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What Every Business Should Know About Pricing

For many small businesses, survival depends increasingly on finding the ever-elusive “right price” for whatever goods or services are being sold. But there’s no magic formula.  No matter what you’re selling, the “right” price to ask is never clearly defined.

For one thing, costs differ from business to business. Online businesses, for example, don’t have the overhead of staffing retail stores and often aren’t subject to the same sales taxes. So an online store can sell at a lower price and still make a profit.

Chip Averwater, a third-generation retailer and chairman of Amro Music Stores in Memphis, TN, has seen it all and has developed a list of tried-and-true pricing advice for other business owners. Here are Averwater’s top pricing tips:

The right price isn’t a multiple of wholesale. It’s tempting to price by simply using a fixed-percentage markup from wholesale. But that strategy assumes all expenses of a sale are determined by the wholesale cost. To price correctly, argues Averwater, you must do it individually and by feel, with consideration given to the total expenses of the sale, customer price sensitivity, competitive options, and the sale’s potential contribution to other business.

Know the difference between wholesale cost and cost of the sale. Wholesale is the cost of the merchandise, not the cost of the sale. Think about it: The price paid to the manufacturer is only the first of many expenses in a transaction. Sales can’t be made without including expenses for rent, salaries, advertising, utilities, freight, maintenance, taxes and others. Just because a sale has a gross margin doesn’t mean it’s profitable.  Unless the price covers all of the sale’s expenses, you are taking money out of your own pocket to make it.

All sales should bear operating expenses. Some business owners subscribe to the theory that since expenses are fixed, so they should accept every sale that has a positive gross margin. But here’s the problem: When are expenses ever really fixed? Sales don’t happen in a vacuum. Boosting sales requires increases in personnel, space, inventory, handling, and virtually every other business expense. In fact, every sale incurs operating expenses so its price should be sufficient to cover them plus a profit.

Practice your pricing math daily. Turns out your math teachers were right. You do need this skill to survive in the real world. You need a clear idea of the cost of every sale, service, and activity your business engages in. That information helps you decide what to stock, what to promote, where to channel your investments and efforts, and of course, set prices. Averwater’s advice is to regularly sit down with a spreadsheet and divide the list of expenses across your product sales and services. Only then will your costs become clear.

Don’t try to offer the lowest price. You’ve probably seen it before: Weaker competitors offer lower prices to attract more customers. At first glance, this might not seem like a bad strategy. But those companies are crossing their fingers and hoping that when the dust settles, there will be a little profit left over.

“It’s futile to try to price below desperate competitors because they’ll always drop their prices below yours,” says Averwater. “Differentiation is almost always a better strategy. Offer superior products and services that customers are willing to pay more for.”

Reputations are made on price-sensitive items, margins on the rest. Price-sensitive items are the ones bought frequently and advertised often. In a grocery store, they’d include bread, milk, and soft drinks. In a musical instrument store, they’d be strings, reeds and picks. Because customers buy them often, price differences between stores are more apparent.

“Pricing these items low creates a value image for the store,” says Averwater. “Higher margins on other merchandise allow the store to make a profit.”

It won’t sell if it’s not on sale. Americans love the thrill of a bargain. In fact, customers have become so accustomed to discounts that many won’t make a significant purchase unless the product is on sale. Many furniture and clothing stores schedule only brief intervals between sales, which they use to catch up, restock, organize and collect prospects for the next sale. Many department stores end one sale only as the next begins.

Copyright © 2000-2012 BizBest® Media Corp.  All Rights Reserved.

5 Worst Ways Business Owners Waste Time

Most of us believe that cell phones, email and other tech devices help business productivity.  But tech devices and some common business practices can actually be big time wasters.  For example, are you and your employees constantly checking email or web sites? Do you have an open door policy, a schedule full of meetings, and a hefty mobile phone habit?  How are you doing on that “to do” list?

“Many workplace practices that were once considered good for business have become major time-wasters today,” says Phil Cooke, who has advised major companies on time-saving techniques for 30 years.  Here are five time wasting practices that Cooke claims are most dangerous to your productivity:

1. Starting your day on email

If the first thing you do every work morning is dig into your email, you can easily be bogged down for hours simply answering messages.  Avoid the email vortex.  Try this instead: When you first get to work – the store, shop, site, office or wherever that may be – do at least one of the most important things you need to do that day (email doesn’t count!).  Then, and only then, check email.  This change alone will boost your productivity.

