How to Deal with Employment Taxes

The employer MUST obtain an Federal EIN if they are going to have employees (See how to obtain an EIN).

Federal Income Tax, Social Security and Medicare Taxes

You generally must withhold federal income tax from your employees’ wages. You withhold part of Social Security and Medicare taxes from your employees’ wages and you pay a matching amount yourself. To figure how much to withhold from each wage payment, use the employee’s Form W-4 and the methods described in Publication 15, Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide (PDF).

The Internal Revenue Service recently released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011.

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011, but not later than Jan. 31, 2011.

Notice 1036 (PDF) contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employers Tax Guide (PDF), contains the percentage method tables and the wage bracket tables that some employers use.

Federal Unemployment (FUTA) Tax

You report and pay FUTA tax separately from Federal Income tax, and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. Refer to Publication 15, Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide (PDF) for more information on FUTA tax.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

Depositing Employment Taxes

The IRS has issued proposed regulations that provide that beginning January 1, 2011, taxpayers must deposit all depository taxes (such as employment tax, excise tax, and corporate income tax) electronically using the Electronic Federal Tax Payment System (EFTPS).

Under these proposed regulations, which are expected to be finalized by December 31, 2010, Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after December 31, 2010.

Reporting Employment Taxes

In general, employers are responsible to report federal Income Taxes, Social Security, and Medicare taxes on Form 941, Employer’s Quarterly Federal Tax Return (PDF) and Instructions (PDF), or Form 943, Employer’s Annual Federal Tax Return for Agriculture Employees (PDF) and Instructions (PDF) (For use by farm employers).

Note: Employers who have an employment tax liability of $1,000 or less for the year may file Form 944, Employer’s Annual Federal Tax Return (PDF) and Instructions (PDF), instead of Form 941, Employer’s Quarterly Federal Tax Return.

Report FUTA taxes on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF) and Instructions (PDF).

e-file for Business and Self-Employed Taxpayers

Whether you’re a business, big or small, or are self-employed you’ll find an e-file for business filing option that meets your needs. Use IRS e-file for Employment Tax Returns, Information Returns, Partnerships, Corporations, Estates & Trusts, plus Exempt Organizations.

Preparing and Filing Form W-2

At the end of the year, the employer must complete Form W-2, Wage and Tax Statement (PDF) to report wages, tips and other compensation paid to an employee. A copy of this form must be given to the employee by January 31st after the end of the year. You must also send a copy of the W-2 to the Social Security Administration (SSA). Employers can prepare and file up to 20 W-2s at a time at the Social Security Administration’s Web site. Using SSA’s online W-2 filing, employers can also print out all the necessary copies of the W-2 for their employees, state taxing agencies, etc.

Correcting/Adjusting Employment Taxes

If correcting employment tax errors on previously filed employment tax returns is required, refer to Correcting Employment Taxes.

Outsourcing Payroll Duties

It is much easier to outsource the payroll and the responsibilities.  The payroll company will not only perform the regular payroll functions but will also file and pay the taxes.  This allows the owner to focus on their business and not on tax issues.

Other Payroll Taxes

Most states require the employer to pay State Unemployment Taxes on the payroll (SUTA) and Workers’ Compensation.  These are a percent of the payroll.  Those states that have income tax, local taxes and school district tax will require the employer to withhold those from their employees pay check.  This can become complicated and I always advise clients to outsource these tasks to experts.

Employee or contractor?

20 Factor IRS Test

The IRS uses a 20-factor test to determine whether a person is an employee. In connection with this test, the IRS has stated the following:

. . . 20 factors have been identified that indicate whether sufficient control is present to establish an employer-employee relationship. The degree of importance of each factor varies depending upon the occupation and the context in which the services are performed. It does not matter that the employer allows the employee freedom of action, so long as the employer has the right to control both the method and the result of the services . . . (Business Reporting, I.R.S. Publication 937).

