Although it seems early, January is the start of tax season… Now’s the time to begin conversations with accountants about last year’s business activities and plans for the current year. It’s time to pull together documentation to support deductions and gather 1099s. Most of the work here is done with your accountant and CPA. From a legal standpoint, however, there are a few key areas of interest on the tax front:
– Independent Contractor Classification. A key area for both state and federal audits is the misclassification of employees as contractors. Washington State has a 7 part test that is a strict guideline as to the requirements necessary for a contractor to be so classified. Companies hiring contractors on an ongoing or regular basis should be sure the contractors meet these requirements and include a warranty by the contractor that it complies with the requirements. Interestingly, the federal requirements are more vague and may not find the same conclusion with respect to the classification of a contractor. The IRS has instituted a safe harbor period where a company that has misclassified contractors can avoid penalties. However, a recent change allows for the federal and state taxing authorities to communicate with one another. This means that if you are found to have misclassified contractors at the state level, chances are you’ll also hear from the IRS on the matter – and vice versa.
– Compensation to Owners. Another area of federal audit risk relates to the wages paid to owners of a company. Be sure that the amounts paid to you as an owner are reasonable wages for the industry and that you are properly withholding taxes or paying estimated taxes so as not to end up with penalties for late or non-payment of appropriate payroll taxes. To formalize the decision, a business should formally adopt compensation policies for its owners through a Board of Directors or Member resolution.
– Corporate Records and the Corporate Veil. Ensuring the company is treated as a separate “person” from the owners remains a critical factor in protecting a business owner’s personal assets. If you do not distinguish yourself from the business, the taxing authorities and courts will not provide you the protection of the corporate structure when it comes to liabilities.
– Wages and Taxes. Remember that, despite the protection of the “corporate veil,” certain liabilities can attach to business owners personally. If the business fails to pay its taxes, the owners of the business will be responsible personally for paying those obligations. Similarly, if the business fails to pay wages to employees, the person(s) making the decision not to pay wages will be personally on the hook for those amounts.