Small Business Basics: Hiring Employees

small business basics
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Running a small business brings with it unique challenges:successfully managing your time, cultivating (and keeping) client relationships, and managing the growth of your business. If your business is growing to the point where it’s difficult to meet client demands, it might be time to hire an employee or two.

Here are five key things you will need to know about hiring employees.

Obtain an Employee Identification Number (EIN)

Your EIN will not only identify your business to the IRS, but will also allow you to pay taxes on behalf of the business and to deal with other business-related matters.

An EIN also reduces your risk of identity theft. You’ll need to complete form SS-4. Follow all instructions carefully and submit it to the address specified on the form. Processing will be delayed if any of the provided information is missing or inaccurate.

Register with your state labor board

Before you hire your first employee, you will need to register with your state’s labor board. Doing so will ensure your business is complying with state and federal labor laws.

Verify employee eligibility

While screening employment candidates can be time-consuming for a new business owner, it’s an important step to ensure that your business is complying with employment eligibility regulations:

  • Your employees are generally required to be legal residents of the U.S. or U.S. citizen, have a social security number, and be of legal age to work in your industry.
  • If you own a nightclub that will serve alcohol for example, your employees must be at least 21.
  • You will need to complete an I-9 form for every employee within three days of their hire date. The I-9 also specifies which documents are required to verify a person’s eligibility to work in the United States.

Establish tax withholding records

Each of your employees will be required to complete a W-4 form on or before their employment date. Many businesses choose to include this form in their new hire paperwork, also known as onboarding documents in some industries.

For more specific information, you can refer to the IRS Employer’s Tax Guide or consult a tax professional.

State employee tax requirements vary by state. The Small Business Administration has an excellent resource for state-by-state tax requirements.

Additionally, at the end of each year you are required to furnish a W2 form to each employee that received hourly wages, salaries or other compensation from your business.

Register with your state’s New Hire reporting program and obtain worker’s compensation coverage

You are required to report any new hires (or re-hires) to your state’s New Hire program within 20 days of the hire or re-hire date.

Lastly, business who have employees need to purchase and maintain a Worker’s Compensation policy. You may purchase a policy though a commercial carrier or you can self-insure through your state’s Worker’s Compensation insurance program.

Managing a growing small business means not only additional client and customer demand for your product or services, but it also means you may have to hire employees to meet the increased demand. By following the steps above, you can ensure your business complies with IRS and state tax board regulations.

 

Get Your Small Business Off To A Good Start

 

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Nothing beats the satisfaction of ditching the 9-5 grind in favor of starting your own business. You’ll have a direct impact on the success of your product or service, and you might even be able to achieve a better work-life balance in the process.

Unfortunately, small business are at higher risk of an IRS audit. Facing an audit is understandably stressful, especially for a rookie business owner. While no one can ever guarantee that your business will be audit-proof, here are some strategies for getting off to a good start with all the necessary records and paperwork; if the IRS should ever come calling, you’ll be prepared.

Keep Accurate Employee Records

This is especially true for payroll records if you choose to hire employees. Each employee will need to complete a W4 form, I-9 form, and any additional company-based forms you provide. Verify the accuracy of all information your employees provide, including address and social security number.

If you hire an independent contractor, they will need to complete a W9 form when they begin working with you. They must complete all required information, including their Tax ID Number (TIN) or social security number.

Hire A Numbers Guru

While there is plenty of DIY bookkeeping software available to small business owners, play it safe and hire an experienced bookkeeper or payroll service if you have employees and/or independent contractors.

They will be able to file quarterly payroll forms, and will deduct the correct amount from each person’s payroll each pay period. Miscalculating these figures is no joke; you may end up owing the IRS and state tax board a fair chunk of change if payroll taxes are miscalculated or under-withheld.

Sure, a numbers guru is an extra expense, but their services are also an investment in the long-term well-being of your business.

Keep Track Of All Expenses and Income

Even if you are a sole proprietor, it is imperative that you keep accurate expense records. Save any and all receipts and keep them organized throughout the year. You will need to be able to substantiate your expenses to the IRS should you ever be audited.

Keep copies of credit card statements, bank statements, receipts and any other expense documentation.

The same goes for income; even if you go it alone, you must keep accurate income records from all sources: credit card, cash, check, electronic transfer, third-party payment services.

If you have a bookkeeper, he or she will able able to track monthly income and expenses for you via bookkeeping software or app.

Hire a Tax Pro

While a bookkeeper can keep track of income and expenses, you’ll need a tax pro by your side come tax filing day. Filing a business return is more complex than a standard 1040, and your tax pro will be able to advise you further on sound tax strategies for your business. A tax pro can also negotiate with the IRS on your behalf should you ever face an audit or other tax matter.