2. Forgetting the power of priorities

Business owners too often spend enormous amounts of time dealing with trivial tasks.  And the worst part is when we still feel like we’re accomplishing something important.  Remember this: Never do minor tasks at the expense of major projects.  Don’t fall victim to what others think is urgent.  Set your own priorities.

3. Being permanently tethered to your mobile device

Put down the mobile device occasionally. Chances are, you don’t really need to check it for text messages, voicemail or email every five minutes.  Entrepreneurs always feel the really big call or message could arrive at any moment.  Get over it; and get on with it. Otherwise your mobile device relationship can be counterproductive.

4. Not Shutting the office door

Whoever invented the “open door policy” must never have run a business and probably didn’t accomplish much, says Cooke.  Sure, you need to be accessible; just not every minute of every day.   Unexpected calls and visitors are huge time wasters, What’s more, research suggest that it takes nearly an hour to get back on track after an interruption.  Schedule set hours for meetings and visitors.

5. Taking all calls

You don’t have to answer every call.  “I’ve seen people interrupt important meetings, sensitive negotiations and more to deal with minor phone calls,” says Cooke.  Don’t be afraid to let callers leave a message.  If you’re in the middle of something and can see the caller isn’t a critical contact, leave it for later.  You’ll waste less time, accomplish more, and the caller would rather have your full attention anyway.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

Five Website Landing Page Mistakes and Fixes

 If you have a website and expect it to help, not hinder your business, you’ll want to avoid the major mistakes that many small businesses make.  Focus on your  “landing pages” in particular.  A landing page, quite literally, is the page on your site where the incoming visitor “lands” as determined by the link they clicked, from an ad, article, directory listing of some other place.

For most small businesses, the landing page is typically the homepage, but that might not be a good idea. The best landing pages are specifically meant to convert the visitor into a paying customer and home pages aren’t typically set up for this.

The landing page is the first glimpse that a customer or prospect might get of how your business looks online, so you’ll want it to leave a good impression.  Here are some typical landing page mistakes and how to fix them: 

Mistake #1: Lousy Links: Do links into your site target specific, relevant pages? Don’t aim every link to your homepage. Instead, create links that bring prospects to the place on your site that will help them the most, such as a product page, contact information or quote request. Don’t think that by merely directing traffic to any page on your website, visitors will take the time to search further for the information they want, or to place an order.

Mistake #2: Crummy Content: How much information have you provided on your pages? How have you titled you pages and named products? To improve chances of showing up in search engines, include “title tags” on your pages that use the terms or titles most commonly searched for. Include as much useful information as you can, including prices or fees.

Incorrect or outdated information is a turnoff, and off-target or poorly written content will make your site look second-rate. Review and update content regularly to keep it fresh. Provide tips, case studies and other information that helps your intended audience solve a problem or accomplish a task.  Avoid industry jargon, and keep it conversational. Proofread carefully.

Mistake #3: Missing Calls to Action: Don’t make visitors scroll down the page to find what they need. Include the most important items on the top portion of the page immediately visible in a browser window (called “above the fold”). Your landing page should call for one specific action. If you want people to order, make them an offer, such as free samples or quotes, a free newsletter, or discounts geared to what they need. Create clear links to the order page.

Mistake #4: Unwelcoming Aesthetics: Imagine stepping into a store filled with poorly organized, untidy shelves and unreadable signage, says Jason Hennessey, an SEO specialist with Everspark Interactive.  Chances are you will leave. The same thing could apply to your website and the overall look and feel of your landing page. As with a bricks and mortar store, you want to enhance your visitors’ experience and instantly make them feel that they have come to a business that is credible and trustworthy.

Mistake #5: Dismal Design: Don’t cram all available space on your website with ads, flash graphics or irrelevant information. That can be both confusing and a big contributor to poor landing page performance.  Keep your site design and landing pages clean and uncluttered, especially when you want a particular call to action. Avoid garish colors, multiple type fonts and large image files that slow things down.

