should be aware of many types of insurance including, but not limited to, professional liability, property, workers compensation, keyman, health, life, disability, buy/sell, etc. We can assist you in determining the right types of insurance for you business.
A strategic business plan is a written document that outlines how the objectives of a company comports with the needs of the market place. A strategic plan defines company goals and outlines how those goals take advantage of available business opportunities.
A strategic business plan is necessary to optimize market research and obtain market share for your business. The plan establishes a focus for your business in the marketplace and helps you focus your business efforts in that area.
Yes, the value of these gifts cards should be included in the employee's gross wages. We can assist you with a "gross-up" calculation to factor in the payroll taxes. Gifts to subcontractors are only deductible up to $25 per individual. Anything above that amount is nondeductible.
We work with many small business owners who have questions and are looking for tax advice related to their businesses. We work with both new and established businesses and because small businesses and their owners are very closely integrated, we consider the owner's tax situation in conjunction with the business. Common questions that we deal with include
- What kind of entity to make the business - sole proprietor, limited liability company, partnership, corporation, S corporation, etc.?
- What type of accounting software do I need?
- What expenses are tax-deductible?
- Can I use my home for my office and my car for my business?
- What types of registrations and taxes does my business have to file (county/city business license, gross receipts/revenue and property taxes; IRS income taxes, payroll and contractor payments; state(s) registration to do business, federal and state income taxes, payroll taxes; unemployment insurance, etc.?
Every small business is unique and we would be happy to discuss your small business tax situation and needs so that you can devote more of your time to running your business. Please give us a call.
Whether you are a small business owner with employees or an individual with a household employee such as a nanny or housekeeper, you may have payroll tax return registration, payment, and filing requirements. These may include IRS payroll tax (FICA and Medicare) and withholding filings and payment, state withholdings, and IRS and state unemployment tax requirements.
The requirements may depend on what type of business you are in, what type of employee you have, how much you pay them, and what state they work in. The penalties for failure to remit payroll taxes and filings timely may be severe, so please contact us to discuss your particular situation so that we may assist you with your payroll tax returns.
If your home is your principal place of business (PPB), you may deduct the costs of mileage to a client as a business expense. We can help you determine if your home qualifies as a PPB. We can also recommend how you can satisfy the substantiation requirements for your mileage. If the client sets aside space for you to work, then that would be considered your PPB. As your PPB, traveling to that destination would be considered commuting, and therefore not deductible.