Tax Issues for Businesses

Answering the knock on the office door, you see an officious man in a dark suit. The authoritative-looking badge on the lapel says "IRS" in bold letters. Your heart sinks. Your knees shake. You're hoping the bookkeeper hasn't gone for lunch. Then, thank goodness, you wake up. Sound familiar?

Fortunately, this isn't an inevitable nightmare for a business owner. No one wants to pay more taxes than is absolutely legally necessary, but no one wants to live this nightmare, either. You, too, can sleep soundly if you keep good records and follow professional advice when it comes to business taxes.

Recently, at a seminar conducted by the Small Business Development Center of Florida Gulf Coast University, Sue Ann Goby outlined tax basics for business owners. Goby is an enrolled agent, approved by the U.S. Department of Treasury to represent any taxpayer before the Internal Revenue Service. Goby is a tax consultant for small businesses.

First and foremost, it is the legal form of the business that determines how a business will be taxed. Sole proprietorships, partnerships and corporations are treated in different ways in matters of taxation (For a more complete discussion of the most common types of legal entities, refer to last month's issue of this magazine). Regardless of the differences, though, several tax issues are common to all forms of business.

Payroll

Many business owners may think that having the bookkeeper do payroll for the organization makes perfect sense. After all, the bookkeeper handles the other records and finances, and is already an employee. Why take on the added expense of having an outside company handle this chore?

Inadvertent mistakes on payroll can be devastating to a business. This is reason enough, said Goby, to have an outside firm handle the payroll. "Find someone else to do your payroll," she advised. "I've seen too many businesses go under because they didn't pay enough attention to payroll and payroll taxes. There are several payroll firms to choose from and they are quite reasonable. It's definitely worth it."

From each employee's paycheck, the federal government requires Social Security, Medicare, federal withholding and unemployment be paid. Also, the state of Florida requires unemployment to be withheld.

Additionally, the employer is then responsible for paying taxes, which usually total approximately 10 percent over the basic payroll. Social Security is 6.2 percent of the first $68,400 per employee. Medicare is 1.45 percent of all wages. FUTA and SUTA must also be paid.

"A common misconception of business owners who are incorporated is that they do not receive W-2 wages," said Goby. In fact, the owner of a corporation is an employee if they work in the business. This means they are subject to the same payroll taxes as other employees of the corporation.

Hiring someone as a consultant or freelancer may seem a convenient way of avoiding the issue of payroll taxes altogether. Take care in this approach. All too often, the IRS may determine that the person is not a consultant or freelancer at all, but an actual employee. The employer then needs to remit the unpaid payroll taxes plus a painful 100 percent penalty for the mistake.

If that isn't chilling enough, Goby warns that if a business is delinquent on payroll taxes, the problem will not go away. "Even if the business folds," she warned, "those payroll taxes will follow you to your grave."

Automobile Expense

Deductions for auto expenses may be a sizable amount for owners of small businesses. "Protect this deduction by keeping adequate records," advised Goby.

Mileage for the commute to and from work is not deductible. This also means that the mileage from one's home to the first business stop is not deductible, nor the mileage from the last business stop to home.

There are two methods for calculating auto expense. The first option is to compute the actual cost of operating the vehicle, plus depreciation. The second option is simpler; deduct 32.5 cents per mile for actual business miles. According to Goby, either option ends up being about the same.

The most important thing about auto expense, though, is keeping a record of the miles driven for business. The process of documenting a mileage log is tedious and incessant. However, it is absolutely necessary. Goby suggests using an item for this that most professionals already will have in hand -- the day planner. "Most of us already carry the calendar around anyway," she said. "Simplify things by jotting down the mileage next to the appointment. Then keep the calendar as a record for taxes."

Other Taxes

When it comes to depreciation on property, it isn't always necessary to depreciate items in the traditional time period of five to seven years. Instead, the business may choose to handle property as an expense, rather than a capital expenditure in some cases. For the 1998 tax year, up to $18,500 may be deducted for qualifying property for the first year it the property is placed in service. "This is really good for items like computers," mentioned Goby. "This kind of property doesn't have a life span of five to seven years."

All forms of business must pay the Florida Intangible Tax. For every $1000 worth of stocks, bonds, notes and receivables, the business is taxed $2.

Likewise, the Florida Intangible Personal Property Tax applies to all forms of business. Personal property used in the business is assessed at cost, less depreciation. Licensed vehicles are exempt. The rate of this tax is determined by local millage.

Avoid Insomnia

The best way to avoid tax problems -- and to avoid paying too much at tax time -- is to find a good tax advisor and keep complete records. "If you're dealing with the IRS and you have a liability, it won't go away," said Goby. Having sound counsel from a tax professional before a problem may occur is preferable to calling someone into a panic situation. Better to avoid problems in the first place. Then you can sleep at night.

Independent Contractor or Employee?

The IRS has specific guidelines that determine whether a worker is classified as an independent contractor or as an employee. The tax implications are significant. A complete determination form (Form SS-8) is available from the IRS office or downloadable from the IRS web site, www.irs.ustreas.gov.

Here are a few of the questions contained on Form SS-8:

** Does the worker receive training from the firm?

** Is the worker given instructions in the way the work is to be done?

** Is the worker required to follow a routine or schedule established by the firm?

** Does the worker furnish a time record to the firm?

** At what location are services performed?

** How is the worker paid?

** Does the worker perform similar services for others?

For several years,