Starting a small business can be challenging, risky but ultimately satisfying. By keeping accurate payroll, income/expense and tax records from the outset, you’re setting a healthy precedent for your business. While there are no guarantees your business will never face an audit, you’ll be in good stead with accurate records and a tax advisor by your side.

 

Can The IRS Levy My Accounts Receivable? Tips For Small Business Owners

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freeimages.com

If you own a small business, there is plenty to worry about: payroll, production, meeting client and customer expectations, and meeting your financial commitments. If you also owe back taxes, you run the risk of the IRS levying your accounts receivable unless you take prompt action.

Last Resort

If you have received correspondence from the IRS and have either not responded to their notices or have not taken any action in clearing your tax debt, the IRS has the authority to levy your accounts receivable in order to recover the outstanding tax debt.

This just doesn’t apply to an outstanding business tax obligation; if you have an outstanding tax debt for your personal taxes, your accounts receivable is an asset that can be levied by the IRS.

Levying assets is the last resort for the IRS. If you haven’t responded to any prior communications or notices from the IRS, including a Notice for Demand of Payment and Final Notice of Intent to Levy, the IRS sees no alternative but to levy your assets, including any business assets.

What Will Happen Next

Once the IRS has begun to levy your accounts receivable, your clients and customers will receive a notice instructing them to re-direct their payments to the IRS rather than paying your company.

This is not only embarrassing for you, the business owner, but it can create problems in the future. Even after your tax debt has been cleared, clients and customers may mistakenly continue to mail their payments intended for your business to the IRS.

How To Avoid This Scenario

By now, you’re reading this thinking, “This could end badly.” Not so fast. There are ways you can avoid an IRS levy of your personal and business assets.

  • Since your accounts receivable is an asset, be diligent in managing your personal and business tax debt. The minute you realize your tax debt is more than you can handle, enlist in a qualified tax professional who can help you negotiate with the IRS. Don’t wait.
  • If you do receive a notice from the IRS regarding your tax debt, don’t ignore it. Instead, reply quickly to the address or phone number provided on the notice.
  • File your business and personal returns on time to avoid penalties.
  • You may want to consider filing an estimated business tax return each quarter. Your tax pro can help you decide if this is a viable option.

Facing an IRS levy of your accounts receivable is a nightmare that you would never want to face. After all, running a small business is stressful enough without having to worry about the IRS seizing your hard-earned accounts receivable.

By understanding the consequences of not responding to IRS notices regarding business and/or personal tax debt and taking a proactive approach in responding to any IRS correspondence, you’ll be less vulnerable to an IRS levy.

First and foremost, get in touch with a licensed tax professional who can advise you of your rights and responsibilities should you be facing delinquent personal or business taxes. Don’t delay. We have fully licensed and qualified Enrolled Agents and tax attorneys who can help you navigate the tax debt process.

Get started today by clicking on the white “Start Chat” button at the top right-hand corner of any of our webpages. We’re here to help.

Just For Small Business Owners: Deducting Business Expenses

 

Photo:freeimages.com
Photo:freeimages.com

 

Small businesses have their own set of tax regulations and requirements. Some small business owners may find themselves paying more taxes than they did when they worked as an employee within an organization or other business.

One of the challenges you’ll face as a freelancer or small business owner is accurately accounting for and deducting business expenses.

Generally, the IRS requires that the expenses in question be “ordinary and necessary.” In other words, they must be typical expenses for your type of business and must be necessary for your business to be successful.

Understanding the Difference Between Personal and Business Expenses

If you use cash and resources for both personal and business use, you will need to accurately record the percentage of business and personal use. One of the most common deductions is for vehicle use.

If you use your vehicle for business purposes 80% of the time and 20% for personal use, you can deduct 80% of the overall expenses (such as fuel, oil, repairs,) as a business expense.

However, the IRS looks very closely at this small business expense, so it is vital that you maintain accurate records of personal and business vehicle use and expenses. Keep all receipts related to repairs, fuel, and maintenance in case the IRS does come calling in the form of an audit. Better to have too much supporting documentation than not enough documentation.

Calculating Cost of Goods Sold

If your business is centered on creating a product and maintaining inventory, then you will need to calculate the Cost of Goods Sold (COGS) before writing off business expenses.

Take into consideration the cost of raw goods used in manufacturing your product, along with storage fees, labor costs, and overhead expenses from the factory. Once you calculate your COGS, you can accurately place a value on any remaining inventory at year end.

One word of caution: if a business expense was included in the COGS, you can’t  write off that business expense as a deduction.

Running your own business has its share of joys and headaches. By understanding a qualified business expense and understanding the difference between business and personal expenses, you can save yourself the additional headache of inaccurate business records and the possibility of an IRS audit of those same records.

