The invigorating scent of spring air serves as a bittersweet reminder that tax time is approaching again.
And because corporations are supposed to file tax returns by March 15, there is little time to waste. Although small-business owners face no sweeping changes in the tax laws, accountants say there are a few key issues of concern.
If you are one of the hundreds of thousands of business owners who rely on independent contractors for help instead of employees, beware: The Internal Revenue Service has pledged to stamp out the illegal use of independent contractors.
"For a while there, everybody and their brother was converting employees to independent contractors," said Rob Giannangeli, spokesman for the Los Angeles district of the IRS. While a business owner may prefer not to hassle with keeping records and paying payroll taxes, Giannangeli said, you should be very careful about who you claim works for you as an independent contractor.
The IRS uses 20 factors to distinguish between employees and independent contractors. The essence is whether you control where and when the person works and whether you provide direction on how to do the job.
For example, the safest kind of independent contractor to hire is a painter who owns the business, submits a bid for a job, buys the paint, paints your walls and presents a bill. But if you hire someone to move boxes around your warehouse a few days a week and tell them where to put the boxes, watch out. This person sounds like an employee to the IRS.
"Independent contractors pose a real problem for small-business owners, even if they have a written agreement with people they contract with," said Nancy Iredale, a Los Angeles lawyer who specializes in tax litigation. "If some years later, those folks apply for unemployment or disability benefits, the state goes after employers for the money and says, 'Fork it over.' "
Iredale said the IRS is preparing a report on the use of independent contractors, which may provide more guidance. Meanwhile, she advises business owners to be very careful when using anyone they do not consider an employee.
Many business owners are unaware of a significant but little-heralded change in the way employers must compute payroll taxes. Instead of using the old tables that lumped Social Security and Medicare taxes together, you now must compute separate amounts from two different tables.
This year, employers must contribute 6.2% for Old Age, Survivors and Disability Insurance (Social Security) up to a maximum wage of $53,400. An additional 1.45% for Medicare is applied to wages up to $125,000. These changes took effect Jan. 1 after Congress raised the Medicare wage base for high-income taxpayers.
"Some of these regulations are just overwhelming for small-business owners," said Robert Solomon an accountant in West Los Angeles. "Congress doesn't necessarily look at the implementation side of generating revenues."
Solomon also reminds business owners to be vigilant about paying their payroll taxes in full and on time. If you don't send in the tax payments shortly after each payroll period, you could be subject to penalties and be personally liable for the amount.
"If you didn't submit $20,000 in payroll taxes, you could owe $40,000," Solomon said. "As soon as you start tapping into the government's money you are exposing yourself to personal liability."
And you do not even have to be the business owner to be responsible for the payroll taxes. The government can go after anyone with the right to control the money in a company.
Tom Dwyer, a tax partner in a Chicago accounting firm, said many family-owned businesses are celebrating the repeal of Section 2036c, known as the estate freeze. The elimination of the tax regulation means that family businesses can easily plan for succession. If a father who owns 100% of his company's stock wants to transfer control to his heirs, he can recapitalize the company, taking preferred stock for himself and transferring the common stock to his son or daughter.
"The son or daughter then has control of the company and its future appreciation, while the father gets a fixed rate of return on his preferred stock," Dwyer said.
He said many business owners may still not realize the IRS wants them to convert from a cash to an accrual system of accounting if their gross receipts averaged $5 million or more over the past three years.
"Since a lot of smaller business didn't comply with the rule, the IRS has made one final window available so you can make the switch by July, 1991," Dwyer said. All returns filed after 1986 should also be amended.
Using the accrual method, business owners must book income--and possibly pay tax on the money--before the cash actually comes in.
"The accrual method has a tendency to defer deductions and produces more tax sooner," said Dwyer, who once worked as an IRS agent.
Chicago taxpayers should be aware that 90 new IRS agents are in training programs and will soon hit the streets to check returns.
With the recent elimination of many questionable tax shelters, IRS agents and auditors have more time to scrutinize the average business owner's tax returns.
If you have a home office, be aware that the IRS will probably take a close look at your return.
"The office has to be your principal place of business, so if you have another office elsewhere, very few people really do qualify," Dwyer said.
Remember: If you want to apply for a six-month filing extension, you must pay 90% of your tax liability when you file the extension forms.
Business Management in Uncertain Times
Managing a business during uncertain economic times is the theme of the ninth annual UCLA Entrepreneurship Conference set for tomorrow. The session runs from 8:15 a.m. to 5:15 p.m. at the UCLA Faculty Center. The fee is $175. For information call: (213) 825-2985.
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