C-Corporations Will File Under A Lower Rate

One of the most significant changes under the new business tax law is the fact the corporate tax rate dropped significantly. In year’s past, the corporate tax rate was 35 percent. Under the new tax code, the rate is 21 percent. This is a significant change that could impact how businesses conduct business. Retaining more of their profits could allow small business owners to invest in growth that would not have been possible before this year.

If you are a young entrepreneur who has recently started a company, you may not see any drastic changes quite yet because, if nothing else, many startups are not profitable in their first few years. But, the new tax code will be in place for at least the next decade. Factoring this rate into your business decisions could alter your long-term strategy.

Lastly, the fact that the corporate rate was reduced could impact how new business owners could choose to register their company. For instance, many small business owners elect to register as an LLC, which allows for pass-through taxation. However, any individual income earned more than $38,700 is taxed at a 22 percent rate.

So, some new business owners may find it more beneficial to form their company as a C-Corporation rather than an LLC because the tax rate is lower. Each individual’s situation could vary, and owners will want to consider dynamics such as double taxation. We recommend talking with an accountant or similar tax expert who can advise on which formation strategy is best. That’s because, as you’ll see in the section below, there are some new perks for LLC and S-Corp owners as well.

Some S-Corporations And LLCs Could Be Eligible For A Reduced Tax Rate

Under the new tax code, S-Corporation and LLC owners could qualify for a 20 percent deduction on “any income attributable to the entity.” However, the company must not be listed on a particular exclusions list. Generally speaking, any company whose sells to customers based on the reputation of the owner is excluded from this deduction. For instance, a small coffee shop would be eligible for the deduction but “Jane Doe’s Consulting” or “John B’s Financial Advice” would not. Excluded services and entities include:

• Health companies
• Consulting services
• Law
• Financial services
• Athletics
• Brokerage service industries

However, if the taxable income for an owner is less than $157,500 for single filers or $315,000 for joint filers after pass-through, they can still take the deduction. No one, regardless of the industry in which they work, can take the 20 percent deduction if income exceeds $207,500 for single filers or $415,000 for joint filers.

There Is No More Alternative Minimum Tax

In the past, the alternative minimum tax was a significant part of corporate taxation. Those who made more than the AMT exemption amount were required to calculate their taxes twice. Prior to the new law, five million Americans were impacted. Now, only an estimated 200,000 tax filers will be affected. Additionally, there is no longer an AMT for corporations. Contact your tax professional to see if you could potentially be someone impacted by the AMT.

Equipment Depreciates Faster

If you’re a small business owner who purchases expensive equipment for your company, you could be in luck thanks to the fact that the new tax code increases the rate at which items depreciate. Under the former law, business owners were required to amortize the cost of equipment over the useful life of the asset.

Under the new law, owners can fully deduct up to 1 million in equipment in the year in which the company purchased it. Those who have current tax liabilities and substantial fixed asset costs will benefit most from this change. The depreciation of assets is only in effect over the next five years, as it will phase out after 2022. Until then, business owners will find that they can expense nearly twice as much as they could previously.  

Owners Can No Longer Expense Transportation And Entertainment

If you’re a small business owner who frequently treated clients to concerts and sporting events, we have bad news for you. Whereas you could deduct these expenses in the past, you can no longer deduct them from your taxes. Your meals, however, remain 50 percent deductible, just as they were in the past. Additionally, owners can no longer deduct travel to and from work. This also includes bicycle commuting reimbursements, which were formerly allowed.

Family-Paid-Leave Credit

If you’re an employer who provides your employees with paid medical or family leave, you could benefit from a deduction over the next two years. In 2018 and 2019, employers can deduct up to 12.5 percent of the wages they pay during this time. Additionally, those employers who pay employees more than half of their regular salaries are eligible for an even larger credit.

Many stipulations determine who is eligible for this program, however. For instance, if an employee’s total wages exceed $72,000, employers will not be able to take the credit. Additionally, the policy that declares paid medical and family leave must be written in a document such as the Employee Handbook.  

