Tax Tips Blog

Melissa writes:
Hope you can help me with a couple of questions:
I am starting a small dog walking business and I am going to pay my children that are ages between 11-14 yrs to make flyers and put them out ,do some light office work and perhaps help with the walking.Since I am just starting out do I need to show a profit to do this?
Chances are I might be able to make what I have already put into my business by the end of the year but its’s questionable.
I am a soleproprietor and do not yet have a EIN # I am assuming I probably need one if I am going to pay my children,right?
How do I figure how much I am suppose to take out for my taxes?
State
FICA
Fed
Is there a certain percentage?
Do I pay that at the end of the year when I file my earnings with my husbands earnings and they just take it out or do I pay quarterly?
Thanks I have gone on the IRS site numerous times I just get more confused.
Melissa

My reply:
Congratulations on starting your business!

While reading my reply, please remember that you didn’t say what state you’re in and you’ll probably be subject to state taxes so please visit your state’s department of revenue to find out more about that.

It is very common that when businesses first start out they do not make a profit. The IRS doesn’t expect to see a profit in the first year of business; however they do expect you to run your business in such a way that it is reasonable to believe that you will make a profit. If you do not run your business professionally or you do not generate a profit after a certain number of years, the IRS will assume that this venture is a hobby and not a business.

Yes, if you hire your children (or anyone for that matter) you will need to obtain an Employer Identification Number (EIN), which you can get online at the IRS website. Again, you may also need a state ID number, please check with your state department of revenue.

As for how much to withhold and when to deposit the withholdings, your state department of revenue will help you with determining the amount of state tax to withhold, if any. Your state department of labor will help you determine the amount of unemployment compensation to withhold, if any. IRS Publication 15, Circular E is the most helpful for determining your basic withholding and depositing responsibilities. The IRS also publishes two supplemental guides, Publication 15-A and Publication 15-B (all publications can be found at the IRS website, they won’t let me link directly to the publications sorry), which explains other payroll items and withholding that you may run into at some point in your business. You may want help with your payroll. If so, many have found my fees very reasonable and I do help employers in various states.

Since you stated you are a sole proprietorship and your children are under age 18, you will not have to pay Social Security or Medicare tax on their wages and, usually, no state unemployment or disability taxes, but you should confirm that with your state. And assuming this is your children’s only source of income, the wages you are paying them are considered “earned income,” which means that the first $5,450 received by each child in 2008 is not subject to Federal taxes. Because of all of this, payroll is usually pretty easy for sole proprietors with young children, but you still must be professional and treat them as employees with a full job description, time card, etc.

Best wishes,
Gina

Ebtehal writes:

I just started LLC company. I hired only one employee as part time for 3 months. How I should deduct his social secuirty and when and where should I submit it. If he make more than $102,000 from his full time job over the 9 months. Should he still pay Social security tax.

Thanks,

Ebtehal

My reply:

Hello Ebtehal, thanks for visiting.

Payroll is more complex than most new businesses realize.  I really do not recommend that any new business do their own payroll.  I wrote a post a couple of years ago about this, which you can read here:  http://glgcpa.com/blog/2006/10/09/payroll-headache/

The first thing you should do is obtain a copy of Circular E (publication 15) from the IRS website, which you can find here:  http://www.irs.gov/pub/irs-pdf/p15.pdf

If you don’t have a Federal Employer ID number you’ll have to get one of those too.  You can do that online here:  http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

Then locate the website for your state department of labor and read their rules.  Often times you need to inform them when you hire someone.  In addition you will have to set up accounts for withholding, if applicable, and unemployment compensation.

When you hired this employee they should have completed Form W-4 and I-9.  The information contained on these forms and Circular E will tell you how to withholding, how much to withhold and when you need to deposit the Federal amounts to the respective Federal authorities.  You’ll have to get the state information from your state department of labor.

It doesn’t matter if your employee is making more than $102,000 or $202,000 from some other job your employee might have - you are still required to withhold at the specified rates.  Then at the end of the year, the employee can apply for a credit of any over withholding on their individual tax return.

