Want to know about the ins and outs of business taxes? Listen to Joshua D. Brinen answer some of the most common questions business owners have regarding taxes:
What kind of taxes do businesses pay?
Depending on the structure of the business, a business will often be required to pay a form of income tax, possibly a form of franchise tax, and trust fund taxes such as employment taxes and sales taxes.
What is a trust fund tax?
Unlike income taxes, trust fund taxes are not taxes that you pay over to the government for you or your business. A trust fund tax is a tax that your business collects on behalf of a government. For example, sales tax is not charged by your business. It’s charged by the state in which your business operates. It is then collected and then paid over on a quarterly or annual basis and reported to the state taxing authority.
Similarly, employment taxes are not completely charged against your business.
A portion are charged against your business. A portion are collected from your employees quarterly and then reported annually. Your business would then report those taxes to either the state and/or the state taxing authority.
Is it better to hire independent contractors or employees?
Well, as any good lawyer will tell you, it depends. If a person who’s working for you is a true employee, are they in your control? Do you provide them with tools and tasks? Do you regulate their hours? And is it a true employer-employee relationship?
If the answer to these questions is yes, then you should treat them as an employee.
However, if the person working for you has other clients, other freelance projects, sets their own hours, works on their own projects using their own tools, and provides you with deliverables on an agreed-upon schedule, then that person might be able to be classified as an independent contractor.
You should seek the advice of a qualified attorney to determine how to classify your employees.
What are the tax implications of hiring an independent contractor vs hiring an employee?
An employee is a worker for whom you will withhold certain taxes and pay those taxes over to the government.
You will also be charged what is termed the “employer portion” of the employment tax and an independent contractor is one to whom you just pay money and the responsibility to pay employment taxation is on the independent contractor. If you classify a worker who should be an employee as an independent contractor, then you will need to pay over the tax that was not collected and you will be subject to significant penalties from the trust fund tax.
What is a responsible person’s penalty?
When a person who is in control of the finances and the checkbook of a business is found to be liable for not paying over or not paying over correctly the trust fund taxes, the individual may also be subject to a civil penalty, which is the equivalent of the trust fund tax that was not paid over to the taxing authority.
The taxing authority may not double collect or double-dip on that tax. However, if the responsible person does not cause the business to properly pay over the tax, the corporate shield of liability may be pierced and the civil liabilities may collect the trust fund tax.
What’s the difference between sales and use tax?
Sales and use tax are essentially the same form of tax. Sales and use tax are a tax placed on the purchase of a good. Sales and use tax is a trust fund tax. The business you run does not collect the tax for itself. The business you run collects that tax for a government agency, usually a state or local government taxing authority.
Sales tax is for items purchased within the jurisdiction of either the state or the local sales tax authority. Use tax is tax charged and paid for goods sent outside the jurisdiction of the local or state sales tax authority.
Contact a Skilled Tax Attorney
Brinen & Associates advises clients regarding their options and remedies for a wide variety of tax matters. Call (212) 330-8151 or send us a message to schedule a consultation.