Independent contractors
IRS worker classification. One of the hottest audit targets is worker classification. You may treat a worker as an independent contractor (IC) because you believe this is the correct treatment, but the IRS may think otherwise and reclassify your worker is an employee. Result if the IRS is correct: You could owe back employment taxes, plus interest and penalties. You may also owe back state unemployment taxes as well as be liable to the worker for fringe benefits, such as medical coverage and retirement plan contributions. Total cost for misclassification can break the bank. What to do:

• Use the correct classification. This depends on your degree of “control.” If you have the right to say when, where, and how the work gets done, the person is your employee, regardless of any label you may use or whether you actually exert such control.
• Be consistent. If you are using workers as ICs and have done so for years, treat others you hire in the future doing similar work in the same way.
• Use an IC agreement. While the agreement itself does not bind the IRS to your choice of classification, informing your worker that he/she is obligated to pay taxes and not eligible for employee benefits is important information to communicate in writing.
• Issue Form 1099-MISC. If you pay an IC $600 or more in total for the year, be sure to give the person this information form. It shows the company’s classification of the worker and can help to minimize penalties if it later turns out that your classification was incorrect.

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Over the past two years, about 7 percent of all Form 1040 filers have requested time extensions, accounting for nearly 10 million returns. If you do the same, make sure to:

• Understand the terms and conditions of the extension. While a typical extension lasts for six months, small business owners must still pay any amount due by April 15. They will otherwise owe a late-payment penalty and interest on the unpaid amount.
• Figure out which extension application you will need to fill out. The standard one is Form 7004 – “Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns” – though quite a few others also exist. Forms can be ordered by phone, 800-829-3676, though they can also be downloaded at the IRS official Web site. If you are not sure which one to fill out, consult your accountant if not the IRS itself.
• Estimate how much you will owe the government, if anything, to the best of your ability. Not only does the IRS require this amount in the application, but the agency may also charge penalty and interest charges if it is underestimated.
• Fill out this particular application on time – if not right now. Requests for an extension are due before April 15. You could face a failure-to-file penalty otherwise, which is 5 percent of the unpaid taxes for each month or part of the month after the due date, plus 3 percent interest.

Also consider other advice and help that the IRS has to offer:

• If you don’t have all of the money, then look immediately into a payment plan. Online registration is available, so that you can figure out as soon as possible what your monthly installments will be like. The IRS charges $105 for setting up the agreement, $52 if the payments can be deducted directly from your banking account.
• If you don’t have a lot of time, then consider filling electronically. By using an online service, then choosing direct deposit, you can receive your tax refund in as few as ten days. Regardless of which method you choose though, be sure to double-check everything – the Social Security numbers, the signatures and the figures, most importantly.

For more information, visit the IRS official Web site.

But Section 179 of the Economic Stimulus Act of 2008 may allow for small business owners to get even more of their 2008 tax returns this year, especially if the following deductions are claimed:

• Computer software. Though small business owners once had to depreciate the costs of new software over three years, they can now fully expense new purchases during the same year, according to Bankrate.com.
• Meals. The Internal Revenue Service now allows for deductions of up to 80 percent of the meal cost, up from 50 percent, according to Bank of America’s Small Business Online Community. Of course, deductions can only be claimed if such meals are taken while traveling away from home and solely right before, after or during normal business hours.
• Mileage. While careful documentation is always required, this year it can result in a bigger payoff. The standard mileage deduction increased to 50.5 cents per mile for the first half of 2008, only to rise again to 58.5 cents per mile for the second half, according to the Small Business Online Community.

Small business owners: What other deductions should be made but are easily forgotten? Will Section 179 reduce any claims that you have to make this year?

To follow up with my previous post Internet Sales Tax Looms for NY…Will It Catch On? I posed a question along the lines of "do you think it should happen/is it a good idea?"

As of June 1, 2008, the legislation will go into effect, requiring internet retailers to collect a sales tax on any orders being shipped to the state’s residents. This legislation was largely enacted to keep online retail Goliaths (namely Amazon.com) in check and attempt to "level the playing field" for brick and mortar stores in the state.

