Construction and Contracting Business. Entrepreneur magazine
and workers’ compensation and pay unemployment insurance. They also represent your business, receive regular payment, and can receive benefits if you offer them. Subcontractors, however, are in control of their own overall work schedule, they can work for other contractors, clients, or companies, and they provide their own tools. They set their own payment terms, use invoices and are responsible for all of their own taxes, Social Security contributions, and benefits.
The determination has implications for your tax liabilities as well as your obligations and commitment to the individual worker. It also determines whether he or she is entitled to benefits such as unemployment and industrial insurance.
Providing benefits such as health or retirement plans to employees, including owners, requires additional paperwork and reporting. This is an area where it is very important to work closely with your lawyer and accountant. The rules and regulations covering such benefits are complex and difficult to decipher. Three of the most common benefits are 1) use of a company-owned vehicle, 2) retirement plans such as 401(k), and 3) medical reimbursement plans, or health benefits. Each is governed by its own Internal Revenue Service rulings. Business owners should be aware of each ruling, how it may affect taxable income, and what type of record keeping is required.
An employee may use a company vehicle for personal use, including daily commuting; however, the value of the personal use is included as taxable income for the employee. An employee who uses a company vehicle must keep records that substantiate the portion spent for business use, for which mileage is deductible, and the portion spent for personal use, which is not deductible.
Optional retirement plans have become much easier to administer in recent years. Typically, an employee elects to have a portion of his pay deducted and invested in a mutual fund or other investment. The company can match the employee’s contribution up to a limit set by the IRS.
As of 2015, the employee’s contribution limit is $18,000 per year, or an additional catch-up contribution of $6,000 for employees age 50 and over at the end of the calendar year. The combined contribution for employee and employer as of 2015 is $53,000, or $59,000 for those using the catch-up plan.
There are other limits on 401(k) plans for highly compensated employees earning over $120,000 (as of 2015). These should be discussed with your plan administrator.
You can find a guide to 401(k) plans at money.cnn.com/retirement/ as well as at the Department of Labor, which has 401(k) information for your business at www.dol.gov/ebsa/publications/401kplans.html. You might also visit http://401khelpcenter.com for more information.
Depending on the type of retirement plan, the amount contributed may be deducted from the employee’s taxable income; the company’s contribution is generally tax free. Most startup companies are not typically in a position to match such contributions. Also, since you may be working with a lot of subcontractors, you may not have a lot of regular employees, at least not for a while.
Health Plans Can Offer Tremendous Benefits
The most recent health care laws require you to provide certain information about the health care options to your employees whether or not you offer health care. According to the Affordable Care Act, if you offer health insurance to your employees you must offer it within the first 90 days of the first day of employment.
Knowing the health care law is very important for a small business owner especially if you want to offer such health insurance. In a competitive marketplace, you will be able to attract and hire more skilled professionals if you can offer health insurance options.
While you can store a wealth of data on computers and online “cloud” services, it’s still important to have a paper trail to back up the computer data. According to the IRS, a business must retain records for “as long as they may be needed for the administration of any provision of the Internal Revenue Code.” Fortunately the IRS does give some guidance on this issue on its website; as long as the business does not file fraudulent reports, most records can be discarded after seven years.
If you have fewer than 25 employees, with an average wage of less than $50,000 per person, you might be eligible for a tax credit if you provide heath insurance to your employees. Check this out at www.irs.gov or put “Small Business Tax Credits” in your online search engine and research the results.
tip
Proof of payment of an amount, by itself, does not establish that you are entitled to a tax deduction. You should also keep other documents, such as credit card slips, invoices, and employee time cards to show that you also incurred the cost.
State governments have their own sets of record-keeping guidelines. For example, the Wisconsin Department of Revenue Sales Tax Division routinely audits businesses to ensure that they are collecting and remitting the proper amount of tax. Its audit usually covers four years; however, it can request records for earlier years if it finds fraudulent activity during the initial audit period.
Record keeping is also useful to a business for its own internal uses. As mentioned earlier, keeping records related to employee benefits is of utmost importance. These items are often red flags for government auditors; a well-organized set of records documenting and justifying benefits will usually save a company time and money in the event of an audit.
Employee performance records are also important because segments of the contracting industry have fairly high employee turnover and relatively high rates for unemployment compensation. An employee who is fired or laid off is usually eligible to receive unemployment benefits, but if an employee is fired because of violations of company policy, he may be ineligible for benefits. However, in order for denial of benefits, the employer must keep a written record of the violations of company policy. These may include unexcused absences, repeated tardiness, or failure to follow safety procedures. Chapter 9 covers the importance of an employee handbook that sets out company policy.
stat fact
Good news on the audit front! The IRS, like so many businesses, is also having budget woes, and as a result in 2014 large corporations as well as small businesses saw significantly fewer audits.
The best approach to record keeping is to be prepared for the audit that may never come. The actual chances of being audited by the IRS are slim. However, it is better to be safe than sorry because audits are very time-consuming and can be expensive. Most businesses can, however, expect an annual audit by their workers’ compensation insurance carrier. This compulsory insurance protects employees against loss of income and supplies medical payments if they are hurt on the job. Because the premiums are based on total payroll, the insurance companies perform an audit every year. Be sure to correctly record employee overtime costs; a portion is exempt from workers’ compensation. Therefore, a business owner must keep records of payroll for each job classification in the organization.