If this is your first year in business or if you need help understanding the tax codes related to small business, don’t hesitate to get in touch with a qualified tax advisor. He or she can walk you through IRS regulations as they apply to your business and provide guidance should you ever be faced with an IRS audit.

As a small business owner, you may find yourself facing additional expenses, but you can’t put a price tag on the peace of mind you’ll get when consulting with a knowledgeable tax pro.

Audit Red Flags for Small Businesses

Freeimages/Paige Foster
Freeimages/Paige Foster

 

In many ways, owning a business can be rewarding: the chance to be your own boss, to conduct business in a way that is line with your own values, and to hire staff that you think will get the job done. The IRS  wants to make sure you are paying the taxes that you rightfully owe and aren’t committing fraud. Here are seven small business practices that can tip off the IRS and trigger an audit:

1. Regularly Claiming Business Losses

In some industries, this can’t be helped. Sometimes expenses far outweigh profits. Running at a loss also reduces your overall tax burden, and so the IRS is going to take an interest in businesses that report losses for two of the past five years. The IRS in this case has the option of re-classifying your business as a hobby, so you’ll want to keep meticulous records and provide documentation that can substantiate those losses.

2. Exceptionally High Salaries To Employee/Shareholders

If you are paying a higher than average salary to employees that are also shareholders in your company, the IRS will have one question foremost in their mind: Why are they being paid substantially more than others on your payroll?

3. Claiming Personal Expenses As Business Expenses

The IRS looks very closely at expenses such as medical, meals/entertainment, cell phone and travel when dealing with a small business. Unfortunately, there have been shady business owners who have had a field day with claiming personal expenses as business expenses.

Your business could attract closer IRS scrutiny if expenses in the above categories tend to be outside the norm for comparable businesses in the same industry. The burden of proof will be on you or your tax pro to demonstrate those costs were normal and customary in the course of running the business.

Keep detailed records of your business-related expenses and keep all receipts associated with them. In the event you are selected for an audit, you will be able to substantiate your claims.

4. Claiming Personal Vehicle Use/Expenses as Business-Related Vehicle Expenses

It may be tempting, but don’t do it. Nothing sends up an “audit me!” red flag to the IRS like vehicle expenses.

If your car is registered in your name but you are using it to conduct business, the IRS will look at this more closely than if the vehicle were registered in the name of your  business.  While not every business owner can finance a car under the business’s name, every business owner can and should keep detailed records of vehicle use for business.

Keep track of business-related mileage, fuel costs, insurance, registration and other related expenses. Only claim what is allowable under law. Keep all supporting documentation in case your business returns are audited. You will need these to support your claim of business vehicle expense.

5. Cash Business

Businesses such as hair salons, restaurants, home day care, and car washes have a higher proportion of cash transactions than other businesses. Be sure to issue a customer receipt for every transaction to document cash flow in and out of the business. Keep detailed payroll and expense records, and hold on to all supporting documentation in the event of an audit.

The IRS looks very closely at cash-based businesses, even if there is no wrongdoing on your part. Detailed records and copies of issued receipts will go a long way toward reassuring the IRS you are not committing fraud or laundering money.

6. Making Late Payments or Filing Late Returns

If you are consistently late in filing your business return or paying taxes, you could increase your risk of an IRS audit.

Make every effort to file your business returns and to pay your related taxes on time. The IRS may suspect you or your business of fraud or other tactics in light of late payments or returns, so timely payments and returns will be to your benefit.

7. Shifting Income to Avoid Taxes

There is no doubt that small business owners are faced with a higher tax liability than an individual who works for an organization. It may be tempting to lower your overall business tax liability by shifting income to non-taxable entities, such as a charity. Don’t do it.

If the IRS even suspects you are shifting income to avoid taxes, they will come calling. Instead, pay what you rightfully owe. If you find yourself in over your head and can’t make the payments on time, find a qualified tax pro who can help you sort out your options.

Small business ownership can be as rewarding as it is demanding. Unfortunately, small businesses fall under suspicion with the IRS because of business owners resorting to unethical tactics to avoid paying taxes or to lessen their tax burden.

Keep accurate and detailed records. If record-keeping isn’t your strong suit, hire a bookkeeper or an admin. assistant to take care of that task for you. Whatever you do, don’t falsify records or shift income.

You may find yourself at the receiving end of an audit notice even with the best of business practices. Try not to panic and enlist a qualified tax pro ASAP who will  walk you through the audit process and represent you before the IRS.

Don’t let the possibility of an audit deter you from owning a business. With sounds business practices, honest record-keeping and a good tax pro by your side, you can withstand an IRS audit.