A Sole Proprietorship will cost you more in taxes than any other business structure because there is a 15.3% self-employment tax due on the net income from the business. I see a lot of fairly new business owners get caught in that trap when I do a FREE! CPA review of their past tax returns. (If you’d like to get a free review of your tax return, just Contact Us.
The trap is that the business owner ends up paying more in self-employment tax (double the regular payroll tax amount) then he does for his income tax.
The solution? Incorporate. And that’s where you could fall into another trap if you’re not careful. If you form a limited liability company (LLC) with just one owner, called a member, you have a single member LLC (SM-LLC).
If you don’t take the extra step to then elect your tax treatment, you’ll get the default tax treatment of Sole Proprietorship. And that means you’re right back at square one – paying the highest amount of tax possible.
It’s easy to fix this mistake though. Not so easy to fix the independent contractor vs employee question. If you have an independent contractor working for you, make sure you’ve got the documentation you need in case the IRS asks.
This week we’re featuring “Winning the Independent Contractor Argument” home study course. This come complete with a template you can use for the necessary Independent Contractor Agreement. You MUST have an agreement if the IRS asks. Otherwise, you’ll be facing thousands of dollars in excess tax, penalty and interest.