Customers are there because they want to accomplish something quickly, and your design needs to keep that in mind every step of the way. Too many small business websites are frustrating to visitors. They force people to hunt for contact basics, have irrelevant information and fail to make the ordering process easy. Keep order and lead-generation forms simple and user friendly. The more information fields you require, the fewer people you’ll get filling them out.  

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

4 New Small Business Tax Surprises

Here are two words small business owners seldom like to see together: “taxes” and “surprise!”  Trying to cope with overwhelming complex tax laws is hard enough without the occasional grenade the IRS tosses across the moat.  But BizBest figures you’d rather know now, before getting a notice in the mail.  Here, then, are tips on four recent or impending tax changes that you’ll want to know about (and one of them is actually good news!):

1)      If your employees earn tips, the IRS has you in its sights (again). The tax agency has launched a new effort to bill employers for Social Security (FICA) and Medicare taxes on tip income reported by employees to the IRS, but not to you.  The genesis of this is an IRS form you probably never heard of:  Form 4137: Social Security and Medicare Tax on Unreported Tip Income.  This is how tip-earning employees tell the IRS about tips they earned but did not report to an employer – including any “unallocated” tips shown on their W-2. And the threshold is low:  Any employee who received cash and charge tips of $20 or more in calendar month and didn’t report that income to you (the employer) must file a 4137. In past years, the IRS didn’t have an easy way to match that income to an employer.  But the form was changed and now requires the employee to include your tax ID number. This, of course, creates a new tax event for you (never mind you didn’t know about it), since you are responsible for paying the employer portion of FICA and Medicare taxes on this income.   IRS is collecting the information from the new 4137 forms it receives, and is sending tax bills or letters to employers telling them how much they owe.  Employers who pay up quickly – usually with the next scheduled payroll tax deposit – are not charged any penalty or interest.

2)      S-Corp business owners who pay themselves extremely low salaries in order to take more profits as lower-taxed dividends are also in the IRS crosshairs these days.  Be aware the IRS might argue that your pay is unreasonably low if it doesn’t come close to standards in your business or profession, and will seek back taxes on the income that it says should have been classified as salary.

3)      And here’s a reason to question the health insurance tax credit for small business that’s received such great fanfare since passage of health insurance form:  If you receive such a credit, it will also count against you by reducing the amount your small business can deduct for health insurance premiums.  Be sure to factor this in when calculating the value of the credit toward purchasing health insurance for your employees.

4)      And finally the good news:  Thanks to 2011 100% bonus depreciation, if your business buys a new heavy (gross vehicle weight over 6,000 pounds) SUV this year, you’ll qualify for a much larger tax break than before.  As long as the SUV is used 100 percent for business purposes, your company can write off the entire cost immediately under the bonus depreciation rule now in place.  Forget the old $25,000 maximum you may have seen as a lid on the amount of an SUV purchase that can be expensed. That doesn’t apply under 2011 bonus depreciation rules.  Both new and used heavy pickup trucks also qualify for full write-off.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

How to Defuse Workplace Conflicts

Workplace conflicts can sap energy from any small business. Whether it involves employees, vendors or contractors, getting such issues resolved is critical to smooth sailing. Business managers overall spend an estimated 40 percent of their time dealing with conflicts both big and small.

That’s just normal, since disagreements, disputes and honest differences exist everywhere. For small business owners and entrepreneurs, the key is this:  By treating conflicts as catalysts for increasing energy and productivity, you can turn them from negatives into positives. Here are five ways to make workplace conflicts constructive:

1.    Don’t be a mediator. Many small business owners and managers try to be neutral party mediators in workplace conflicts when in fact that’s not their role. Your obligation is to the interests of the business and others who work there, and you need a combination of skills, structure and finesse to express (and impose) your own view on how things need to be.

2.    Open with an icebreaker:  Most people are ready to complain, debate or argue at the outset of any conflict. They’ve conjured up their best arguments and are ready for battle. For best results, don’t go straight to the topic of the controversy.  That will only get people stuck in their positions. “You need to do something different,” says Steven Dinkin, president of the National Conflict Resolution Center, which helps teach conflict resolution skills. What you need is a way to open a conversation about difficult issues in a non-threatening way.

An icebreaker is not idle chit-chat, but a smooth transition. The ideal opener might ask for a person’s own take on something both work-related and positive. For example, if the conflict involves two workers involved in the same project, ask each of them how they became involved and what they hoped to achieve.