Amazon has now responded by suing the New York State Department of Taxation and Finance claiming "that since it does not have a physical presence in the state that it should not be required to collect taxes on shipments going to New York." In addition Amazon says the New York law is unconstitutional based on a 1992 U.S. Supreme Court ruling that claims states are prohibited from requiring out of state retailers to collect sales tax unless the company has a physical presence in the state. New York defends the law by arguing that the Amazon Associates program, which allows Web site publishers to receive commissions by promoting Amazon items through their sites make Amazon liable to collect taxes on its behalf for those affiliates who live in New York. (this paragraph courtesy WebProNews.com )

So while the question is no longer "do you think it should happen/is it a good idea?" I now pose these questions to you all: How long before other states enact identical or similar legislation and how do you think it will affect online consumerism?

How would you feel about hiring an accountant who puts the interests of the IRS before those of you or your business? What’s that you say? You wouldn’t like it? That’s what I thought you’d say…but what if I told you you had to?

Unfortunately, that may be the case.

(I mean, I won’t force you to but a much stronger influence might…what was their name again?…..oh right! The Government.)

The Small Business and Work Opportunity Tax Act of 2007 stipulates that those who prepare returns containing an understatement of tax due – which the preparer "knew or reasonably should have known" – will be subject to penalties amounting to "the greater of $1,000 or 50% of the income" the preparer received for that particular federal return.

The act also expands the definition of tax-return preparer to cover those handling any federal return, including those for estate, gift, excise, and employment tax.

According to a recent Fortune Small Business article there are a bevy of downsides to this new legislation including:

• The act has the potential to injure the close personal relationships many small businesses maintain with their accountants.
• Smaller businesses may need to prepare more documentation than previously required. In turn, accountants may be less apt to take clients at their word.
• In some extreme cases, accountants may ask for far less data, hoping they will be less liable the less they know, which would put more of the legal burden on entrepreneurs.

So it sounds a bit like intimidation doesn’t it? And it would appear that the government would end up with a lot of free (and somewhat covert) auditors. How do you plan to handle this new legislation? Are you going to write your congressman? Did you even know this tomfoolery was afoot?

And for those of you who do end up getting audited this tax season (for real) check out How to Survive an Audit of Your Business- And Live To Tell About It

It is important to know that while seeking the help of professionals is advisable, you always want to make sure to do your own research and check for deductions on your own. Make sure that if there is any ambiguity in an IRS regulation that you check with a tax professional or with the IRS before you take a questionable deduction. No matter how great the deduction may be it is not worth getting audited over.

A great place to start is at IRS.gov where there are several publications written in a readable style to help you learn what expenses are considered tax deductible for the self employed. Form 1518, IRS Tax Calendar for Small Businesses and Self-Employed and form 535, Business Expenses, are two excellent informative publications to help you get started learning about deductions.

Making sure you follow the IRS instructions is very important and you need to be aware there are several keys that can lead to your getting audited. Claiming your house as a deduction is the number one alert to the IRS that can lead to an audit. That is not to say that you cannot deduct the correct portion of your house, just make sure that you do it within the guidelines of what the IRS allows.

Travel is another area you want to be very careful about when deducting as a business expense. The IRS has very specific guidelines regarding what is considered business travel and what traveling expenses are eligible for deductions according to the regulations.

Supplies and equipment for your business are deductible and health insurance also may be deducted. If only one member of your family is self employed be aware that you may only be eligible to deduct the self-employed family member’s healthcare costs. If the other family member is eligible for benefits through their employer then you cannot claim the cost of those benefits as a deduction.

Clothing can be deductible but only if it is usable for the business purpose exclusively. If you have a coat that can be worn when you aren’t working then it would not be considered deductible. If however, it is something like a specific fire proof jacket is needed and it isn’t possible or pragmatic to wear it when you aren’t working then that fireproof jacket would be considered tax deductible.