Consult A Tax Expert

Taxes are already tricky for small business owners, but they will become much more challenging this year because of new regulations. We highly recommend that business owners contact a trusted tax professional to help guide them through the process. Licensed professionals can help maximize your return and profits, allowing you to invest more money in your company. They’ll also ensure you remain compliant with the new regulations which were put in place.

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What Is An Employee?

Before detailing how to hire employees, it’s critical that you first understand what an employee is. According to Investopedia, “an employee is defined as any individual who is hired for wages or salary.” The company must pay taxes on an employee’s wages and could potentially have to pay health insurance as well.

This is noticeably different than an independent contractor. An independent contractor is also paid for work. However, independent contractors do not work for the company directly. They work for themselves and are paid by the company for services they provide. This is often done on a contractual basis. Most importantly, LLCs do not pay taxes on any monetary payment they make to a contractor. Independent contractors must pay the entirety of the tax burden.

Tax Prerequisites When Hiring Employees

If you’re interested in hiring employees, there are a few tax-related things you’re going to want to do beforehand. First and foremost, you must ensure that you have an employer identification number. You should have received this number when you formed your company, as it allows you to pay taxes and open a business bank account. However, if you don’t yet have an EIN, you’ll need to secure it immediately. It is mandatory to have an EIN when hiring employees.

You should also be mindful of the fact that you’ll likely need to secure a similar number at the state level. While the IRS issues the EIN, many states require companies to obtain additional numbers when filing state taxes. Each state is different. We recommend starting with your local Secretary of State’s Office to learn more about securing a state employer account number.

You’ll also want to establish a quality record-keeping system. The Internal Revenue Service can audit your company at any point within four years of filing. This means that your company must have records of employment taxes on hand for at least four years. You should establish where you plan to keep these records for safekeeping. Although the minimum requirement is four years, LLCs should expect to keep the records for at least six years, if not longer.

Lastly, LLC owners will also need to set up records that allow them to withhold taxes. There are three different withholdings with which they should be aware. The first is federal income tax withholding. To establish this, owners will need new employees to complete a Form W-4, otherwise known as an Employee’s Withholding Certificate. Employers will then need to complete a Form W-2 for each employee that they hire.

The Form W-2 outlines all wages that an employee has earned, as well as all tax they’ve withheld during the year. At the end of the calendar year – no later than January 31 – the LLC owner will need to send a copy of this form to the employee. They’ll also need to submit the paperwork to the Social Security Administration by February 28. The W-2 is unique to employees. If you were to hire independent contractors, you would need to complete a Form 1099.

Employees also have the option for state withholdings as well. State withholding forms are similar to the Federal W-2 and W-4 forms but are unique from local government to local government. Be sure to repeat the above process at the state level as well, based on your state’s requirements.

Other Employment Factors

Before LLC owners set up tax records for their new employees, they first must determine who to hire. After choosing the ideal candidate, there are a few legal requirements that LLC owners will need to fulfill. The most critical is ensuring that a potential employee is eligible to work in the United States. The first thing that owners should do is have the employee complete a Form I-9. This form includes information such as an employee’s eligibility and Social Security number.

In addition to the I-9, employees will also need to provide you with valid identification. The I-9 lists three columns of identifications that would suffice. Employees can either provide one item from List A, or a combination of one piece from List B and a second item from List C. Items on List A includes Permanent Resident Cards and passports. List B contains items like driver’s licenses, while List C includes things such as a Social Security card.

In specific scenarios, employers may also have to complete the federal E-Verify program. This is an added measure to ensure the information that employees provided is accurate. Some states mandate that employers run an employee’s information through the E-Verify system.

Although it is not required under law, LLC owners may want to conduct a background check on a potential hire as well. This is especially critical for small business owners who are hiring employees. As a growing company, their reputation is vital. Running a background check, otherwise known as pre-employment screening, allows you to protect:

• The company
• Customers
• Employees

Even though a background check is not mandatory, there are laws that employers must follow should they choose to conduct one. For instance, employees must authorize an employer to perform a background check. Many of the legal requirements are determined at the state level, so be sure to consult with the Secretary of State’s or Employment Office to learn more about the conditions surrounding background checks.