3.    Listen closely. Sometimes what you don’t say is more important than what you do. Good outcomes come from listening carefully to others. This sends a positive message that you are genuinely concerned. And it’s simply the best way to get to the bottom of what’s really going on. “To get this going, ask an open-ended question,” says Dinkin. Then listen carefully to that person’s side of the story. Quickly re-insert yourself into the discussion if it turns negative.

4.    Use and encourage positive language:  Any frustrated business owners knows how easy it can be to slip into negativity after a conflict erupts. Always think before you speak. “Remember, it’s a conversation, not a trial,” says Dinkin. “If you keep the language positive, whoever you speak to will likely mirror what you’re doing. Even the needs of the business can be expressed I positive terms, which will lead to a better tone overall.”  For example you can say, “This is affecting the entire business, and we need to address it so we can get everyone focused back on our goals.”  When you keep things positive, you can work toward great solutions efficiently and effectively.

5.    Aim for SMART conflict solutions: Your goal is not just to defuse a situation in the near term, but to come up with a sustainable answer to the problem.  That requires the so-called SMART approach that has the following qualities:

Specific:  Be clear about who will do what, when, where and how.

Measurable: Establish a way to tell that something has been done, achieved or completed.

Achievable:  Whatever solution you come up with needs to fit the situation and be doable by those involved. In short, don’t set anyone up to fail.

Realistic: Check calendars for holidays and vacations; look at past performance to predict future actions and allow time for glitches and delays.

Timed:  Set reasonable deadlines and target dates and provide necessary tools and support to meet those targets.

And finally, “Once you have your smart solutions, quickly put them in writing,” says Dinkin. “It’s the best way to keep people’s memories in line with what everyone agreed on.”

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

New SBA Study says IRS Small Biz Audit Crackdown is Bogus

Ten years ago, a landmark IRS report claimed that small business owners under-report income by $80-100 billion yearly and account for over half of the U.S. “tax gap” of owed by uncollected taxes.   As a result, small business owners have been subjected to increased audits and reporting requirements, including the controversial new 1099 rule.

But now for the truth:  A new study just released by the U.S. Small Business Administration (SBA) Office of Advocacy says the IRS crackdown on the backs of small biz has been bogus all along.  And that comes from independent research commissioned by the Feds themselves – not some anti-tax business group.

After reviewing 10-years’ worth of IRS small business audits related to the innocuously-named “National Research Program” (NRP), outside researchers found that a mere 1% of all issues examined resulted from intentional failures to report income properly. Yes you read that right – one percent. In other words, 99% of income underreporting is unintentional, and undoubtedly the result of a vast and utterly confusing array of tax rules and regulations.

And here’s the real gut punch for biz owners:  While small business was tagged as the tax cheating culprit, the new study says that large corporation tax gaps are scarcely being measured at all, and that the IRS has been using estimates dating back to the 1970s and 80s to calculate corporate noncompliance.  What’s more, says the new report released by SBA:  “The IRS focused its tax-gap study on individual tax returns, and on returns not subject to withholding or third party reporting, which skewed the study unfairly toward small business.”

Over the last five years, audits of returns typically filed by biz owners have soared, while those for corporations with $10 million or more in assets have actually dropped 13%.  These are figures reported by the SBA itself.

But which type of audit pays off the most for taxpayers – small biz or big corporation?  No contest.  According to the new whistle blowing report, the IRS collects an average of $9,350 per auditor hour spend examining big biz returns, but only $1,034 per auditor hour spend auditing small business.

The new study concludes with this:  Unlike large corporations, small businesses lack the resources and expertise to negotiate with the IRS.  Indeed, 71% represent themselves in audits. They are overwhelmed by the complexity of the tax code.  Only aggressive outreach and education designed to help small businesses understand their tax filing obligations will significantly reduce the tax gap attributed to them.

BizBest will email the full 54-page report in PDF, free of charge, to anyone interested. Email your request to editor@bizbest.com, and be sure to include the email address you’d like the report sent to.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

Best and Worst Areas for Small Business Bankruptcies

Bankruptcy filings by small businesses in the U.S. have dropped sharply in some areas, but have actually risen in others according to a new study of bankruptcy trends among the nation’s 24 million small businesses conducted by Equifax, one of the major credit reporting agencies. While bankruptcy rates have slowed in many regions, California remains troubled, accounting for nearly 20% of the country’s business failures. 

