The IRS and employers often are at loggerheads over the classification of workers as employees or independent contractors. Typically, many employers want to to treat workers as independent contractors, while the IRS often determines that workers are misclassified employees. Sometimes, the issue winds up in the courts.
Fortunately, there might be a way for employers to obtain a measure of protection if the IRS challenges the classification of a worker or workers. With “Section 530 relief,” an employer may avoid adverse tax consequences from a misclassification of employment status. However, this special safe-harbor rule is only available if the employer can show it had a reasonable basis for treating workers as independent contractors.
A Brief History of Section 530
As we stated in the main article, Section 530 is part of the Revenue Act of 1978. Initially, it was scheduled to expire on December 31, 1979. After then being extended twice, it was made permanent by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.
In 1996, a paragraph was added to the existing Section 530 provision, requiring the IRS to inform an employer about the safe-harbor rule, when appropriate. This notification must be provided before the IRS begins an audit of the employment status of an employer’s workers.
You just closed your books on 2019 and got that tax shock. Maybe you paid too much, maybe the business had a huge tax bill. Regardless, it’s time to start planning for 2020 and minimize the double taxation that comes with a corporation. So, how can you withdraw cash from a closely held corporation in a tax-smart way?
How do I pay myself from my business?
You pay yourself either with a salary or with an owner’s draw. Which you choose depends on the structure of your business and will have an effect on your personal and business taxes. You pay yourself a salary just like you do an employee, complete with all withholdings. An owner’s draw comes from the business’s profits or capital distributions. In that case, taxes are paid on the personal tax return rather than having withholdings taken in advance.
What is a closely held corporation and does this work?
A closely held corporation is one in which five or fewer shareholders hold more than 50% of the company’s shares. A small business with an “owner” that is also incorporated will typically be a closely held corporation. So, how do you take money out of a corporation?
C Corporations are subject to double-taxation. That means that the business pays taxes on its profits, and the shareholders then pay taxes on their income from the corporation. As the business owner, it’s your job to minimize both of those, for both you and your shareholders.
The Hack: Entrepreneurs are constantly being reminded, “Work ON your business, not IN your business.” The best way to accomplish that is through delegation. And the best things to delegate away are those pesky tasks that keep following your calendar around.
The Solution: Upwork, Fiverr, TaxConnections. These sites are the way to outsource just about anything you need done, from data entry cold calls, programming to tax, financial and business support.
The Benefit: When you first start outsourcing some of the busy work, you’ll be amazed at how much time you save yourself. That’s more time to work ON the business.
The Hack: Cash flow is often the biggest challenge for small business owners. Maintaining a healthy flow of cash through the business is paramount. Getting your cash now, rather than waiting for a check, is a great relief to your finances. You started accepting credit cards. Now, process them wherever you are! This is great for on-site workers (think HVAC, Electricians, etc.), freelancers, and Events (workshops, seminars).
Governor Gavin Newsom’s signature made it official. California’s Assembly Bill 5 (AB5) is now law. In case you missed the news leading up to this, AB5 is the law that can turn a freelancer into an employee. Under the law, which takes effect on January 1, 2020, a freelancer will be designated an employee of a company if they perform job duties as part of the core business offerings of the company, OR if the way they work is directed by a company boss, OR if the worker doesn’t have their own independent business. How does that sound to you?
In a letter, Governor. Newsom said, “Assembly Bill 5 is a landmark legislation for workers and our economy…a next step is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work.” Obviously, the focus is on helping workers. But do freelancers see themselves as workers? Do they want to? One thing we know is they want more pay as well as some benefits and protections.
You may be thinking about refinancing this year to take advantage of falling interest rates. Or you may have refinanced your home mortgage last year and have yet to file your 2018 return (because you filed an extension). Either way, there are important federal income tax implications. Here’s what you need to know.
Deductions For Home Mortgage Interest
For federal income tax purposes, you can deduct interest on a mortgage that qualifies as home acquisition debt. In addition, you can deduct or amortize points paid to take out a mortgage that qualifies as home acquisition debt.
However, for 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) reduced the amount that can be treated as tax-favored home acquisition debt to $750,000 (or $375,000 if you use married filing separately status).
A SWOT Analysis is a strategic planning tool to help you position your business within your market and your industry. The components that make up SWOT are: Strengths, Weaknesses, Opportunities and Threats. As a bonus, you can also throw in an additional T (SWOT-T), Trends. Here’s a short description of the SWOT components:
- Strengths: What are your business’ strengths, relative to your direct competition and the market. These are internal. What do you sell, and how do you do it better than anybody else?
