Читать книгу Construction and Contracting Business - Entrepreneur magazine - Страница 12
ОглавлениеTitle 26 of the Federal Code, also referred to as the Internal Revenue Code, is made up of 20 volumes and is nearly 17,000 pages long. It includes laws covering income taxes, payroll taxes, gift taxes, estate taxes, and excise taxes. Most states have their own tax regulations covering similar taxes and tack on rules and regulations covering items like workers’ compensation insurance and sales taxes. In addition, agencies such as the Social Security Administration and the Equal Employment Opportunity Commission issue their own pamphlets regulating employers. Employer compliance with the myriad of rules and regulations is a daunting task but one that cannot be ignored. A properly established and organized business can cope with the government bureaucracy fairly easily if it understands the basic rules and establishes internal procedures for following those rules.
The first task in setting up your own contracting business is to decide exactly what form, in legal terms, you want your business to be. This legal structure largely determines how much risk the owner takes on and how the government will treat his income. As an entrepreneur you should consult with your lawyer and accountant when deciding which form of business to use, and when consulting with these professionals, be sure to disclose all of your family assets and income, because these factors may influence their recommendations. The choices that business owners have when forming a new company follow:
1. Sole proprietor. This form of business has no separate structure from its owner. Even though the sole proprietor may register a trade name like “Jane’s Drywall Service,” all assets, debts, tax liabilities, and risks belong to Jane. Sole proprietorship has several disadvantages. It may be harder to obtain financing, and you will have unlimited liability in the event the business is sued. This is the simplest form of business and is reserved for the individual entrepreneur. The advantages of being a sole proprietor are being able to make all of the business decisions yourself and sell the business when you choose. There are also few legal costs, little paperwork, no formal business requirements, and no corporate tax payments.
2. Partnership. Formed when two or more individuals enter an agreement to manage a business, a partnership does not protect the individual liability of the owners. The partners manage the business and are personally liable for debts and obligations of the business. Like an S corporation (see below), the partnership does not pay taxes because the profits and losses are passed on directly to the partners. From a legal perspective, partnerships are easy to form. Many partnerships are very successful if the partners have a strong bond and their strengths complement each other.
3. Limited liability company (LLC). Increasingly popular, this is a hybrid structure that combines the limited liability of a corporation (S or C) with the tax advantages and flexibility of a partnership. The company is owned by members, as opposed to stockholders, and profits and losses are passed on directly to them. In some cases, a member may contribute services rather than money and, in turn, receive an interest in profits and losses.
4. S corporation. Usually reserved for smaller companies with fewer than 100 shareholders, an S corporation provides limited personal liability to its shareholders (owners) so that if the corporation is sued, the personal assets of the shareholders are protected from the lawsuit. The other significant issue with S corporations is that the corporation itself does not pay income taxes. All profits and losses are passed through to the individual shareholders according to the share of the stock each owns. Shareholders are liable for taxes even if they did not receive cash income from the company. The company itself is managed by a board of directors that appoints officers to take responsibility for day-to-day operations.
5. C corporation. Most large companies in the United States are C corporations. Like an S corporation, shareholders are protected from lawsuits and the company is managed by a board of directors. However, the corporation is an entity unto itself, which is taxed on its profits, and the shareholders are taxed on any dividends they receive. Shareholders must be aware that dividends are paid on after-tax profits, which results in double taxation because the shareholders are also personally liable for taxes on the dividends they receive.
When deciding on a business structure that meets both your business and personal needs, the entrepreneur should consider the following:
How vulnerable is your business to lawsuits? Court dockets are full of suits against contractors. Is your specialty among those involved in numerous lawsuits by unhappy clients? If it is, then a corporation or LLC is the best for you.
Do you need to pull cash or capital out of the business? Once you set up a corporation, you cannot generally take money out of it (even if it is your own money) without paying income taxes on the distribution.
Tax implications are another factor and should be discussed with your accountant. For example, if you use a company vehicle for personal use, you may have to report the value of the personal use as additional income and pay additional taxes.
The level of control you want to have over business operations should be discussed with your lawyer. Corporations are managed by a board of directors and must make financial reports to stockholders. For very small companies, these boards may comprise of only family members. But as the business grows, nonfamily members often join the board, and outsiders may invest in the company. They may also have a say in how your business is run. For greater control, you may be better with a sole proprietorship or partnership if you and your partner agree on who makes decisions on each area of the business.