The Equifax study traced small biz bankruptcy trends by metropolitan statistical area (MSA). While bankruptcies accelerated in some areas, 10 of the top 15 MSAs with the greatest number of small business bankruptcies in 2010’s 4th quarter saw a year-over-year drop from a year earlier. The Chicago-Naperville area scored the best improvement — a 30% drop in bankruptcies. Following behind were a number of California MSAs, many of which reported double-digit decreases. 

But five top MSAs saw bankruptcies rise. One surprising result involved Wisconsin, which saw a 16.5% jump in small business bankruptcies – more than any other MSA on the top 15 list below. 

Despite improvements in some areas, California ranks as America’s bankruptcy capital. Six California metro areas made the list of top 15 MSAs with the highest number of small business bankruptcies. And all California MSAs combined (22 total) accounted for nearly a quarter of U.S. small business bankruptcy filings over the past year. 

MSA Q4 ‘09 Q4 ‘10 % Change 
Los Angeles-Long Beach -Glendale, CA 1082123013.68%
Riverside-San Bernardino -Ontario, CA 705642-8.94%
Houston-Sugar Land-Baytown, TX 4114458.27%
Sacramento-Arden-Arcade –Roseville, CA 533424-20.45%
San Diego-Carlsbad-San Marcos CA 438389-11.19%
Denver-Aurora, CO   463368-20.52%
Santa Ana-Anaheim-Irvine, CA   410365-10.98%
Portland-Vancouver-Beaverton, OR-WA 407333-18.18%
Dallas-Plano-Irving, TX 367327-10.90%
California – Rest of State 352300-14.77%
Oakland-Fremont-Hayward, CA 293286   -2.39%
Wisconsin-Rest of State 23627516.52%
New York-White Plains-Wayne, NY-NJ 2702720.74%
San Jose-Sunnyvale-Santa Clara CA 2482667.26%
Chicago-Naperville-Joliet, IL 375262-30.13%
Total 65906184-6.16%

Despite improvements in some areas, California ranks as America’s bankruptcy capital. Six California metro areas made the list of top 15 MSAs with the highest number of small business bankruptcies. And all California MSAs combined (22 total) accounted for nearly a quarter of U.S. small business bankruptcy filings over the past year. 

 

 

 
 
 

 

 

MSA Group Q4 ‘09 Q4 ‘10 
Total Bankruptcies – CA MSAs in Top 15 4,0163,902
Total U.S. Bankruptcies – All MSAs 23,31919,616
CA MSAs in Top 15 as % of All US Bankruptcies 17.41%19.89%

The study also named 15 metro areas with the fewest small business bankruptcy filings in the fourth quarter of 2010 — all reporting 9 bankruptcies or less.    

MSA Total Q4 ‘09 Total Q3 ‘10 Total Q4 ‘10 
Kingsport-Bristol, TN-VA 1869
Baton Rouge, LA 18179
Erie, PA 16249
Gulfport-Biloxi MS 10139
Amarillo, TX 1758
Charleston, WV 968
Killeen-Temple-Fort Hood TX 20237
Binghamton, NY 16137
South Bend-Mishawaka, IN-MI 1876
Trenton-Ewing, NJ 1276
Shreveport-Bossier City, LA 976
Lafeyette, LA 7115
Gainesville, Fl. 685

Business Owner Guide to Top Legal and Tax Trends

Starting and operating a small business is never easy, and all of the tax and rule-making authorities that get in your way don’t help. Legal and regulatory issues, trends and requirements are always changing, forcing business owners to run a new gauntlet each year.  To keep you on top of things, here are 11 trends and changes you need to know:

1. Rising unemployment insurance (UI) rates: UI funds in many states are at critically low levels. As a result, biz owners in many areas can expect to see UI contribution rates higher in 2011 to replenish depleted UI trust funds and repay federal loans taken to allow states to continue to pay benefits.

2. Changing tax laws: In 2011, business owners even greater complexity (if that’s possible), including a partial payroll tax holiday, the ability for businesses to expense 100 percent of their capital investments, and the retroactive extension of some temporary incentives that expired in 2010.