- Weaknesses: What are your weaknesses versus the competition and overall market. Again, these are internal factors. Where do you need to make improvements, or at least have plans to fend off attacks against these weaknesses by competitors and a shifting market. Are you lacking resources to compete in certain areas?
- Opportunities: These are long-term goals and are external to your business. Think sales and distribution channels, market sectors, etc.
- Threats: The biggest threats to your survival come from the government, competitors, shifts in the industry, etc. Again, these are external. If you think of an internal threat, that’s most likely a weakness.
- And sometimes Trends: What is the arc of your industry? A great case study is IBM, who has seen its products pivot from typewriters to personal computers to software to services to artificial intelligence. Where is your industry headed in the next ten years?
Maybe not 1099 reasons. But there are good reasons to go the independent contractor route versus hiring employees. Of course, there are also compelling reasons to go the other direction on that. There’s a lot to consider when you make this choice, so let’s dive in.
Independent Contractors Versus W2 Employees
Before we get into the reasons to hire independent contractors, we need to understand the essential differences between the two, especially from the point of view of the IRS. Straight from IRS.gov, an independent contract is “an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.” With a W2 employee, the business must pay income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax. There are also insurance costs involved. With a 1099 contractor, the business simply pays contracted rates, and the contractor pays all associated taxes. It’s obviously important to get this right, as the business may face penalties, fines, legal fees and even an audit otherwise.
Read More: I’m Hired! Going Entrepreneur
Pros And Cons Of Hiring Independent Contractors
Depending on the business model, there are several advantages and disadvantages to hiring a contractor versus an employee.
Pros of Hiring Independent Contractors:
There’s good news in 2019! Yes, you still have to pay your taxes, and paying them on time is a great idea. So, what’s the good news? Paying taxes means your business is making a profit! But there’s a catch.
There is a new tax law for your 2018 taxes, along with some changes you’ll want to keep an eye on for 2019. In either case, you’ll need to stay on top of the calendar. Whether you’re a C Corp, an S Corp, an LLC or a sole proprietor, here are the key dates for your 2019 Federal Tax Calendar filings straight from the (check out the IRS calendar for all dates, including payroll). Below are the key business tax dates in 2019:
- Individuals (Sole Proprietorships): Form 1040 is due on the 15th of the 4th month following the end of your tax year.
- Partnerships: Form 1065 is due by the 15th day of the 3rd month following the end of your fiscal year.
- Corporations: Form 1120 is due by the 15th day of the 4th month (3rd month for S Corps) following the end of your fiscal year. And remember your estimated taxes, due on the 15th of the 4th, 6th, 9th, and 12th month of your fiscal year.
Meal, vehicle and travel expenses are common deductions for businesses. But if you don’t properly document these expenses, you could find your deductions denied by the IRS.
An Important Requirement
Subject to various rules and limits, business meal (generally 50%), vehicle and travel expenses may be deductible, whether you pay for the expenses directly or reimburse employees for them. Deductibility depends on a variety of factors, but generally the expenses must be “ordinary and necessary” and directly related to the business.
Proper documentation, however, is one of the most critical requirements. And all too often, when the IRS scrutinizes these deductions, taxpayers don’t have the necessary documentation.
What You Need To Do
Following some simple steps can help ensure you have documentation that will pass muster with the IRS:
At this time of year, a vacation is on many people’s minds. If you travel for business, combining a business trip with a vacation to offset some of the cost with a tax deduction can sound appealing. But tread carefully, or you might not be eligible for the deduction you’re expecting.
Business travel expenses are potentially deductible if the travel is within the United States and the expenses are “ordinary and necessary” and directly related to the business. (Foreign travel expenses may also be deductible, but stricter rules apply than are discussed here.)
Currently, business owners and the self-employed are potentially eligible to deduct business travel expenses. Under the Tax Cuts and Jobs Act, employees can no longer deduct such expenses. The potential deductions discussed below assume that you’re a business owner or self-employed.
There’s no easy answer to this question, though the entity choice considerations have undergone some changes due to the new tax law. For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%.
On the surface, that may make choosing C corporation structure seem like a no-brainer. But there are many other considerations involved.
To maximize the tax benefits of property ownership, homeowners, investors and real estate professionals alike need to be aware of the breaks available to them as well as the rules and limits that apply. Whether you’re selling your principal residence, renting out a vacation property or maintaining a home office, tax savings are available if you plan carefully. However, in some cases, tax savings may be reduced under the Tax Cuts and Jobs Act (TCJA).
Home-Related Tax Breaks
There are many tax benefits to home ownership — among them, various deductions. But when you filed your 2017 tax return, the itemized deduction reduction could reduce your tax benefit from some of these breaks. And while that limit goes away for 2018, the TCJA reduces or eliminates these breaks: