The IRS targets worker classification

April 22, 2011

If you have people working for your business, you may have to decide how to classify them. Are they employees or independent contractors?

Classifying your workers as independent contractors generally saves you money. That’s because you avoid paying employment taxes and benefits on their behalf.

In most instances, however, very few of your workers actually qualify as independent contractors. If the IRS determines that you misclassified your employees as contractors, you could end up paying back all of the employment taxes and benefits that should have been paid over the years. Depending on the size of your workforce, the cost to you could be substantial, potentially bankrupting your business.

How can you ensure that you properly classify your workers? Start with the factors listed by the IRS to determine a worker’s classification. If you maintain control over your workers through hiring, training and supervision, scheduling the work to be done, and by providing them with tools and materials, your workers are most likely your employees. The same holds true if you pay your workers a set salary or an hourly wage and have the right to let them go at any time.

As a general rule, if you only have the right to control or direct the result of the work and not the means and methods of accomplishing the result, the individual may qualify as an independent contractor.

If your business employs independent contractors, take steps to protect yourself and your business. Be consistent with how you classify your workers, and follow how other businesses in your industry classify their workers. And don’t forget to send a Form 1099-MISC to contractors who earn $600 or more from you during the year.

The proper classification of workers has become a priority issue for the IRS. Make sure that your workers are classified correctly. For assistance, give us a call.

Leave a Comment » | April 2011 | Tagged: , , , , | Permalink
Posted by gillilandcpa

Act fast if you want to cut your 2010 taxes

December 7, 2010

1. Tax rates are likely to go higher in 2011, so you might benefit from shifting income into 2010 and delaying deductions until 2011. It’s always a matter of personal circumstances, so analyze the two-year results of shifting income and deductions before you do anything.

2. Remember that required minimum distributions from retirement plans are back this year. If you’re over 70½, your 2010 distribution must be taken by December 31 or a 50% penalty may apply. If you turn 70½ this year, you could wait until April 1, 2011, to take your first distribution. In deciding, consider the likelihood of higher tax rates next year and the fact that a delay means you’ll have two taxable distributions for 2011.

3. With the $100,000 income limit dropped for converting a traditional IRA to a Roth, consider doing a conversion before year-end. You can elect to pay the tax over two years’ tax returns, 2011 and 2012, or pay in full on your 2010 return.

4. Consider buying needed equipment for your business to benefit from the first-year $500,000 expensing option and 50% bonus depreciation.

5. If you’re planning to add employees soon, do so before January 1, 2011. If you hire someone who has been unemployed for a while, you might qualify for an exemption from social security payroll taxes on the new hire’s wages. Keep the new worker for at least a year and you could also qualify for a tax credit of up to $1,000.

6. Start a pension plan for your small business. You may be entitled to a credit of up to $500 in each of the plan’s first three years.

7. Review your portfolio and start thinking about offsetting gains and losses for the year. You can deduct $3,000 of losses against ordinary income.

Leave a Comment » | December 2010 | Tagged: , , , , , , , | Permalink
Posted by gillilandcpa

HIRE employees before January

November 5, 2010

If you’re planning to add employees in your business, consider doing so before January 1, 2011. Under the “HIRE Act” passed earlier this year, you could qualify for an exemption from social security payroll taxes on wages paid a new worker who had been unemployed for the previous 60 days or more. Keep the new worker for at least a year, and you could also qualify for a tax credit of up to $1,000.

Leave a Comment » | November 2010 | Tagged: , , , | Permalink
Posted by gillilandcpa

Pay yourself reasonable wages

October 22, 2010

 

What rule do you follow if there are no rules to follow?

As the owner of an S corporation trying to determine a reasonable salary to pay yourself, the question is important – and difficult to answer. The reason: At present, there are no specific regulations, safe-harbor provisions, or minimum wage requirements defining what amount of compensation is “reasonable” for S corporation shareholder-employees.

As a result, when times are tough, the lack of hard and fast rules could tempt you to forego paying yourself a salary and instead take money from your corporation in other ways, such as distributions or loans. Yet that approach might be costly.

Why? While these methods can be legitimate, without the presence of a reasonable salary, it’s possible for distributions and loans that you pay yourself from your S corporation to be reclassified as wages. If that happens, you could end up owing interest and penalties in addition to payroll taxes.

Here are two general guidelines for setting your salary.

* How much you pay key employees. Wages and other amounts you pay unrelated, non-owner staff can indicate a starting point for your own compensation.

* The average salary for your profession or industry. Information from government wage surveys and online benchmarking tools offer compensation trends and information.

Congress is considering new rules concerning certain professional services and the salary paid by S corporations. Give us a call to review your situation.

Leave a Comment » | October 2010 | Tagged: , , , , , | Permalink
Posted by gillilandcpa

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