While tax planning for your business is a constant process that changes with time and growth of the company, these are certain recommendations that will likely remain significant and helpful throughout the development of your enterprise:
1. Keep complete and accurate records.
Keeping proper records all year will help ensure your company’s taxes are accurately filed. Make sure to keep your receipts and accounts complete and accurate, particularly if you intend to claim an expense as a tax deduction. Additionally, keeping several hard copies, and backing up electronic records are necessary to ensure there are no gaps in the record throughout the year, and that you can wholly substantiate your expenses. As such, with the possibility of any business being audited, it is important to have complete records, to be able to prove the business is allowed certain deductions.
2. Clearly understand who is an employee, and who is an independent contractor, and properly classify them as such.
For federal employment tax purposes, the usual common law rules are applicable to determine whether a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker, and the business. You should consider all evidence of the degree of control, and independence in this relationship. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Relationship of the Parties.
Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.
Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker's job. This includes:
The extent to which the worker has unreimbursed business expenses;
The extent of the worker's investment in the facilities or tools used in performing services;
The extent to which the worker makes his or her services available to the relevant market;
How the business pays the worker; and
The extent to which the worker can realize a profit or incur a loss.
Relationship of the Parties covers facts that show the type of relationship the parties have. This includes:
Written contracts describing the relationship parties intended;
Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay;
The permanency of the relationship; and
The extent to which services performed by the worker are a key aspect of the regular business of the company.
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. However, if you have reasonable basis for not treating an independent contractor as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker.
3. Determine whether offering “fringe benefits” such as health, vision, and child care assistance may help you save money.
Generally, if an employer pays the cost of a health insurance plan for his/her employees, including an employee’s spouse and dependents, the employer’s payments are not wages and are not subject to Social Security, Medicare, FUTA taxes, or federal income tax withholding. Generally, this exclusion also applies to qualified long-term care insurance contracts. However, the cost of health insurance benefits must be included in the wages of S corporation employees who own more than two percent of the S corporation (two percent shareholders).
The Department of Labor's Health Benefits Under the Consolidated Omnibus Budget Reconciliation ACT (COBRA) provides information on the rights and protections that are afforded to workers under COBRA. Certain individuals who are eligible for COBRA continuation health coverage, or similar coverage under state law, may receive a subsidy for 65 percent of the premium. Employers may recover the subsidy provided to assistance-eligible individuals by taking the subsidy amount as a credit on its quarterly employment tax return. For more information see:
Help Employers Claim COBRA Medical Coverage Credit on Payroll Tax Form;
COBRA Health Insurance Continuation Premium Subsidy;
COBRA: Answers for Employers
4. Keep business and personal expenses separate. Make sure to maintain separate checking accounts, and credit cards for your business and personal expenses.
5. Look at the Small Business Jobs Act, signed into law in 2010. The law has nearly 20 initiatives aimed at decreasing the tax burden and providing savings for small businesses.
Keep in mind these tax tips are limited, and very general in scope; every business is unique and requires specialized analysis for efficient tax planning.