For ten years now Tony Watson has been employed with Robert Hall & Associates. Tony is an enrolled agent, which is a federally licensed tax practitioner who has technical expertise in the field of taxation. He is empowered by the U.S. Department of the Treasury to represent taxpayers for audits, collections and appeals before all administrative levels of the Internal Revenue Service. Tony's father being friends and partners with Robert Hall and family for years, is how Tony came to know of Robert's work.
My first question to Tony, knowing how complex tax laws are, was, on the tax front, what's the advantage of being a sole proprietor?
He said the one thing he learned quickly is to plan for your tax year. Most business owners are cash-basis tax-payers, Jan 1- Dec 31st. So we map out the upcoming year with our clients, try and find the bottom line, and determine it before the year ends. What most people don't know is that Uncle Sam wants you to pay your taxes by December 31st, but they allow you to pay up until April 15th of the following year. The #1 thing for sole proprietors is planning, making sure all the money is sheltered or put away in certain investments so you can have the tax write off within that year.
Why do entrepreneurs need asset protection?
Everyone will have a different opinion on running a business, but my ten-years of experience has taught me that incorporating is the #1 priority so that your assets are protected. Self-employed individual isn't covered by workman's compensation insurance and they need personal insurance and they may have employee insurance policies.
Once a company is up and running, the benefit is to show the IRS that you aren't an employee of your own company.
I asked Tony to explain further and he said as an S Corporation you become an employee of your business, and therefore you are required to pay yourself through payroll. The payment means that you work and/or manage your company and you pay yourself a reasonable salary. A corporation can pay you as low as 35%.
If I have an employee, how do I deal with the tax effect of dealing with an employee?
The number one rule of business is, pay your employees. Before you do that, make sure they are employees and not individual contractors. At Robert Hall & Associates, we teach our clients how to determine if their employees are actually contractors or full-time employees. I advise entrepreneurs to build a team who can help them with that question.
How do you tell the difference between the two?
Is the individual using your assets, your tools, uniforms, do they have set hours, are they required to use equipment you provide for them? Independent contractors come in, on their time, they use their tools, wear their clothes, and does the job. An employee has a set amount of hours, a contractor will not.
Tony's top tips:
- Plan, plan, plan (P.O.P. Power of Planning)
- Make sure you have the right team involved in your business. An attorney, a tax advisor, etc.
- Make sure you protect your personal assets from your business assets.