AboutRichard Fritzler Expertise I am in the business of tax planning for business owners. Our company helps business owners structure so that they can be reduce the taxes that they owe, making them far more profitable.
Experience Since 1986 I have been helping successful business owners reduce taxes, protect assets, and limit their liability. The company is Owelesstax, incorporated at www.owelesstax.com
Organizations National Small Business Owners Association.
Nevada Association of Listed Resident Agents.
Citizens Legal Association
The Business Owners Institute
Publications Contributing author to "The Corporate Standard Newsletter".
I am also a writer for an email newsletter about business
Googlegroups/Successfulbusiness
I am also an Expert in the areas of Tax Law, Retirement Planning, and Estate tax issues.
Expert: Richard Fritzler Date: 12/6/2007 Subject: Sub contractors
Question I am a sole proprietor of a software engineering company. I've never used subcontractors before, but I have a large job coming up and plan on using one or two contract application developers.
How is this handled for tax purposes? Will I pay tax on my income and then pay their salaries from after-tax dollars, or is that considered a business expense, where I would only pay tax on the profit I have left after paying my overhead?
Thank you.
Tedd
Answer The money that you pay others to help in your business is deductible, whether they are employees, or sub-contractors. So no you won't pay your taxes first then pay them out of the net.
You are entering a high risk area!!
Although you can use independent contractors and in many cases it the most appropriate type of business relationship. There are many other business owners that have abused this business model and so now this area is patrolled constantly.
Kind of lie a DUI checkpoint on New Years Eve, you have choices; avoid it, understand it and live the rules, or be stupid and get caught.
you see some people, not seeing the whole picture believe that by paying someone as an IC they reduce taxes, and therefore save money. This is not actually true, the taxes are just as big, they merely get passed entirely to the contractor to pay. Other people understand that although it doesn't reduce the total tax it does keep them form having to pay it. Which is not entirely true either. Or they use this tax dodge to make it seem the employee is getting paid more, even though it is the unpaid taxes that are being transferred to them.
The reality is that individuals are horrendous when it comes to paying taxes, that is why the government has moved the burden of collecting and paying the taxes away from the individual and onto the employer. the taxes are paid long before the employee ever sees a penny of the money so they can't screw it up.
The IC shifts the collection and paying of taxes away from the employer by claiming the Employee is a separate business, and is then responsible to withhold etc.
But, for many who are claimed to be independent they are truly not.
And this where the damage occurs. If you claim someone to be in IC, and they don't pay all the taxes, the IRS has an option to possibly reclassify the IC to "Common law employee" at that point three years later, the IRS will notify you that you are required to pay all the back taxes, penalties of 100% and interest.
That is a spendy penalty for just not doing what is required.
If your guys will truly be independent then you can go through checkpoint DUI and drive out the other end.
To determine if they will be truly independent, google "Independent contractor" "20 questions".
Richard Fritzler
phone 800 590-6612
www.owelesstax.com
www.nevadacorporateservices.com