The size and nature of the business also influences the structure. Small companies that focus on limited services may be better run as sole proprietors or LLCs. Among these might be excavating contractors or roofing companies. However, large companies that require large amounts of capital, may have union employees, work on numerous projects at one time, and hire subcontractors usually benefit from a corporate structure.
There are two types of accounting methods that are used by small businesses: cash accounting and accrual accounting. The IRS has placed some restrictions on the use of the cash method, so the new contractor is advised to consult with his accountant to decide which is best for his business. While most accounting software programs use the accrual method, it is usually a simple matter for a good accountant to make the year-end adjustments needed to prepare an accurate tax return based on a cash accounting system.
The difference between the two methods is basically one of timing. When using the cash method, revenue is recognized and recorded on the company books when the money is actually received, and expenses are recognized when payment is made. However, when using the accrual method, revenues and expenses are recorded when incurred. Consider the following information:
K&K Contractors—Cash Accounting vs. Accrual Accounting
December 7, 2015: Materials are purchased on credit by K&K for Smith project: $2,500
December 10, 2015: Smith project is completed
December 12, 2015: Smith is sent an invoice for $5,000
December 31, 2015: Tax year ends for K&K Contractors
January 7, 2016: Smith pays $5,000 to K&K
January 30, 2016: $2,500 is paid by K&K to the supplier for Smith materials
The effect on the income statement of K&K Contractors varies by the accounting system used:
1. Cash accounting. Neither the $2,500 expense nor the $5,000 income is included in the 2015 income statement because the actual payment and receipt took place in 2016.
2. Accrual accounting. Both the $2,500 expense and the $5,000 income are included in the 2015 income statement even though the cash was not received until January 7 and the expense not paid until January 30.
As you can see, the accounting method used can have an effect on your taxes, both positive and negative. Both methods, however, offer legal strategies for accelerating expenses so that they occur in the current year and for deferring income into the following year. Obviously, care must be taken, and consultation and advice from your accountant is paramount.
Bankers, Lawyers, Accountants, and Insurance Agents
These specialists are crucial to a new business. However, although they may be experts in their own field, they may not really understand how your business operates. In order to profitably use their intelligence and expertise, the new business entrepreneur must work closely with these professionals; it is usually a mistake to turn a task over to one of them and think “It’s OK, the accountant is handling it.” In particular, tax and labor laws are extremely confusing and are subject to a certain amount of interpretation. Also these laws often change. The business owner must help the lawyer and accountant interpret the myriad rules and regulations as they pertain to her specific contracting business.
A good relationship with a banker can both save money and enable to company to operate more smoothly. When looking for a bank to do business with, take along your business plan, or send a copy in advance of your meeting, so that the bank can better understand your goals and objectives and how you will reach them. When a personal business banker understands the financial status of the business and the owners, he is in a good position to advise the company in a number of areas. Because many businesses borrow money from banks to purchase tools and equipment, the banker is a valuable resource for understanding interest rate trends and projections. Again, presenting a clear business plan assists in obtaining loans with the most favorable terms. The banker can also help establish a line of credit for companies that need ongoing cash to support daily operations.
The final outside professional that contractors must have on their team is the insurance agent. Insurance has become a highly complex and specialized business covering all aspects of American life. Three areas of insurance are of particular interest to contractors: 1) general business and vehicles, 2) workers’ compensation, and 3) health insurance. Rather than working with a single insurance company, it is often advantageous to work with an insurance agent who represents a number of different insurance companies. The agent can compare prices to ensure that the contractor is getting the best coverage at the best cost. Often, contracting companies will work with one agent to handle business, vehicle, and workers’ compensation and another agent for health insurance. In this age of specialization, other agents may be engaged to find life insurance or long-term health insurance coverage if these are benefits that a business owners wishes to offer his employees.
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Most contractors have inland marine insurance, which covers equipment other than vehicles. Premiums for this insurance may be based on either replacement cost, which will pay for new equipment to replace destroyed or stolen equipment, or on actual value, which is based on the current depreciated value of the equipment. Actual value insurance has much lower premiums than replacement cost insurance; however, the ultimate cost of replacing equipment is higher. Actual value insurance is usually recommended unless a contracting company generally works in unsafe neighborhoods.