Studying the forms and guides provided by the IRS is a great place to start but also include a visit to your CPA who can take what you have learned and apply their knowledge and experience to maximize your deductions for the upcoming year’s tax liability you face as a self-employed business person.

Get started – You’re already in a serious time crunch, so time is truly of the essence. Start gathering all your income and expense paperwork as well as any business receipts. Luckily, you can file electronically with the IRS and there are dozens of tax preparation software programs available to guide you through all of the forms. Of course, if you really feel overwhelmed, you can always hire an accountant, bookkeeper or take your paperwork to H&R Block and let them sort it all out for you! But, the important thing is that you do something. Remember, time is running out!

Take advantage of all your deductions – One of the great things of owning your own business is being able to get extra tax deductions. If you run your business out of your house, you can deduct the rent and utilities used for your office. If you take business associates out to lunch, dinner or drinks, you can deduct the restaurant bill. You can even deduct the expense of computers, cell phones, PDAs and more. To learn more about all the business deductions available to you, visit IRS.gov .

Be thorough – You may have waited too long to start your 2007 taxes, but that doesn’t mean you should rush through the filing process. Forms completed in haste can leave you paying more in taxes than you needed to, or getting an incomplete notice from the IRS. If you find yourself having to guess on the forms, then perhaps it’s time to hire a professional.

Stay ahead of the game next year – You may have waited a big too long to begin your 2007 taxes, but that doesn’t mean you have to get yourself in the same bind next year. Once you’ve wrapped up this year’s filings, make a pledge to plan ahead for your 2008 taxes. Organize your receipts in different folders, such as postage, office equipment, rent, utilities, phone bills, etc. You may even want to hire a bookkeeper to design a spreadsheet to make keeping track of income and expenses easier.

So, unless you want to end up paying late penalties to the IRS, you’ll need to buckle down and get started on your tax paperwork for 2007. But, don’t worry, it doesn’t have to be overwhelming or time-consuming or even stressful. If you feel you’re in over your head, don’t hesitate to hire a professional to either do the work for you or guide you through the process. And, hopefully, you’ll get started on your taxes a lot earlier next year!

It ranks right up there with getting your wisdom teeth pulled or surviving the first anniversary of your 29th birthday (for those who haven’t had their coffee yet, that would be your 30th birthday-the horror!). And yet, much like getting your wisdom teeth out (probably inevitable) and turning 30 (definitely inevitable), if you run a business, odds are you’ll eventually have to deal with the unpleasantness known as a lawsuit.

Your best defense is a good offense and you can create a good offense by taking some preventative steps to reduce the risk of being threatened with a lawsuit according to a presentation covered by the Beaufort Gazette recently:

• Rule No. 1: Incorporate. Going alone often provides poor asset protection and poor tax benefits. Have an attorney or accountant review corporate records once a year.

• Rule No. 2: Know the law. Ignorance is no defense, and in fact it’s a good way to get sued. Small-business owners should particularly focus on employment and tax laws. Good record-keeping and proactive tax planning are key.

• Rule No. 3: Maintain adequate insurance. Conducts an "insurance physical" every few years. Business owners should be aware that it’s possible to be over-insured. Employment-practices liability insurance can help businesses respond to claims of employment discrimination.

• Rule No. 4: Manage fairly and wisely. Business owners should beware of falsified résumés, have detailed job descriptions, tackle poor performance early and consistently enforce policies.

• Rule No. 5: Prohibit harassment. A 2007 Texas case indicates "some male supervisors are still truly clueless." Case in point:

A male director of nursing was accused of quizzing female employees about their sex lives two to three times a week in front of other employees, including asking them if they took men home the previous night. When the women asked him to stop, he threatened to fire them.

At trial, he admitted he was questioning the women this way because he thought that if they had a lot of sexual activity the night before, it would affect their work performance because they would be tired — that’s what he said. I can’t believe this case even went to trial. The jury awarded each woman $7,500.

