Small Business FAQ – Employee or Independent Contractor?

I need to hire people to help with an upcoming project. Are they considered independent contractors or are they new employees?

The amount of control you have over the workers you hire will indicate whether they should be classified as independent contractors or as employees. In general, if you tell your workers where, when and how to do their jobs you should classify them as employees.

You can classify your workers as independent contractors only if you have a minimal amount of control over their work activities. If a worker has their own business entity formed to offer their services, and they also offer these services not just to you but also to others, then they would be more likely to be considered an independent contractor.

For example, if you hire a specialty sign painter with her own business formed, workshop leased and several jobs in process for other clients, this worker would likely be classified as an independent contractor. If in doubt, err on the side of treating your workers as employees.

While classifying your workers as independent contractors can save you money in the short run (you don’t have to pay the employer’s share of payroll taxes, provide employee benefits such as health insurance or have an accountant keep records and file payroll tax forms), it may get you into big trouble if the IRS later audits you. The IRS may reclassify your “independent contractors” as employees and assess hefty back taxes, penalties, and interest against you.

Small Business FAQ – Opening a Bank Account, Business License and Home Office Income Tax Deduction

What documents do I need to open a bank account for my new business?

Most U.S. banking institutions will require both a Federal Employee Identification Number from the U.S. Internal Revenue Service (also known as a federal tax ID number) and proof of registration with the Secretary of State office in the state where the business is primarily located. Some banks may have further requirements.

Do I need a license for my business?

Maybe yes, maybe no. Many small businesses do not need a specific type of license to operate. For example, if you are a consultant, software developer or website designer, it is unlikely you will need a professional business license. However, most states, counties and cities have licensing requirements for certain types of businesses. Also, many cities, towns, counties and other local jurisdictions have licensing requirements just to operate your business within their borders. Accordingly, you should check with each of your local government offices (state, county, city and town) to see if your specific type of business needs a license. Examples of businesses which need a license are restaurants, construction services, gas stations, movie theaters, health related services, insurance brokers and auto repair services.

I work in my home part time. Can I take the home office tax deduction?

If you operate a business out of your home you may be able to take the home office income tax deduction. This deduction allows you to deduct the cost of a portion of your rent or mortgage, as well as some related costs such as utilities, insurance and remodeling, from your business gross income. However, there are strict requirements to be met to be eligible for the deduction. For example, you will not qualify for the deduction if you use your office part for work and part for personal reasons or if you don’t use the space regularly for operating your business.

Where to Incorporate? How do I get a U.S. Tax ID Number (FEIN)? Small Business FAQ

Where should I incorporate?

You may incorporate in any state regardless of where your business is physically located. Incorporating in the state where you reside is usually the best choice. Delaware has also been a favorite due to the state’s extensive case law governing corporate activities and relatively liberal incorporation requirements. However, most states have now enacted incorporation statutes similar to Delaware. Also, if you incorporate in a foreign state (other than where you reside) you will have to register your business with that state and pay income taxes in accordance with the regulations of that state.

How do I register my business with the U.S. Internal Revenue Service (IRS) and obtain a Federal Employee Identification Number (FEIN)?

Upon the formation of a new business entity, the business must obtain a tax identification number (the FEIN) registering the new business with the IRS. The FEIN may be obtained on the internet at It is strongly recommended you speak with a legal or tax professional before filing with the IRS for a FEIN.

Sole Proprietor or Business Entity? Small Business FAQ

Two common questions of a new business owner are:

  1. Do I need to incorporate or form a business entity?
  2. Does a sole proprietorship work better if my business consists of only me?

A business entity protects your personal assets from creditors and other legal claims against your business. Without the protection of a business entity, it is possible your personal assets could be used to satisfy a legal judgment related to your business activities. With a business entity in place, the entity serves to shield your personal assets from such claims.

A sole proprietor, defined generally as any business conducted by a single individual and operating without a business entity structure, does not receive the same type of liability protection for their personal assets.

For this reason alone, it is generally advisable to form a business entity to operate any business venture.

CARES Act – Summary of Tax Benefits for Small Business

The CARES Act, effective March 27, 2020, provides significant benefits for qualifying businesses suffering financial difficulties due to the economic impact of the current health crisis.

Paycheck Protection Program Loans – These loans are available through the Small Business Administration (SBA) to small businesses, nonprofit businesses and those who are self-employed. The funds obtained through this loan program can only be used for certain business expenses including payroll costs, rent, utilities and mortgage payments. If the loan funds are actually used for any of these specific purposes within the 8-week period after the money is received, then the loan amount can be forgiven. Any amounts not used for the specific purposes must be repaid over a 2 year period at a 0.5% interest rate. There is no requirement for a personal guarantee of the business owner, or to provide a certain amount of collateral, in order to obtain a Paycheck Protection Program loan. The amount of the loan forgiven is determined by the number of employees who are retained by the business during the loan period. The business will not incur any cancellation of indebtedness income from the forgiven loan amount.

Employee Retention Tax Credits – These credits consist of refundable payroll tax credits in the amount of 50% of qualified wages paid between March 13, 2020 and December 31, 2020. To qualify for the tax credits an employer must (1) have had their operations suspended either fully or partially due to the current public health crisis, or (2) the gross receipts of the employer must have declined by 50% or more from the same period during 2019. This tax credit is not available if the employer has received a Paycheck Protection Program Loan. The amount of the credit is limited to $10,000 per employee including health insurance plan costs for the employee.

Net Operating Loss Carrybacks. Net operating losses of a business incurred during the years 2018, 2019 and 2020 may now be carried back 5 years. This may allow businesses with net operating losses to amend previous tax returns and generate immediate tax refunds. Net operating losses may now offset 100% of taxable income rather than only a portion of taxable income.

Employer Payroll Tax Payments. Between March 27, 2020 and December 31, 2020, payment of the employer’s portion of the Social Security taxes for employees can be deferred for a period of two years. 50% of the deferred payment amount is due on December 31, 2021 and the other 50% is due on December 31, 2022. This payroll tax credit is also available for self-employed individuals.

Property Improvement Deductions. Amounts spent by a business to improve qualified property may be deducted immediately instead of depreciating the amount over the life of the property.

Excess Loss Limitations. Limits on the amount of excess losses that can be deducted by pass-through tax entities and the self-employed that were enacted as part of the 2017 Tax Cut and Jobs Act do not apply for tax years ending on or before December 31, 2020. This change provides a business with the ability to amend previously filed income tax returns and possibly generate immediate cash refunds. Tax returns for 2019 can also be prepared without accounting for excess loss limitations.