No matter what your political views may be, all business owners must deal with government rules and regulations. Most contractors don’t like it but have little choice except to cope as best they can. Certainly lawyers, accountants, bankers, and insurance agents can assist in the process, but the responsibility of complying with the numerous government rules and ordinances falls squarely on the business owner’s shoulders. Even though following government guidelines can be difficult, especially when rules and regulations are constantly changing, it is important for the contractor-owner to realize that ignorance of laws is never an excuse for noncompliance. Below are some of the common obligations that businesses face. Fortunately, most of the information on such obligations can be found on the internet at www.irs.gov. The accounts and/or forms that most new businesses must use to operate legally are:
Federal government
– Employer Identification Number (EIN) (used for income tax forms, it is similar to an individual’s Social Security number)
– Federal unemployment (Form 940)
– Income tax withholding, Social Security, Medicare (Form 941)
– Employee income tax reporting (W-2)
– Employer summary of W-2s (W-3)
– Employee withholding form (W-4)
– Employee proof of citizenship (I-9)
– Dividend or similar payments (1099) (actually, at last count, there are 16 different 1099 forms)
State government
Each state has its own forms and regulations; following is a general list:
– State unemployment
– State income tax withholding
– Workers’ compensation (they call it insurance, but in reality it’s a tax)
– New hire reporting
– Sales and use tax: state, county, city, stadium
– Professional licenses (architect, surveyor, landscape architect, and engineer, to mention a few)
– Work permits for employees under the age of 18
– USDOT Number for operation of commercial vehicles; varies by state; visit the Federal Motor Carrier Safety Administration at www.fmcsa.dot.gov for more information.
Employee or Contractor?
Following are IRS questions for determining an employee or a contractor. Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Of course, as is always the case with the IRS, you can find a lot more on this very important topic at www.irs.gov.
While you may start out as a one-person show, chances are you will soon start hiring employees or start working with subcontractors. It’s important that you know the difference, as it matters to the IRS. There are a few key differences between employees and contractors. For example, you control all the jobs and provide the materials for the jobs your employees are responsible for completing. You also take out money for all taxes, Social Security, Medicare, and workers’ compensation and pay unemployment insurance. They also represent your business, receive regular payment, and can receive benefits if you offer them. Subcontractors, however, are in control of their own overall work schedule, they can work for other contractors, clients, or companies, and they provide their own tools. They set their own payment terms, use invoices and are responsible for all of their own taxes, Social Security contributions, and benefits.
The determination has implications for your tax liabilities as well as your obligations and commitment to the individual worker. It also determines whether he or she is entitled to benefits such as unemployment and industrial insurance.
Providing benefits such as health or retirement plans to employees, including owners, requires additional paperwork and reporting. This is an area where it is very important to work closely with your lawyer and accountant. The rules and regulations covering such benefits are complex and difficult to decipher. Three of the most common benefits are 1) use of a company-owned vehicle, 2) retirement plans such as 401(k), and 3) medical reimbursement plans, or health benefits. Each is governed by its own Internal Revenue Service rulings. Business owners should be aware of each ruling, how it may affect taxable income, and what type of record keeping is required.
An employee may use a company vehicle for personal use, including daily commuting; however, the value of the personal use is included as taxable income for the employee. An employee who uses a company vehicle must keep records that substantiate the portion spent for business use, for which mileage is deductible, and the portion spent for personal use, which is not deductible.
Optional retirement plans have become much easier to administer in recent years. Typically, an employee elects to have a portion of his pay deducted and invested in a mutual fund or other investment. The company can match the employee’s contribution up to a limit set by the IRS.
As of 2015, the employee’s contribution limit is $18,000 per year, or an additional catch-up contribution of $6,000 for employees age 50 and over at the end of the calendar year. The combined contribution for employee and employer as of 2015 is $53,000, or $59,000 for those using the catch-up plan.
There are other limits on 401(k) plans for highly compensated employees earning over $120,000 (as of 2015). These should be discussed with your plan administrator.
You can find a guide to 401(k) plans at money.cnn.com/retirement/ as well as at the Department of Labor, which has 401(k) information for your business at www.dol.gov/ebsa/publications/401kplans.html. You might also visit http://401khelpcenter.com for more information.