3. Health care reform: A new rule provides business tax credits for small companies that offer health insurance to employees. Grandfathering will remain an important component of health care reform. Health plans that existed on March 23, 2010 are grandfathered, meaning that they do not need to add many of the new protections under the health care reform law. To remain grandfathered, health plans cannot make any significant changes to the plan.

4. Flexible spending account (FSA) changes: Effective this year, over-the-counter medicines and drugs other than insulin (i.e., aspirin) are longer eligible for reimbursement from a health FSA unless the item is prescribed by a medical practitioner.

5. Employment law trend: The U.S. Department of Labor and many states have enacted or are considering measures to provide greater transparency to workers on the wages they are owed, especially in key areas such as minimum wage and overtime requirements, and to increase penalties on those who fail to pay their workers the compensation they are entitled.  Expect to see new rules enacted.

6. 401(k) disclosures: If your business offers a 401(k) plan, new regulations will require disclosures of fees being charged by the plan. In addition, plans offering “target date” funds will likely see further disclosure requirements around those investments.

7. States go revenue hunting: Many states are facing critical budget shortfalls, and are contemplating new tax and fee increases or filing changes to raise money. Also be aware that many state agencies are reducing staff, which could result in processing delays for businesses requiring licensing or other state services. Be sure to renew or apply for business licenses early.

8. Federal Trade Commission (FTC) requirements:  With the dramatic increase in the use of social media such as Facebook and Twitter, as well as blogs, the FTC has issued regulatory guidance around the use of advertising in social media, especially endorsements and misleading or dishonest product reviews. The agency has also recently proposed the creation of a “Do Not Track” tool for the Internet (similar to the telemarketing “Do Not Call” registry).

9. IRS enforcement: To help collect more tax revenue, the IRS is ramping up its enforcement efforts in several areas affecting small business. In 2010, the IRS kicked off an employment-tax audit program that will carry into this year and beyond. These audits are focusing on employee misclassification, executive compensation, fringe benefits, and adherence to general employment tax filing requirements.  The IRS is also accelerating efforts to increase tax compliance among employees who collect tips.

10. Privacy protection: Most states now require businesses to notify customers (and sometimes government authorities) when sensitive data is breached. Some have new laws requiring that businesses protect sensitive client data. Businesses handling protected health information are subject to additional requirements.

11. Employment verification:  U.S. Immigration and Customs Enforcement (ICE) continues to crack down on companies knowingly hiring undocumented aliens. Several different Congressional immigration reform proposals, which may present further employment verification obligations, are being considered.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

What You Must Know about Hiring Independent Contractors

If your business uses independent contractors, the best tax advice is simple: Watch your back! Why?  Because state governments are lining up to help the IRS nab businesses they believe have misclassified workers as independent contractors instead of employees.

In tax terms, the difference is huge. If the IRS says you did it wrong, the taxes and penalties will do some serious damage.  And states now want their pound of flesh as well.  Pennsylvania, for example, just enacted a law that can impose civil and even criminal penalties on businesses that misclassify workers. Other states with similar laws include CO, CT, DE, IL, MD, MA, NE, NJ, NM, NY and WI.  Others won’t be far behind.

And be aware that the IRS uses leads and other information it gets from all states to identify and audit small businesses it feels are misclassifying workers.  In short, small business is a big target, and thousands of audits are underway already, with thousands more to come.

Using independent contractors or “contract workers” properly has long been one of the stickiest issues that small business owners face.  Are the people you bring in to provide specific services “independent contractors” (non-employees)? Or are they actually employees?

Because independent contractors are responsible for paying their own taxes, using them can save your business a bundle in payroll taxes, insurance, benefit costs, training and other areas. Independent contractors work for themselves. They operate their own business and have you as a client. You are not their employer and don’t set their hours or control how they perform their work.

But the IRS sees it this way: A worker is an employee of your business unless you can prove otherwise.  “Determining whether a new worker is an employee or an independent contractor can be tough,” says Keith Hall, National Tax Advisor for the National Association for the Self-Employed (NASE).  “Keep in mind that you can’t just choose which one is easiest.  It really depends on who calls the shots day to day.”

