Are my workers employees or independent contractors?

This important question has significant financial implications to small business owners. IRS Publication 15-A states "The general rule is that an individual is an independent contractor if you, the payer, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result." Based upon decided cases, the consideration of whether a worker is an employee or a contractor falls into three main categories: do you control the worker's behavior, do you control his financial situation and the relationship between you and your worker. If the issue is unclear in your circumstances be sure get professional advice.

What is a “Single Member LLC”?

A Limited Liability Company (LLC) can have one or many owners (known as “members”). If just one person is the owner the structure is known as a “Single Member LLC”, which allows you to treat the business as a “Sole Proprietorship” for tax purposes, while retaining the other legal protections of an LLC. IRS has recently held that married persons may both own the business and still be classified as a Single Member LLC.

I just started my new business this year. How do I know how much to pay in quarterly estimated taxes?

This is one of the most vexing issues facing new business owners. It’s very important to prepay the proper amount to avoid penalties and to avoid a shocking tax debt at year end. Avoiding penalties requires that you meet one of two tests by year end: 1) You must have paid in at least as much as the actual tax from the previous year, or 2) You must have paid in at least 90% of this year’s actual tax. Remember, this tax is calculated on the profits from your new business, and in combination with all other taxable income from other sources, so you must be able to approximate your business income as you progress through the year. Many businesses will earn modest or no profits in the first year, but you must watch the issue carefully. Typically you should review your profitability and your estimated tax status with your tax advisor before the end of each quarter until your business becomes stable and more predictable.

I own a small LLC. Do I withhold taxes when I pay myself?

If you (including your spouse) are the only owner(s) you are a “Single Member LLC”. For tax purposes you will report the business income on your personal tax return on a Schedule C, just like a sole proprietorship. In this case money paid to you by the business in the form of compensation is considered a “draw”, not payroll. The business does not withhold payroll taxes, but you are responsible for making estimated tax deposits individually.

As a sole proprietor, do I need an employer identification number (EIN)?

A sole proprietorship that has no employees and files no excise or pension tax returns is the only business that does not need an employer identification number. In this instance, the sole proprietor may use his or her social security number as the taxpayer identification number. A sole proprietor would be required to obtain an EIN only if either of the following applies: (1) you pay wages to one or more employees or (2) you file pension or excise tax returns. Generally it is a very good idea for a proprietor to use an EIN even though it isn’t required to avoid giving out his or her social security number. It's simple and free to get an EIN and it increases your protection from identity theft.

What is an Employer Identification Number (EIN)?

An Employer Identification Number (EIN) is a nine-digit number that the IRS assigns in the following format: 00-0000000. The IRS uses the number to identify taxpayers who are required to file various business tax returns. EIN's are used by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals, and other business entities.

Q&A - Taxes