|
Questions:
What type of business entity should I chose?
Can I treat employees working for me as contractors and avoid payroll taxes and employee reporting requirements?
What are the current IRS mileage deductions?
What is the Social Security taxable income limit and taxable rates?
What are the medicare rates?
When do I have to issue Form 1099 Misc?
Answers:
What type of business entity should I chose?
A business can be conducted in a number of forms, such as a partnership, a regular corporation, or an S corporation. Doing business as a partnership has many tax advantages. Income is taxed only once, and there is great flexibility in how income and deductions are passed through to the partners. But the partners' assets are put at risk, since each general partner is personally liable for the partnership debts and obligations.
Corporations don't have the liability problem, since shareholders aren't responsible for debts of the corporation. However, a corporation's income may be taxed twice, once when the corporation earns it and once when it is distributed to the shareholders in the form of dividends.
Electing to be an S corporation avoids double taxation. However, S corporations have many restrictions as to the number and type of shareholders, classes of stock, ownership of subsidiaries, etc.
The limited liability company offers a way out of this dilemma. An LLC is owned by investors known as members. It is managed either by the members themselves or by designated managers. Like shareholders of a corporation, the members' liability is limited to the amount of their investment. And, IRS generally treats LLCs that are owned by more than one person as partnerships for tax purposes. LLCs that are owned by one person are disregarded for tax purposes, with the result that the income of the LLC is taxed to the owner directly, without any entity level tax. If you are already doing business as one of the other entities, it may make sense to convert to an LLC.
[top]
Can I treat employees working for me as contractors and avoid payroll taxes and employee reporting requirements?
To help determine whether a worker is an employee or an independent contractor for wage withholding purposes, IRS has developed a twenty- factor control test based on common law principles, i.e., principles that have evolved in the courts. The twenty factors indicate what degree of control by the business over the worker is sufficient to establish an employer/employee relationship.
The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. The twenty factors are designed only as guides for determining whether an individual is an employee. Special scrutiny is required in applying the twenty factors to assure that form is not elevated over substance. This test is not conclusive as to corporate officers and does not apply to statutory independent contractors. (Even if a worker is classified as an employee under this test, an employer may still be entitled to special "Section 530 relief" from withholding responsibilities.)
The twenty factors are:
1. Instructions to worker;
2. Training;
3. Integration into business operations;
4. Requirement that services be rendered personally;
5. Hiring, supervising, and paying assistants;
6. Continuity of the relationship;
7. Setting the hours of work;
8. Requirement of full-time work;
9. Working on employer premises;
10. Setting the order or sequence of work;
11. Requiring oral or written reports;
12. Paying worker by the hour, week, or month,
13. Payment of worker's business and/or traveling expenses;
14. Furnishing worker's tools and materials;
15. Significant investment by worker;
16. Realization of profit or loss by worker;
17. Working for more than one business at a time;
18. Availability of worker's services to the general public;
19. The firm's right to discharge worker;
20. Worker's right to terminate relationship.
The Courts have stated that this list is not all inclusive and have added four additional tests in distinguishing independent contractors from employees. They also consider (1) industry practice or custom in the area of the parties, (2) the intent of the parties, (3) whether written, signed independent contractor agreements were executed, and (4) whether employee-type benefits were provided (vacation, sick leave, medical insurance, and pension accrual). Workers’ compensation insurance does not indicate an employer-employee relationship.
With any independent contractor, it is always a good practice to use written independent contractor agreements which clearly define the work to be performed, period of performance, and contractor responsibilities under the agreement. Clearly stating the worker’s status as an independent contractor, with the worker acknowledging the statement, reduces the possibility of the worker claiming employee status later.
[top]
What are the current IRS mileage deductions?
Business:
1/1/05-8/31/05 $0.405 per mile
9/1/05-12/31/05 $0.485 per mile
Charitable (all year) $0.14 per mile
Medical/moving
1/1/05-8/31/05 $0.15 per mile
9/1/05-12/31/05 $0.22 per mile
[top]
What is the Social Security taxable income limit and taxable rates?
Social Seccurity Taxable income limit: $90,000
Employee rate 6.2%
Self-employed rate: 12.40%
[top]
What are the medicare rates?
Employee: 1.45%
Self-employed: 2.90%
[top]
When do I have to issue Form 1099 Misc?
A Form 1099 MISC must be issued when you pay rent, royalties, nonemployee compensation, or other payments not reported elsewhere. Generally, all income must be reported unless you receive a completed Form W-9. Then, total nonemployee compesation payments made to independant contractors during the year must exceed $600 before Form 1099-MISC is required. The same is true for rental payments. Also, entities identifying themselves as corporations on Form W-9 are exempt from the reporting requirement. Partnerships and LLC's are not exempt, however.
[top] |