For example, some states limit the type of criminal history into which employers are allowed to look. Other states protect the credit history of prospective employees, allowing employers only to pull these records if the job meets particular criteria. LLC owners may want to look into hiring a third-party agency who specializes in conducting background checks.  

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Protect Yourself From Liabilities

As an independent contractor, you expose yourself to tremendous liability. Clients would be able to go after all of your assets if something were to go wrong with a deal, including those not related to your day-to-day contracting obligations. This includes things such as your:

• Savings account
• Personal vehicle
• Home

However, working under the LLC umbrella practically eliminates this. That’s because the business organization is responsible for its own debts and liabilities, even if you are the sole owner and only employee. This, in turn, protects your personal assets were anything to go wrong with a contract. Were your business to have debts, the clients typically cannot come after your personal assets.

Simplify Taxes

One of the most significant benefits that self-employed contractors can gain when forming an LLC is the fact that their taxes will become much more straightforward. LLCs offer pass-through taxation. This means that the owner can claim anything the company earns on their personal income statements. LLC owners won’t have to worry about double taxation, as they would with a C corporation.

So, owners will end up protecting themselves from liabilities without having to give up any income. And, taxes become easier to file because LLC owners merely report a profit or loss on a Schedule C, which they attach to their personal income returns. The Internal Revenue Service, for tax purposes, views LLCs just as they do general partnerships and sole proprietorships.

Additionally, LLC owners can opt to be taxed as an S-Corporation, which would allow them to reduce their self-employment tax. Depending on how much money you earn as an independent contractor, this could be in your best financial interest. We strongly advise you to seek out a trusted account or similar financial professional who can advise you on the tax implications of registering as an LLC.

Credibility

Forming an LLC demonstrates to clients that you are professional and that you take your work quite seriously. Think about how much better it looks if a customer were to call, say, “John Doe’s Content Marketing LLC” as opposed to “John Doe.” This is especially true when the LLC could direct the client on how to wire money to their business account. The bottom line is that other companies will take you more seriously if you form an LLC.

Open A Business Bank Account

Registering as an LLC also allows self-employed contractors to open a business banking account. Currently, you may find it easy to keep track of employment funds. Perhaps you’ve allocated a personal credit card and account strictly toward self-employment income. If so, this is excellent, as you’re already on the right track.  

However, if your business were ever to grow, it would be difficult to add a non-family member to this account. A business bank account allows you to do so. It also allows you to track everything much easier. No longer will you forget small expenses or miscalculate income. With a business banking account and credit card, you’ll have a detailed financial report at the end of the year of all business income and expenses.

We’ve spoken with many self-employed contractors who said that before creating an LLC, they did not put much time into running cash flow statements or similar financial analysis. But once they started a company and opened a business bank account, they found it much easier to calculate figures such as their profit margin.

Also, remember that the IRS can audit you at any time. With a dedicated business bank account, it’s significantly easier to go back and track your financial history during a given year. This becomes much more challenging if you’re using a personal bank account for your business funds.

You Can Accept New Forms Of Payment

One of the other significant financial perks to opening a business bank account upon forming an LLC is the fact that you can accept new forms of payment. For instance, you can allow clients to pay with a credit card. They could also wire the funds to your business account directly. Some corporations have regulations about wiring money to a personal bank account, which is why this would be nearly impossible if an independent contractor chose not to create an LLC.  

You Could Gain New Clients

Lastly, 1099 contractors could want to form an LLC because it could put them in touch with new possible clients. Unfortunately, many companies have grown weary over the past couple of years of using 1099 contractors. This is primarily because the IRS has caught companies using the 1099 designation to skirt employment requirements, such as FICA taxes and health insurance. Now, many companies have said they won’t work 1099 contractors as a result.

Allow Someone To Handle Your Administrative Needs

When forming an LLC, one of the requirements is that you designate a registered agent to serve on the company’s behalf. The agent receives all legal correspondence on behalf of this company. Registered agents could prove to be integral to a company’s success. Hiring a quality registered agent could allow you to focus strictly on business dealings, instead of having to worry about tracking down relevant forms and information.

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