The 20 common law factors are:

1. Instructions: An employee must comply with instructions about when, where, and how to work. Even if no instructions are actually given, the control factor is present if the employer has the right to give instructions. Independent contractors direct themselves as to when, where and how to do their work.
2. Training: An employee is trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.
3. Integration: An employee’s services are integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control.
4. Services rendered personally: An employee renders services personally. This shows that the employer is interested in the methods as well as the results. Independent contractors are generally free to hire assistants or to sub-contract their work, since they are directing their own operations and making their own decisions about how to get the job done.
5. Hiring, supervising and paying assistants: An employee works for an employer who hires, supervises, and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.
6. Continuing relationship: An employee has a continuing relationship with an employer. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals. An independent contractor ordinarily is hired to do a particular job and then moves on to do work elsewhere for another organization.
7. Set hours of work: An employee has set hours of work established by an employer. An independent contractor is the master of his or her own time.
8. Full-time work: An employee normally works full-time for an employer. An independent contractor can work when and for whom he or she chooses.
9. Work done on employer’s premises: An employee works on the premises of an employer, or works on a route or at a location designated by an employer. An independent contractor ordinarily sets his/her own place of work.
10. Order or sequence set: An individual who must perform services in the order or sequence set by an employer looks like an employee, subject to direction and control.
11. Oral or written reports: A person who regularly submits reports to a supervisor looks like an employee, who must account to the employer for his or her actions.
12. Payments: An employee is paid by the hour, week, or month. An independent contractor is paid by the job or on a straight commission.
13. Expenses: An employee’s business expenses are customarily paid by an employer. This shows that the employee is subject to regulation and control. An independent contractor ordinarily pays for his/her own business expenses.
14. Tools and materials: An employee is furnished significant tools, materials, and other equipment by an employer (examples in a church: computer, books, music, uniforms).
15. Investment: An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.
16. Profit or loss: An independent contractor can make a financial profit or suffer a financial loss, whereas an employee ordinarily does not suffer any financial losses associated with his/her work.
17. Works for more than one person or firm: An independent contractor offers and ordinarily gives his or her services to two or more unrelated persons or firms at the same time (example: an outside snow removal or lawn service used by a church would do the same work for a number of clients and would be considered an independent contractor; a facilities maintenance person who does full time work for the church that includes snow removal and lawn service and does not have a snow removal/lawn service business for other clients probably would be considered an employee, absent other unique circumstances).
18. Offers services to general public: An independent contractor makes his or her services available to the general public.
19. Right to Fire: An employer can fire an employee. An independent contractor typically cannot be terminated so long as he or she produces a result that meets the specifications of the contract for the services.
20. Right to quit: An employee can quit his or her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make good for failure to complete it.

Primary factors:

1. Does the person have the right to require compliance with significant instructions?
2. Does the person have the right to set the hours of work?
3. Does the person have the right to set the order or sequence of services to be performed?
4. Does the person have the right to discharge the person?
5. Does the person have the right to hire, pay, and supervise assistants as the nature of the work requires?
6. Does the person have no ability to realize a profit or loss?
7. Does the person have no investment in significant tools, materials, and other equipment when such items are necessary to accomplish the task and are customarily provided by the person?
8. Does the person have no significant investment in facilities when they are necessary to accomplish the task and they are customarily provided?

How to write a marketing plan

In general the Marketing Plan includes:

• Market Analysis
• Market Definition
• Customer Profile
• Competition
• Risk
• Sales Strategy
• Capital Requirements

The Marketing Plan is the most important part of the business plan as it identifies if there is a need and if the entrepreneur wants to continue the business plan. It describes how a company will react and manage market conditions to generate sales.

