I’d like to take a moment to explain what the IRS business mileage rate means to small business owners.  It’s quite simple really…it’s the maximum amount per mile you can deduct from taxes if you’re reimbursing using the mileage method.  If you reimburse employees more than this rate, the overage is taxable to them (known as a taxable fringe benefit).  On the flip side, you don’t HAVE to reimburse this amount.  It’s the MAXIMUM deductible amount, not the required amount (unless you’re in California, everything is different there!).

So, if you’re like many of the small businesses I work with and the thought of reimbursing 50.5 cents/mile for a trip to the post office is something you can’t handle, it’s okay.  It’s nice to reimburse at the IRS rate, it’s a good thing to do, but you don’t have to.  Sure, your employees will complain because all of their ill-informed friends have told them they are mistreated.  You can simply tell them that the IRS sets the maximum tax deductible amount and they can consult with their tax preparer about the possibility of deducting the rest.  The IRS certainly doesn’t know how to manage your business!

-Kelly

A question was posted on LinkedIn regarding how to pay the owner of a LLC: http://www.linkedin.com/answers/finance-accounting/accounting/FIN_ACC/149517-15002788.  I posted an answer to this question and thought it might interest some readers here.  This is a common question among business owners, so I’ll expand on the answer.

When a LLC is created, the tax treatment is determined.  Payments to the owners of the business are made per the tax treatment. 

Sole Proprietors (or LLC single member): No payroll is paid to the owner.  The owner may take draws from the business.

Partnerships (or LLC taxed as Partnership): No payroll is paid to the owner.  The owner may tak draws.

S Corporation (or LLC taxed as Corporation: Owner is paid via payroll.  Typically, owners will take as small a payroll as possible to reduce payroll taxes and will also take distributions of equity.   You must be careful to draw a "reasonable" salary to avoid IRS perils – it’s a good idea to talk to your CPA about the proper payroll amount and frequency/amounts of distributions.

C Corporations (or LLC taxed as C Corp): Owner is paid via payroll.  Typically, owners will want to take a very large payroll to avoid the double taxation consequences of a c corp.  The IRS is on to this trick as well, so care should be taken.  Again, CPA advice is recommended.

~Kelly

The question I get asked most frequently from new clients is "what are the independent contractor rules?"  All small business owners like to use independent contractors to save money and avoid the dreaded payroll. 

The IRS and state agencies want to ensure that you are not misclassifying employees as independent contractors to get around employment laws and taxes. You must be sure you’re following the rules or you could face stiff penalties.  In the event worker’s are reclassified during an employment audit, you could be forced to pay all of the employment taxes owed from prior periods plus penalties and interest.  (and yes, they do regularly audit small businesses.  I’ve personally handled 2 audits in a two year period for my small client base.)

So, how do you know that you are classifying independent contractors appropriately?  Well, it’s not as easy as you would think.  The IRS and individual states employ different rules.  The general rule for any employment law is you must follow the most conservative law.  If the state’s laws are more stringent, you must follow state law…it’s usually the state that further clarifies a federal law.

The IRS publishes a 20 question test, http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P07_1115.  You need to satisfy as many as possible to clear the independent contractor hurdle.  The most basic answer is – they must be "in business".  The person you are contracting to should: have more than one client, advertise their business, have the ability to hire and fire employees, and control their work.  In addition, you should have a contract with them.

What do you do if you have an independent contractor who is really an employee, but you don’t want to run payroll?  The easiest answer is to hire them through a staffing agency.  You’ll have to do some homework to find the agency that’s right for you. They will have a fee, but it’s much less if you just want to run your person through their payroll rather than asking them to recruit someone for you.  The other option is to utilize a PEO (professional employer organization) who will handle all payroll, benefits and HR issues for you.  I’ll be investigating PEO’s in the near future and will post my findings.

If you’re an Oregon employer, the bureau of labor and industry has a great site (http://www.oregon.gov/BOLI/) that answers many questions small business owners have regarding employment law.  I’ve also called them on many occassions for clarification on employment laws. 

For further reading on Oregon independent contractor rules, see: http://www.boli.state.or.us/BOLI/TA/T_FAQ_Taindocon.shtml. 

Kelly Totten, Acclaro Accounting