Depending on the type of retirement plan, the amount contributed may be deducted from the employee’s taxable income; the company’s contribution is generally tax free. Most startup companies are not typically in a position to match such contributions. Also, since you may be working with a lot of subcontractors, you may not have a lot of regular employees, at least not for a while.
Health Plans Can Offer Tremendous Benefits
The most recent health care laws require you to provide certain information about the health care options to your employees whether or not you offer health care. According to the Affordable Care Act, if you offer health insurance to your employees you must offer it within the first 90 days of the first day of employment.
Knowing the health care law is very important for a small business owner especially if you want to offer such health insurance. In a competitive marketplace, you will be able to attract and hire more skilled professionals if you can offer health insurance options.
While you can store a wealth of data on computers and online “cloud” services, it’s still important to have a paper trail to back up the computer data. According to the IRS, a business must retain records for “as long as they may be needed for the administration of any provision of the Internal Revenue Code.” Fortunately the IRS does give some guidance on this issue on its website; as long as the business does not file fraudulent reports, most records can be discarded after seven years.
Small Business Tax Credits
If you have fewer than 25 employees, with an average wage of less than $50,000 per person, you might be eligible for a tax credit if you provide heath insurance to your employees. Check this out at www.irs.gov or put “Small Business Tax Credits” in your online search engine and research the results.
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Proof of payment of an amount, by itself, does not establish that you are entitled to a tax deduction. You should also keep other documents, such as credit card slips, invoices, and employee time cards to show that you also incurred the cost.
State governments have their own sets of record-keeping guidelines. For example, the Wisconsin Department of Revenue Sales Tax Division routinely audits businesses to ensure that they are collecting and remitting the proper amount of tax. Its audit usually covers four years; however, it can request records for earlier years if it finds fraudulent activity during the initial audit period.
Record keeping is also useful to a business for its own internal uses. As mentioned earlier, keeping records related to employee benefits is of utmost importance. These items are often red flags for government auditors; a well-organized set of records documenting and justifying benefits will usually save a company time and money in the event of an audit.
Employee performance records are also important because segments of the contracting industry have fairly high employee turnover and relatively high rates for unemployment compensation. An employee who is fired or laid off is usually eligible to receive unemployment benefits, but if an employee is fired because of violations of company policy, he may be ineligible for benefits. However, in order for denial of benefits, the employer must keep a written record of the violations of company policy. These may include unexcused absences, repeated tardiness, or failure to follow safety procedures. Chapter 9 covers the importance of an employee handbook that sets out company policy.
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Good news on the audit front! The IRS, like so many businesses, is also having budget woes, and as a result in 2014 large corporations as well as small businesses saw significantly fewer audits.
The best approach to record keeping is to be prepared for the audit that may never come. The actual chances of being audited by the IRS are slim. However, it is better to be safe than sorry because audits are very time-consuming and can be expensive. Most businesses can, however, expect an annual audit by their workers’ compensation insurance carrier. This compulsory insurance protects employees against loss of income and supplies medical payments if they are hurt on the job. Because the premiums are based on total payroll, the insurance companies perform an audit every year. Be sure to correctly record employee overtime costs; a portion is exempt from workers’ compensation. Therefore, a business owner must keep records of payroll for each job classification in the organization. Failure to keep accurate records can result in overpayment of premiums.
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Know the ins and outs of your state! Some states exempt very small employers from carrying workers’ compensation; other states exempt owners who hold more than 25 percent of the stock of the company. Other states cap the amount of income of owners that is taxed. Learn the regulations in your state, and save yourself some money.
The business structure you select will have an important impact on the amount of taxes you pay, the amount of personal risk you assume, and the level of control you have over your business. Careful consideration, in consultation with your lawyer and accountant, must be made prior to choosing a legal structure.
The “government” may seem like a huge monster lurking in the shadows waiting to pounce on the unsuspecting business owner. However, with careful organization and proper accounting, it is relatively easy to satisfy the tax requirements of both state and federal governments. Ignorance of the law is no excuse for violating the rules.
It is important to understand the difference between an employee and a subcontractor for several reasons, especially when it comes to the IRS.
Even if you are not providing health insurance, the new health laws require that you provide such information to your employees. Providing decent health care benefits can give you a leg up on your competition when hiring top candidates.
Maintaining good records is critical to all business enterprises. It is far better to be prepared for the government or insurance audit that may never come.
