Do You Have An Employee Or An Independent Contractor?

All business owners hope to succeed at scoring good talent. Now, should that accomplishment come from hiring an employee, enlisting the services of an independent contractor, or both?

An employee is a smart choice if you want complete control over that person. You decide the hours of work, tools and equipment used, training provided and more. Hiring an employee could be the better choice if the job is essential to your business and not a peripheral job, such as a cleaning crew. On the other hand, employees come with an abundance of legal and regulatory responsibilities on your end. Both the federal and state governments regulate the payment of wages, salaries, overtime and other work-related rules. You also must comply with payroll tax, unemployment insurance and worker’s compensation insurance requirements.

You can assign duties to an independent contractor, impose a deadline and work product; nevertheless, you cannot tell that person how to get the job done. Independent contractors can work for others, usually set their own hours and often provide their own tools or equipment. This type of arrangement could be ideal if the work can be done by a professional who doesn’t need much supervision. An independent contractor could also be a good choice when the work is a short-term project that will be completed in a defined period of time. Oftentimes, your only financial responsibility is providing the independent contractor with a Form 1099-Misc each year.

The decision to hire an employee or an independent contractor is done on a case-by-case basis; many businesses use a mix of both. Be aware that the IRS considers a worker to be an employee unless you can prove otherwise.

Increased Child Tax Credit And The New Family Credit

Beginning in 2018, the child tax credit increases to $2,000 per qualifying dependent child age 16 or younger at the end of the calendar year. This is a huge benefit because a credit reduces your tax bill dollar-for-dollar! Also, up to $1,400 of the credit could create a refund if you have at least $2,500 of earned income. Once you earn more than $200,000 ($400,000 if married filing jointly), the credit decreases. 

A qualifying child must be a U.S. citizen, U.S. national or resident alien. The child must be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, grandchild, niece, nephew, adopted child or foster child. Also, don’t forget that you must provide at least half of the child’s support during the year and the child generally must have lived with you for at least half of the year. The child cannot file a joint return (or file it only to claim a refund) and you must provide a Social Security number for the child on your tax return.

New this year is a $500 nonrefundable credit, also known as the family credit, for qualifying non-child dependents and qualifying children aged 17, 18, or under 24 if a full-time student. A non-child dependent must be a close relative or live with you. Their taxable income must be less than $4,150 for the year, and you must provide over half of their support. The non-child dependent also must be a U.S. citizen, U.S. national or U.S. resident; however, the Social Security requirement does not apply, though you’ll still need a taxpayer identification number.

IRS To Waive Some Estimated Tax Penalties

With the confusion over whether or not your employer was withholding enough tax on your behalf, or if your 2018 estimated payments should be based on your 2017 tax liability, or reflective of the new tax legislation, the IRS has decided to give some of us a break.

So long as you paid in 85% of your total tax liability for 2018, your penalty will be waived. For more information, please see IRS Notice 2019-11.

The New Rules Surrounding Casualty Losses

Beginning in 2018 and continuing through 2025, casualty losses are no longer allowed as an itemized deduction for many taxpayers. If you suffer a personal loss to property as the result of a storm, fire, flood, theft or some other unforeseen incident, your loss is not deductible unless the loss occurred in a federally declared disaster area announced officially by the President.

Losses incurred in federally declared disaster areas are still allowed as an itemized deduction and are subject to the $100 per casualty and 10% of adjusted gross income limitations. However, if you have personal casualty gains, your casualty losses can still be offset against those gains, even if the losses aren’t incurred in a federally declared disaster. Also, any gain resulting from a casualty can be deferred into replacement property.

More information can be found through the IRS website here.

What Is The Best Business Entity?

The idea of starting a business is scary enough; then comes the difficult decision of what type of business entity to establish. You’ll need to consider your financial needs, risk and ability to grow. Choosing correctly at the start is critical because it can be difficult to change your legal structure after you have registered your business.

A sole proprietorship is quick and inexpensive to form. You have complete control over your business. You are entitled to all profits from the business. Nonetheless, you are also liable for all business debts and have an unlimited personal liability, which may be undesirable. This type of entity may also make it difficult to raise capital if needed.

A partnership has several options: (1) a general partnership with overall equal division of profits, liability and management or (2) a limited partnership with one partner controlling the operations and other partners with limited roles. Partners must file taxes twice, once for the partnership and once for the individual. Also, if disputes arise between partners, there could be some drama. Similarly, with this type of business, you could be held liable for actions made by your business partner.

A multi-member limited liability company (LLC) is a hybrid between a partnership and a corporation, and it can be taxed as either. This entity provides options for the actual business structure with the limited liability of a corporation and the operational flexibility and tax structure of a partnership.

If liability and outside funding are your main con­cerns, then a C corporation might be your best fit. A C corp­oration provides limited liability. Other pros of a C corporation are the ability to generate capital. Plus, the current tax rate is capped at 21%. Conversely, C corporations are subject to double taxation—once when the corporation makes a profit and again when it pays dividends to shareholders. There’s also the accumulated earnings tax, a tax imposed by the federal government on companies with retained earnings deemed to be unreasonable and in excess of what is considered ordinary. Essentially, this tax encourages companies to issue dividends, rather than retain the earnings.

An S corporation is also a good option for limited liability; yet, an S corporation has stricter operational processes including shareholder compensation requirements. On a positive note, this type of corporation eliminates any double taxation since the income is passed through to the shareholders to report on their personal returns.

The best option for you will depend on your personal and business goals and how they align with what each type of entity has to offer. I can help you with this decision - I would rather have you consult with me first before jumping into an entity that isn’t right for you, whether tax-wise or administrative-wise.