• Rule No. 6: Catch and correct wage and hour violations. Failure to pay overtime is "the new food for plaintiffs’ attorneys." Since 2003, federal court filings involving wage actions have surpassed employment discrimination cases, and settlements have reached into the tens of millions of dollars.

• Rule No. 7: Be careful with independent contractors. Conduct regular reviews of independent contractor classifications and careful consideration of how much control business owners have over contractors.

• Rule No. 8: Watch out for workers’ compensation claims. Adequate training and maintaining a drug-free workplace can prevent accidents. If they do occur, immediately reporting claims and having a return to work commitment helps. Signs of possible fraud include claims by a disgruntled or new employee, an employee on leave who is difficult to contact, or accidents to which there are no witnesses.

• Rule No. 9: Hire an attorney. Interview several before making a selection, and hold regular meetings to compare case progress with budget constraints and requiring authorization for expenses exceeding $200.

• Rule No. 10: Document, document, document. Keep tax-related records for at least eight years, employee records for the term of employment, plus five years, and shred papers before disposal.

SmallBusinessNewz.com also has prepared this short video clip with a few more tips the keep you "out of the the dog house."

Accounting and Taxes

When it comes to the health of any company, the day-to-day monies coming in and going out are important to keep tabs on. There also needs to be a good amount of planning to make sure you know what you should be putting aside for Uncle Sam, so you are not unpleasantly surprised at the end of the year.

Working Capital Needs Calculator – Working capital is the money you need to have in the bank to be able to pay all the bills that come into your accounts payable department. This calculator can show you what is happening with your cash flow and what you need to be bringing in to keep your head above water.

Self-Employment Taxes Calculator – If you are self-employed, there are all sorts of tax and deduction rules that may apply to you. This calculator will help you find out what you will end up paying when it’s all said and done.

Gross Pay Calculator – If you have employees, you need to make sure you are taking the right amount out of their paychecks to cover all tax and federal deductions, as well as any benefits. This calculator will make sure your number crunching is correct.

For more calculators check out our article "We’ve Got Your Number – Business Finance Calculators "

Do You Need to Register?
Depending on the size of your business, you may be able to trade without registering your details. However, this is only if you’re trading with your own name – so, a sole proprietor named John Smith could set up a company called John Smith and he’d be fine. It’s when you start describing your business that the rules change.

For example, if the business was a delivery company and it was called John Smith Couriers, then you’d need to register your business details. This is to make sure that you’re properly rated when it comes to taxes, whether they’re federal, state or otherwise. Failing to register properly can cost you up to $25,000 in fines for a company, and $2,000 for individuals.

Use a Unique Name
Another way that businesses and individuals commit fraud (even if they’re unaware of it) is by trading on someone else’s name, and again this is where registration comes into its own. You can normally register your name (as well as find out whether it’s unique or not) at your local department of commerce website. Failing to do so and trading on some other business’s name can land you with a hefty fine.

One particularly useful method of registering your business name is via your local tax office – not only will this save you time, you can also find out the information relating to your business tax and any payroll deductions, etc, that you need to put in place.

Do You Need to be Incorporated?
Depending on your business, you may need to take additional steps to make sure you’re following the law. Although you might think that you’re small enough to not worry about being a limited liability company, or LLC, you might need to do so according to your local or state laws. The same goes for incorporation – although it only really affects businesses making more than $120,000 per year, again your local federal requirements might state that you need this function.

Business Numbers or Tax Numbers
If you’re starting a business, one of the things you’re going to have to do when registering it is to make sure you’re covered for the relevant taxes. After all, you don’t want to overpay due to being in the wrong tax bracket, and you don’t want to face a hefty back tax either. Therefore, you need a Business Number or Tax ID. The good news is that it only applies to the following four areas:

- Payroll deductions
- Import/export trade
- Corporate income tax
- Federal and state tax

Although it might seem a lot of work, especially if you’re running a relatively small business, ignoring proper registration of your business and all that entails could cost you a lot more in the long run.