Use the Appropriate Tax Status for Your Business Phase and Entity.

The words “entity” or “status” of your business may be used in two ways:  (1) to describe the legal entity of your business (sole proprietor, partnership, LLC, S-Corporation, C-Corporation) or, (2) to describe status of your business for tax purposes (pass-through or corporation).  In the following post we will be discussing which legal entity is appropriate for your business for asset protection purposes; here, we are evaluating what status you should be using for tax purposes. 

Generally, either a business is a pass-through tax entity or it is taxed as a corporation.  If a business is pass-through, the profits or losses are passed-through to the tax return of the owners.   The owner owes taxes for any profits, even if those profits are not actually taken home by the owner.

If the business is taxed as a corporation, the corporation files its own tax return and pays taxes on its profits.  Money may be paid to owners as salaries for work performed and the owner will pay taxes on his/her salary, just like any employee.  Other money may be paid to owners as dividends on their stock and the owner will pay taxes on dividends, just like any dividends received on stock.  Read more

Is it legal to have a business in your home?

The question has two sides — is it legal to have a business in your home OR are you running your business legally?  The second questions deals with what you have to do to run your home business without getting in trouble with some government agency, but the first question asks if you are allowed to even have a home business in the first place. 

Answer:  It depends.  Don’t you love lawyer answers?    Read more

How do you keep your contractors from becoming employees?

I advocate using independent contractors, such as Virtual Assistants, as a way to grow your business without increasing overhead and regulatory issues.  But the only way for this strategy to work is for you to be actually hiring independent contractors, and not accidentally letting the relationship morph into an employee relationship.   If the person is actually an employee, you must be paying social security taxes, FICA, unemployment, and withholding income taxes on them — and you are personally liable for those payroll taxes if you are wrong (even if you are incorporated). 

How do you keep this from happening?  Read more

When do you need a Tax ID number or EIN for your business?

Question:  “Do I have to get a tax ID number or employer identification number (EIN) to run my business from home?  Can I just use my social security number (SNN)?”

Answer:  It depends.

Let’s start at the beginning.

A tax ID number or employer identification number (EIN) is a number you get from the U.S. federal government that gives an identification number to a business, much like a social security number does for a person.  States also issue tax ID numbers (unlike the social security number system, where you use the same number for both federal and state dealings, you must get a separate number for each state).  This ID number is what you use for tax filings and other dealings with the government.

If you have a business that is not incorporated and is not an LLC, and you are running it as a sole proprietorship (the default if you have not formed a business entity), your default tax ID number is your own social security number.  If you form a business entity (corporation or LLC) or partnership, which is technically a separate “person” from you (even if you are the sole owner and the only worker), then you must get an tax ID number for that business.  You must also get an EIN if you hire employees, because you need that number for your payroll tax filings.

Even if you are not required, you still may want to get a tax ID number for your business.  Why?  Because you don’t want to have to list your personal social security number every time you file out an application for a business credit card or sign a business contract. 

Getting a federal tax ID number is free and easy.  Just fill out a form on the IRS website and you get the tax ID number immediately online, with no waiting.   You are not changing your tax status (if you are a sole proprietorship you are still a pass through tax entity) and do not have any additional paperwork or taxes, just from getting the ID number. 

For more information, check out the IRS’s explanation of Employer ID Numbers.  

Photo courtesy of Beatrice Murch (blmurch) on Flickr.