Its detail is:

• Who are the customers
• What are the demographics and psychographics
• Prepare profiles of the potential customer
• Learn the lifestyle and priorities
• What is the industry like
• Market shares

• Sales and distribution
• Pricing strategy
• Advertising and promotion
• Location

• To understand the total market
• Talk to customers, competitors, suppliers
• Put yourself in the customers shoes

• Sales volume
• Customer satisfaction
• Expansion of potential markets

How to write a Business Plan

The new entrepreneur is more educated in all areas of business than ever before.  The student understands marketing, finances, opportunities, timing and how to implement.  Success today involves:

• Motivation
• Education
• Innovation
• Implementation

The new entrepreneur has exchanged GUTS for BRAINS

The collection of the ideas is materialized in the form of a Business Plan.  The business plan takes the abstract and converts it to the concrete.  It gives the developer a structure to understand the business, the industry, the market places, the opportunities, the threats, the barriers and the viability and sustainability, if any, of the proposed venture,

A business plan must be a living document that the entrepreneur develops, and develops, and develops.  Since the market place is so dynamic, the business plan and the strategy developed must be constantly revisited to adjust for the paradigm changes.  Without a business plan the entrepreneur has no concrete direction and increases his/her chances of being blind sided by its competitors.

A business plan allows the user to anticipate problems, instead of  spending time solving problems.  It allows the user to be proactive instead of being reactive to changes. Lenders and venture capitalists require the submission of a business plan for the opportunity to obtain financing. It has been found that most businesses that fail do not have a business plan. It has also been found that over 93% of businesses that are still in existence after 10 years have a detailed up to date business plan. The message in this is clear. If you want to increase the chances of success in your business venture, it is essential that you have a well prepared business plan.

Benefits:

• It will identify needs and wants of clients and the market place
• Shows demand for your services
• Aids in the design of the services that fulfill clients needs
• Outlines measures for generating cash and helps to project profits/cash
• Identifies competitors and analyzes the firm’s competitive advantage
• Identifies your strengths and your weaknesses
• Outline of a Business Plan
• Executive Summary
• Company Summary
• Services
• Market Analysis
• Strategy Summary
• Management Summary
• Financial Plan

• Is there a NEED?
• Understanding the Opportunity
• What is the Profit Potential and InvestmentCapital
• Time
• Risk

• Competitors
• Changing Client Preferences
• Personnel Turnover

4. Why Go Into Business? No sense unless you can stay there:

• Safely
• Service the client
• Prosper

5. Change Will Occur

• Can you market the new Service?
• Is the Service affordable to the Client
• Is their a CLEARLY VISIBLE Benefit to your Service

6. Users of a Business Plan

• Used by the Person
• Used by the Lenders
• Used by the Clients
• Used by the Employees

7. Business Plan Objectives

• Must Look at the Market
  • Present and Future
• Must Look at the Investment
• The Plan Must be Market Driven
• Potential for Profit, Sales Growth and Expansion
• Plan must demonstrate USER BENEFIT

• List CEO and key management by name
• Include previous accomplishments to show these are people with a record of success
• Summarize number of years of experience in this field

11. Resource Requirements

• Technology Requirements
• Personnel Requirements
• Resource Requirements
  • financial, distribution, promotion, etc.
• External Requirements
  • products/services/technology required to be purchased outside company

12. Risks & Rewards

• Risks
  • Summarize risks of proposed project
• Addressing Risk
  • Summarize how risks will be addressed
• Rewards
  • Estimate expected pay-off, particularly if seeking funding

13. Key Issues

• Near Term
  • Isolate key decisions and issues that need immediate or near-term resolution
• Long Term
  • Isolate issues needing long-term resolution
• State consequences of decision postponement
• If you are seeking funding, state specifics

14. Goals & Objectives

• 5-Year Goals
  • State specific measurable objectives
  • State Market share objectives
  • State revenue/profitability objectives

Marketing Plan

15. Market Driven Required

• Show the clear positive responses from clients
• Plan must project the market reaction
• Make it Happen

16. Market Analysis

• Is there a need for me in the Market Place?
• Why will people come to me for my service?
• What is my Competitive Advantage?
• Look outward

17. Industry Analysis

• SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis
  • Strengths and Weakness of the Company
  • Opportunities and Threats in the market Place
  • Strategic Alliances

18. Market Analysis

• Who are the Clients?
• What are the demographics and psychographics
• Prepare profiles of the potential Client
• Learn the lifestyle and priorities
• Who is servicing your potential Client?

19. Marketing Strategy

• Pricing
• Promotion
• Timetable for implementation

20. Market Summary

• Market Past, Present, & Future
• Review those changes in market share, leadership, players, market shifts, costs, pricing, or competition that provide the opportunity for your company’s success.

