There’s lots of news on the federal tax front. Uncle Sam has made a number of changes recently, and more are on the horizon. This may be a good time to chat with your tax advisor. You’d like to take full advantage of benefits available to your small business. And, of course, you’d like to avoid penalties. Here are some tax law developments you should know about.
Husband-Wife businesses
An amazing percentage of service contracting businesses are owned and operated by a husband and wife. If you and your spouse have such a business, and if it’s not run as a corporation or LLC, there are some tax issues to consider. How you proceed can affect the tax forms you prepare and how you and your spouse later qualify for Social Security and Medicare benefits.
Generally, the IRS classifies an unincorporated husband-and-wife business as a partnership. This means you have to keep partnership records and file a partnership tax return each year with the IRS. Couples often avoid the paperwork hassle by treating the business as if owned by one spouse only. The business then files a Schedule C in the name of that spouse. The problem is that only that spouse receives credit for Social Security and Medicare coverage purposes.
There’s now a way for both you and your spouse to avoid being classified as a partnership, and for each of you to get credit toward Social Security and Medicare benefits. You can elect to be a “qualified joint venture.”
You can become a qualified joint venture if you and your spouse are the only members of the venture, file a joint tax return, both materially participate in the business, and both elect not to be treated as a partnership.
You’ll each prepare a separate Schedule C showing your shares of business profits or losses. And, if you’re subject to self-employment taxes, you’ll each prepare a separate Schedule SE. You’ll send these to the IRS with your annual Form 1040.
Payroll tax holiday
Congress has provided an incentive for your business to hire new employees this year. It applies to people you hire who were unemployed during the 60 days before you hired them. If you’ve hired such people after Feb. 13, 2010, you don’t have to pay the employer’s share of Social Security taxes through the end of that year. You still have to pay the employer’s share of Medicare taxes.
You can’t get this tax break for someone you hire to replace another worker unless the other worker quit or was fired for cause. And you can’t get this tax break if you hire a relative or a dependent.
Retained worker credit
Another tax break for employers is the retained worker credit. Your business can get a tax credit of $1,000, or 6.2 percent of a retained worker’s wages (whichever is less), for each worker who qualified for the payroll tax holiday – if you retain the worker for at least 52 consecutive weeks. The details are a bit complicated, so check with a tax professional to see how this credit might apply to your business.
Health insurance credit
As a small employer, beginning in 2010, you can claim a tax credit for part of the contributions you make to your employees’ health insurance premiums. To qualify for this credit, your business must have no more than 25 employees, and the average annual wages you pay them can’t exceed $50,000.
The tax credit can be as much as 35 percent of your health insurance contributions, depending on the number of employees on your payroll, and how much you pay them. Again, this is complicated stuff, so you’ll want to consult your tax advisor.
A heads-up: This health insurance credit is just the tip of the iceberg created by the 2010 health care legislation. In the coming years, additional health care incentives and penalties affecting businesses will be phased in. The costs to your business – as well as the paperwork – are likely to multiply to unprecedented levels.
For example, in early 2012 when you prepare a Form W-2 to report an employee’s 2011 earnings, you’ll need to disclose how much it costs your business to provide group health insurance to the employee. This additional information won’t affect the employee’s tax liability, but it can be an administrative nuisance for your business.
It’s always wise to stay abreast of changes in tax laws, and it’s better not to wait until “tax time” next year to review your tax position with a trusted advisor.