My best advice - get someone to help you and fast.

Best wishes,
Gina

Oscar writes: My wife owns a small home-daycare, never more than 15 children. She operates out of our house. She has one full-time (employee) for whom she pays all taxes and medicare and two other part-time contract employees. Her business is legally registered as an LLC partnership. One of the part-time contract employees is demanding that my wife pay SS and Medicare because her tax preparer told her my wife was obligated to do so. Is my wife liable to pay SS tax and Medicare tax for part-time contract employees who received a 1099 from her business? How does one address this amicably without any repercussions to either party? Thanks!

My response: Hello Oscar and Happy New Year! Thanks so much for visiting my site and sending me an email! To answer your question, I have my doubts that the two part-time “contractor” employees are actually 1099 independent contractors and obviously so does that employee and his/her tax preparer. If your wife’s part-time contract employees are actually employees, then yes your wife’s LLC should be paying Social Security and Medicare and possibly withholding Federal Income Tax as well. You may want to read the article I wrote on employees and independent contractors. As for addressing the issues with your help, the best thing to do is to be honest with them. Why did you think they were independent contractors? If your accountant or tax advisor suggested paying these people as independent contractors, I’d start looking for a new advisor. Let your wife’s employees know why you felt they were independent contractors and what you intend on doing about it now. Best wishes, Gina

I am a strong advocate of having a professional handle your payroll as many small businesses end up paying unnecessary interest and penalties due to late or inaccurate payroll forms and tax payments. Short of that, please use this as a general guide prior to performing your year-end payroll duties:

1. Verify the accuracy of your employee’s address and social security number
2. Verify the accuracy of your terminated employee’s address and social security number
3. Verify the accuracy of your company contributions to employee provided retirement plans
4. Determine the amounts of non-cash fringe benefits or awards that need to be included on your employee’s W-2s. This will include items such as: group term life insurance, health insurance benefits for 2% shareholders of an S-corporation and personal use of a company car
5. Compare the amounts submitted each quarter on Form 941 and your State Forms to your year-to-date records
6. Don’t forget to file any annual forms, which include Form 940 (Federal Unemployment), Form W-3 (W-2 transmittal), Form W-2s (Employee Wage Statements), Form 1096 (1099 transmittal) and Form 1099s (Independent Contractor statements).
7. Deliver a W-2 to each of your employee’s by January 31, 2007.
8. Deliver a 1099 to each of your Independent Contractors by January 31, 2007.

Many people have had headaches, some even migraines, but only a small business understands how bad a payroll headache can be. QuickBooks and other software have provided the illusion to a lot of small businesses that even if they have never prepared payroll they can handle their own payroll. I have found that is rarely the case. Software programs are fancy sophisticated calculators. If the software is not properly updated it will not calculate the proper amount of withholding. If the person using the software does not use it properly, it will not work properly. Even if you manage to correctly calculate the taxes to be withheld, your payroll responsibilities do not end there. Your responsibility as an employer to withhold payroll taxes from your employees is a fiduciary responsibility. As soon as you issue a check to an employee, you become a trustee for the U.S. Government and the amount of taxes withheld should not be used to pay other expenses. One of the most confusing areas for small businesses in regards to employment taxes seems to be the timing of the tax payments to the governemtn. If you are busy trying to run and grow your small business, it’s easy to forget to make a payment, complete the payment coupon incorrectly, or pay the wrong amount. In general, new employers are required to pay federal withholding taxes on a monthly basis. As your business grows, the frequency increases to semi-weekly. For the largest businesses, taxes are due within twenty-four hours of each payroll. According to the IRS Chief Financial Officer’s Office of Unpaid Assessment Analysis about 128,000 individuals have outstanding trust fund recovery penalties because they didn’t pay their pay payroll taxes. Including accumulated interest, these penalties average $93,750 per person and total about $12 billion. It usually only takes one payroll notice before employers quit doing payroll themselves and hire a professional. Had they hired the professional first they may have saved themselves a payroll headache.