Posted on December 10, 2010May 31, 2016 by Jan Roberg

Last Minute Tax Tip: Hire Your Kids

Reduce your taxes, hire your kids to work for you!

Do you own your own small business as a sole proprietorship? Do you have kids? If so, did you know that you can pay your kids to work in your business and they won’t be subject to social security and Medicare taxes? Now if you pay them more than their standard deduction, they could be subject to income tax withholding but even so, not having to pay the employment tax is a big savings. You also don’t have to pay Federal Unemployment taxes either.

Why is this good to know? Well if you pay your kids wages from your business, it’s a business deduction and that’s money you’re keeping in the family and not paying self employment taxes on. It’s important to keep the wages commensurate with work that the kids actually perform. The IRS isn’t going to buy the idea that your 4 year old is earning $50,000 a year doing statistical analysis for your company. But what can your kids actually do?

My first job was handling all of the scut work that the secretaries in the office wouldn’t do. I cleaned the white board in the meeting room, made the coffee, made photocopies and ran errands. I was happy because I was getting paid, the secretaries were happy because they didn’t have to do those jobs any more, and the boss was happy because his staff was happy. I was 15 at the time, but frankly a much younger kid could have handled that job.

My son’s in college now, but he used to be my IT guy. For the cost of a Chucky Cheese pizza and some tokens, he’d take care of any computer problems I had. After he left for school, I had to hire a professional to help me. The freelance IT person I hire costs me $99 per hour. I had no idea how valuable my son was as an employee until he went away. I had never paid him a wage. (Granted, I’m paying through the nose for tuition but that’s another story.) What I should have done was pay him a wage and let him buy his own pizza. That would have reduced my self-employment taxes.

So what about your kids, do they help you with your business? Can they? Would they? If the answer is yes, then you might want to consider putting them on the payroll.

Who’s allowed to do this? There are only two categories of businesses where you can put your children on the payroll without paying employment taxes. One is sole proprietors; that’s businesses that file a schedule C with their 1040 tax return. The other is partnerships where both of the partners are the parents of the children working. If there is even one partner who is not a parent of the child, then you must pay the payroll taxes. Also, if you own a corporation of any kind, you must pay employment taxes on your child’s wages.

With the year end fast approaching, and winter break heading this way, now might be a perfect time to test the waters for hiring your kids. The money you pay them now will reduce your taxable income for 2010.

Posted on November 15, 2010January 13, 2017 by Jan Roberg

How to Get an EIN Number for your Business for Free

You can get an Employer Identification Number for your small business for free at the IRS website.

If your business needs an EIN (that’s an employer identification number), it takes about 5 minutes on the IRS website and you can get one for free. I mention this because I found a company online that will do it for you for $75. For an extra $75, they’ll put a rush on it. So you can pay $150 for the rush job, or you can do it yourself for free in less time than it takes to fill out their online payment agreement.

The first step is to go to the IRS website. This link will take you right to the EIN page.

IRS EIN link

This page has links to a lot of information so it’s pretty useful. It also has the link to go to the EIN application. The online application has limited working hours, you’re not going to be able to file the application at 3 in the morning. They’re basically open from 6 am until a little after midnight Monday through Friday with limited weekend service.

Before you actually apply for an EIN, think–do you really need one? If you’re a corporation or a partnership, the answer is yes. If you are an LLC, that means you are a limited liability company-that does not make you a corporation, so just because you are an LLC doesn’t mean you need to have an EIN. Other reasons for needing an EIN include if you have employees, need to pay excise taxes, are a non-profit organization, trust or estate.

You might not need an EIN per IRS standards, but it may be beneficial to your business anyway. For example: if you work as an independent contractor and do not want to give your social security number out or you are setting up a bank account in your business name. Some vendors won’t give you business discount rates unless you have an EIN number, and I had one client who needed one because a vendor wouldn’t work with her at all because she didn’t have an EIN and she really needed the account.

Generally,iIf you are working as a contract laborer and filing your return as a sole proprietor, it’s most likely that you do not need to have an EIN number.

Applying for the actual EIN: I recommend using the online application. The application is presented in an interview style format. It asks questions, you answer them and when you get to the end. voila’ you have an EIN number. It sort of has a dummy proof mode too that let’s you tab back if you’ve answered a question incorrectly. I recommend having access to a printer when you do it so that you can print out your new EIN when you’re done. You don’t want to lose that number once you’ve got it.