If you’re unsure how to classify a worker, here’s quick advice from NASE:

  • If you control the Who, Where, When and How the work is done, they are probably an employee. This means that you, as the business owner, must file a Form W-2 and withhold income and payroll tax, among other things.
  • If the worker controls their own work product and even has other customers besides you, then they are most likely independent contractors.  Payments to independent contractors are reported on IRS Form 1099, and the independent contractors are responsible for their taxes and their own tax forms, including Schedule C, Profit or Loss from Business and Schedule SE, Self Employment Tax.

And also know that workers who believe they’ve been improperly classified as independent contractors can file an Uncollected Social Security and Medicare Tax on Wages form asking the IRS to calculate and collect the employer portion of those two items that would have been due from you.

Here are 12 other things you should do and know:

  1. Using an independent contractor agreement can help (a little): A simple agreement that specifies the independent contractor relationship can help validate your position, but it won’t be enough by itself. Sample independent contractor agreements that you can use or adapt for your own business are available online at Business Owner’s Toolkit and DocStoc.com.
  2. Know the rules for your specific business or industry: Some industries or types of businesses have established a tradition of using independent contractors rather than employees and have cleared this with taxing authorities. But at the same time, firms in certain lines of business are at high risk for aggressive worker “reclassification” audits – especially construction and landscaping.  IRS Publication 15-A, The Employer’s Supplemental Tax Guide (PDF) has detailed guidance including information for specific industries.
  3. The Independent Contractor Report, which has been tracking legal issues in this area since 1986, has detailed information on industries most at risk.   
  4. Know what the IRS says: This is an area where’s it’s important for business to look at what the IRS is saying about the business relationship between you and the person performing the services. The links below have what you need.
  5. Contractors control when and where they work. While they might receive job specifications from a client, they are not given specific instruction on how to accomplish a task.
  6. Avoid setting a pattern of daily or weekly work hours dictated by your business.
  7. Contractors do not usually have a permanent or continuing relationship with your business and have time to pursue other clients. Compensate contractors on a per-job basis, rather than weekly or monthly.
  8. Contractors are paid to complete a set task and may bring in others to complete it, at their discretion and on their payroll.
  9. Contractors use their own tools and technology and are responsible for their incremental expenses. They have an investment in their own “business” and should be able to perform their duties without your facilities.
  10. Contractors can’t be fired as long as they produce results that meet their contract specifications.
  11. Contractors are not covered under health insurance or other benefits you have for employees.  They should have their own.
  12. Legal self-help publisher Nolo has a great guidebook that shows you how to: create a valid contract, assess who qualifies as an independent contractor, hire ICs without risking an audit, retain ownership of intellectual property when using ICs and take advantage of the IRS “Safe Harbor” law.  Details at Nolo.

These IRS resources will also help:

FACTA Identity Theft Rule Update

The much-feared, long-delayed and highly-confusing “FACTA Red Flags Rule” is an anti-fraud law requiring “creditors” and “financial institutions” to identify, detect and respond to the warning signs, or “red flags” that could indicate identity theft. Due to vague wording of the law, it appeared that many small and professional businesses could be considered “creditors” and thus be subject to onerous compliance requirements.

The Red Flag Program Clarification Act, passed in December and signed by the President, now clarifies that Congress only intended for traditional creditors to be subject to the Red Flags Rule, not doctors, lawyers and other professional groups who became creditors by default not by choice.  As a result, fewer small businesses will be subject to the Red Flags Rule, although no business or organization is exempt.  Every business must determine for itself which rules apply to them.

The requirements were mandated by the Fair and Accurate Credit Transactions Act (FACTA) – hence the name. The FTC’s Red Flags Web site, www.ftc.gov/redflagsrule, can help you determine if your business is covered, and what you’ll have to do to comply. It includes an online compliance template that lets you design your own Identity Theft Prevention Program through a fairly easy online form, as well as articles directed to specific businesses and industries, guidance manuals, and a FACTA Red Flags FAQ.

FACTA’s definition of “creditor” includes any business that regularly extends or renews credit – or arranges for others to do so – and includes all businesses that regularly permit deferred payments for goods or services. Accepting credit cards as a form of payment, however, does not, by itself, make you a creditor. “Financial institutions” include entities that offer accounts that enable consumers to write checks or make payments to third parties through other means, such as other negotiable instruments or telephone transfers.

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