Your Top Start-Up Questions Answered

Taxes

Contractor or Employee?

Q: Currently I am employed as a developer for a small company. I have no benefits other than three weeks of vacation. I would like to start my own business and work as a contractor for this company. What advantages would there be to this arrangement, both for my current company and for me?

A: Your accountant can give you a lot more detail, but the bottom line is that you'll need other clients to be considered a contractor. If you become a contractor and only work for this one company, the IRS will classify you as an employee anyway. There is a list of rules that you can get (your accountant or the IRS will have them) that tells you whether you are a contractor or an employee.

That aside, advantages for you would be more flexibility (if they tell you when or where to work, then the IRS will say you are an employee), the ability to find other projects (and perhaps become in demand enough to raise your rates), and the feeling of being your own boss. The disadvantages are that you'd have to pay your own Social Security and employment taxes-be sure that if you become a contractor, you get more than you get now, because your expenses will increase. Plus, the company will have a lot less of a commitment to you-it is much easier to "lay off" a contractor than an employee.

Deductions

Q: I am starting an HR Consulting and Training business. My question is very broad: What are deductible expenses for a small, homebased start-up?

A: You'll definitely want to talk to an accountant to get the official version, but here is some basic data:

Any miles that you drive for business purposes-to a meeting, to buy company supplies and equipment, and so on-can be deducted. The easiest thing (and the most defendable to the IRS) is to get a mileage book from any office supply store and, whenever you get in your car, ask "Is this for business?" If so, record the beginning and ending mileage on that trip. Some people combine personal trips with business trips, but I'm not sure how the IRS views that.

Other things you could probably deduct would be computer equipment in your home office, possibly furniture and other supplies for that office, a digital camera or camcorder if you can show that you use it in your business, magazine subscriptions, and meals with clients. The rules on these things are always changing, so definitely check with an accountant.

Here are some good resources to help you:

Withholding Taxes

Q: I have been asked by a family in our city to supervise the homeschooling of their three children. They would pay me $450 per week. Obviously, I would owe taxes on this money. Would I be considered a small business and responsible for my own taxes and FICA, or are the people who hire me responsible for this?

A: You will need to sit down with them and decide one way or another. If I had to guess, I'd say that they have assumed you'll pay your own taxes, and this is the typical way (as it is a fair amount of work for them to make you an employee). If that's the case, then make sure you know how much taxes and FICA you'd owe, and subtract that from the $450, and make sure it is worth it for that amount. You may need to negotiate a higher amount after you take that into consideration.

Any accountant can explain this in detail, and I'd recommend that you contact one for detailed advice. This isn't something you want to mess around with-you want to make sure everyone is on the same page.

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