Before you do the online application, you might want to check out the written application form so that you have all of your information handy before you apply: http://www.irs.gov/pub/irs-pdf/fss4.pdf

To go straight to the online application, click this link:

https://sa2.www4.irs.gov/modiein/individual/system-unavailable.jsp

On little glicth, for some reason, if you need an EIN because you receive home health care services, you can’t apply for your EIN online, you have to use another application method. I suggest calling on the toll free number: 1 (800) 829-4933. That’s the toll free number for the tax and business specialty hot line. You will have to wait on hold for awhile, but it’s still faster than using the mail.

Posted on November 8, 2010December 17, 2016 by Jan Roberg

Small Business Basics

Deduct all of your legitimate business expenses

I’ve done a lot of posts about unusual small business deductions, but I haven’t done anything about the basics. If you’re new to the small business world, that’s what you really need to know. These are some of the basic, core facts that you need to know to prepare your small business taxes.

First, if you’re just starting out, and you haven’t filed any papers like articles of incorporation, and you don’t have any partners, then you’re considered to be a sole proprietor. Your business tax return goes on a form called a Schedule C, and that’s part of your regular 1040 form. Don’t file your personal taxes and then try to file your business return later, they’re one and the same thing.

What if I’m an LLC? An LLC is a limited liability company, it’s not a corporation. Most LLC’s will file as sole proprietors unless they have filed documents to be taxed as an S or C corporation. (Then they file corporated tax form 1120S or 1120.) LLCs that have partners will file partnership returns, form 1065. This post is about sole proprietors who file Schedule C with their 1040 return.

A popular question I hear is, “How much money do I have to make to file a return?” According to the IRS, if you make over $400 of self employment income, you are required to file a federal tax return. This is very different from the minimum filing requirements of regular returns. Once you’ve made over $400, that income is subject to self employment tax and the IRS is very keen on collecting your self employment tax.

Another common question is, “How will the IRS know that I’ve made over $400?” The easiest way for the IRS to find out your income, assuming that you haven’t reported it yourself, is from forms 1099MISC. Many companies hire people as contract labor and don’t withhold payroll taxes. If you make over $600 from them, they are required by law to give you a form 1099MISC, showing how much they paid you. A copy of that form also goes to the IRS. That’s the most common way small businesses can get in trouble for underreporting their income.

Another way the IRS can find out that you’re not reporting your income is through your bank records. Let’s say for example that all of your business transactions are for cash and you never receive a 1099MISC. Although you wouldn’t get caught as quickly, let’s say you had an annual income of $20,000 from your all cash business. Your spending would be out of line with your income and could trigger an audit. A quick look at your bank statements would prove you weren’t reporting your income. If you’re serious about starting a real business, do it right and have a plan for handling your taxes. It will save you a lot of trouble in the future.

Small business income, unlike wage income, has one big disadvantage–it get’s taxed twice. First, it’s taxed at your normal tax rate and then again at the self employment tax rate (15.3%.) Let’s say you’re already in the 25% tax bracket for another job you have, your self employment income would then be taxed at 40% (the 25% plus the 15%.)

Small business income also has one big advantage–you can reduce your self employment income by any expenses you had acquiring that income. You may even have more business expenses than you have income, in that case, you can use your business losses to reduce your regular income, that lowers your overall income tax bill. Now you don’t want your business to be losing money every year (that’s not really good business practice.) But when you’re starting up, being able to deduct your losses is very helpful.

So what kinds of expenses can you deduct? The key phrase that the IRS uses is anything that is “regular and necessary” for the business. A good guideline is right on the Schedule C form. Here’s a link to it right here: Schedule C. Advertising, legal and professional fees, auto expenses, insurance, rent, repairs and maintenance, supplies, and office expenses. Meals and entertainment are deducted at 50% of what you spend (since the idea is that you’d have to eat anyway.)

If this is your first time filing taxes for your small business. I recommend getting a professional to help you. Even if you have a knack for the paperwork, it really helps to have someone else go over the possibilities of what you can deduct and make sure that the big things like depreciation (if you have that) are handled correctly. If you get started on the right track, it’s easier to stay that way.