21. Competition

• Summarize competition
• Outline your company’s Sustainable Competitive Advantage

22. Opportunities

• Challenges & Opportunities
  • State client problems, and define the nature of the service opportunities create by those problems

Financial Plan

• To Determine if your Business is viable
• To Determine what capital you need
• To forecast the financial operation of the Business

24. Financial Statements

• Income Statement
• Balance Statement
• Break Even Analysis
• Statement of Cash Flow
• Ratio Analysis
• Working Capital Needs
• Financing Needs

25. Assess the Owners/Investors Needs

• Return on Investment
• Cash Flow
• Provide financial forecasts with:
  • Expected
  • Pessimistic
  • Optimistic Results
• Cashing Out

26. Long Term Affect

• Integrity
• Ethics
• Honesty
• Testimonials

[1] http://www.exton.com/bic/plan.html

[2] http://www.sba.gov/gopher/Business-Development/Business-Initiatives-Education

How to apply for an Employer Identification Number (EIN)

Apply By EIN Toll-Free Telephone Service

Taxpayers can obtain an EIN immediately by calling the Business & Specialty Tax Line at (800) 829-4933. The hours of operation are 7:00 a.m. – 10:00 p.m. local time, Monday through Friday. An assistor takes the information, assigns the EIN, and provides the number to an authorized individual over the telephone. Note: International applicants must call (267) 941-1099 (Not a toll-free number).

Apply By FAX

Taxpayers can FAX the completed Form SS-4 (PDF) application to their state FAX number (see Where to File – Business Forms and Filing Addresses), after ensuring that the Form SS-4 contains all of the required information. If it is determined that the entity needs a new EIN, one will be assigned using the appropriate procedures for the entity type. If the taxpayer’s fax number is provided, a fax will be sent back with the EIN within four (4) business days.

Apply By Mail

The processing timeframe for an EIN application received by mail is four weeks. Ensure that the Form SS-4 (PDF) contains all of the required information. If it is determined that the entity needs a new EIN, one will be assigned using the appropriate procedures for the entity type and mailed to the taxpayer. Find out where to mail Form SS-4 on the “Where to File Your Taxes” (for Form SS-4) page.

An EIN is the business 9-digit tax identification number.  It is important that businesses apply for one with the IRS to establish themselves as a business.  There is not a cost and it is easy.

How to Become an “S” Corporation

First the organization must register with the Department of Revenue of the Secretary of the State or other agency identified within their state to file their Articles of Incorporation. Once they file these documents and receive verification back from the state, the business then files the IRS Form 2553 to elect the S Corporation status.

S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

To qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders
  • including individuals, certain trust, and estates and
  • may not include partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have one class of stock
• Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.

How to decide if running a Small Business is right for me!

Questions to answer before you do it:

1. Do I have the right kind of business experience?
2. Can I take responsibility?
3. How much time do I have to spend in the business?
4. Can I afford the risk?
5. How much capital will I need?
6. Where will I get the capital?
7. What are my personal financial needs?
8. Do I have the support of my immediate family?
9. Am I capable of marketing/selling my product/service?
10. Do I know who my competition is?
11. Do I understand the market place?
12. Do I understand the investment required?  (Fixed and Variable)
13. What are my CASH needs?
14. Do I understand the time commitment required?
15. Who are my suppliers?
16. What are the barriers to enter the market place?
17. Will I have partners?
18. What will the partners bring to the relationship?
19. What happens if the partners do not get along?
20. What happens if a partner dies or wants out?
21. What is the profit potential?
22. What is the future opportunity for growth?
23. What are my insurance needs?
24. What are my tax obligations?
25. What are the social issues?
26. What are the environmental issues?
27. What are the economic issues?
28. Where will I find my customers?
29. Why will people buy from me?
30. How will I survive when competition occurs?
31. How will I protect/maintain my sales when competition occurs?
32. Who are the customers?
33. What benefits do I provide the potential customers?
34. Where will I locate?
35. How will I meet with clients?