US Business Law / Taxes

Backup withholding can catch taxpayers and businesses unaware. My colleague William Perez, Guide to Tax Planning, has a comprehensive article on backup withholding, from the taxpayer's viewpoint. But if your business pays a contractor or other business, you need to know about backup withholding.

What's Backup Withholding?

Before you begin paying a contractor or freelancer or other business, you must get a W-9 form. The W-9 is a request for taxpayer ID and certification (if the person is exempt from backup withholding). If you don't have an ID or if the ID is not valid, the IRS requires that you withhold federal income tax from that payee at the rate of 28%. You don't have to withhold FICA taxes (Social Security/Medicare), because the contractor is supposed to pay those, through self-employment taxes.

How Do I Know if I'm Supposed to Implement Backup Withholding?

You will receive a notice from the IRS telling you to start withholding, because the taxpayer's ID is missing or invalid. Here's more about IRS notices and backup withholding.

Backup withholding is deposited through the EFPTS system, the same as other payroll taxes and on the same schedule. Employers must also file a Form 945 each year to report backup withholding.

More about Hiring and Paying an Independent Contractor

If the IRS gives you a notice of audit, you will need business records to prove your deductions. If the records as missing or destroyed by forces outside your control (fire or flood, for example, you may be able to get the IRS to accept other means of estimating these expenses. But if you don't have these business records  because you destroyed them intentionally, you may be liable for interest and penalties, in addition to having the deductions disallowed.

Remember, in tax matters, the burden of proof is on you - the taxpayer - to provide documents backing up your business tax deductions. The Tax Court said, "Deductions are a matter of legislative grace, and a taxpayer must prove...entitlement to a deduction."

In a recent Tax Court case, a taxpayer destroyed the records for his independent contractor business for 2008 because he was diagnosed with a terminal illness and decided he didn't need the records. Then he got the audit notice and tried to make up the records to validate his deductions. The IRS, and the Tax Court, weren't buying it. The Court upheld the IRS ruling to disallow the expenses and to charge him a penalty for non-compliance.

William Perez, Guide to Tax Planning, discusses how long to keep tax records.

Read more about Keeping Business Records for Tax Verification

Source: Striefel v. Comm. T.C. Memo 2012-102

If your business depends on technology, you may be aware of the changes in patent law with the America Invents Act. The main provision of the law is the change to a system of "first inventor to file" (FITF), which took effect March 16, 2013. Under this system, an inventor can now file a patent and then take some time to "perfect" it. The process then allows public comment both before and after the patent is awarded.

This new system is supposed to be an advantage in international situations, but, a recent Forbes article says there has been fear that  the new system will reward larger companies, who have more access to large legal staffs to help them file. But the article also notes that "the solo entrepreneur with a great idea remains ahead of the patent game."

In another recent article, Inc.com says small businesses are filing fewer patent applications: the percentage of small business-secured patents has dropped from 30 percent in 2000 to 20 percent in 2013. Part of the issue is the cost of filing a patent and getting it fast-tracked through the system (up to $4,000), costs that larger businesses can better afford than small companies.

The good news is your company doesn't have to wait until a patent is fully developed to get a patent. Upstart Business Journal suggests filing early and providing as much detail as possible. But make sure you have a fully formed idea before you file.

In any case, if you have a patentable idea, talk to an attorney who specializes in intellectual property to help you work through the patent process.

Read more about Finding and Hiring an Attorney

Read more about the New Patent Law and Your Business

Confused about how the Affordable Care Act (ACA) (AKA "Obamacare") affects your business? Join the club. To help you sort through the confusion, I've done some research on information available from various federal agencies.

To start, you might want to look at this brochure from Health and Human Services: For Small Businesses: The Facts on the New Health Care Law. The brochure is very general, so you'll need to look further for details.

Your business is affected by the ACA depending on how many employees you have.

If you have fewer than 25 employees, you don't have to provide health insurance, but you might be eligible for a business tax credit if you do. It's called the "Small Business Health Care Tax Credit" and you find detailed information on the IRS's "Small Business Health Care Tax Credit for Small Employers" page. The page includes information on eligibility and how to sign up, with examples. This tax credit has been available since 2010, so if you think your business might qualify, it's worth exploring. Talk to your tax advisor.

Read more about this small business health care tax credit.

Beginning in 2014, if you have more than 50 employees you must pay an assessment if you don't provide an acceptable health plan for those employees. The IRS calls this an "Employer Shared Responsibility Payment." Find answers to common questions about this assessment on this IRS page: Questions and Answers about the Employer Shared Responsibility Provisions of the Affordable Care Act."

If your business employs more than 25 but fewer than 50 employees, you don't have to provide health insurance, but you don't get a tax credit if you do provide health insurance.

Read more about How the Affordable Care Act affects your business.

Love your company logo? You can protect it from being stolen by some other company, but not by copyright. Certain kinds of intellectual property (IP) can't be copyrighted, but some of those can be trademarked. Here's what I mean:

Copyrights protect authors of creative works (books, plays, artwork, music, and more). Copyrights don't cover titles, names, short phrases, and logos used by businesses, but trademarks and service marks do.

Why you may need both a copyright and a trademark:

TacticalIP has a good description of the differences between copyrights and trademarks. He also points out that there are times when you will want both:

Sometimes both copyright and trademark protection are useful. For example, a new slogan for your widget may also appear in print ads for the widget. You will likely want both copyright and trademark protection, since they offer different protections for different things. The ad's text and graphics are covered by copyright, but the slogan may be protected by trademark law.

LegalZoom uses the example of a complex logo which would certainly need to be trademarked, but that might also include a great deal of creative authorship and might also qualify for copyright protection.

How to be sure your get the protection of a copyright or trademark, or both: Get an attorney. This is another of those "don't try this yourself" things. I have worked on several trademark applications myself and each time I gave up (various reasons) and turned it over to an attorney.  Look for an Intellectual Property specialist; it's worth the money.

More about the Copyrights and Trademarks-The Differences

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Bad stuff happens to everyone, including businesses. But there are some things you can do to protect yourself and your business when things happen. For example:

Divorce or other change in your family status. If your spouse or marital partner is also a co-owner of your business, you can prepare a buy-sell agreement to designate what happens to the business in these situations, particularly if one of you wants out of the business.

Death or disability. Yours or another business owner's. For protection against loss of income from disability, your business should have disability insurance and life insurance (naming the business as beneficiary) on each owner or key management employee. That buy-sell agreement can also protect the business in case an owner leaves the business due to death or disability.

Dissolution of the business - involuntarily through bankruptcy or voluntarily - can be difficult. Before you voluntarily close your business, prepare an exit plan so you can retain the business value in the process.

Disaster -  Even though disasters, by definition, are unexpected, you can make a plan to keep employees safe and protect valuable business assets before a disaster, and get back to work quickly after a disaster. Read this article on  Planning for Disaster - Before and After . And check out these business disaster planning tips from the SBA.

There's no time like now to consider these situations and plan to keep your business strong in almost every situation.

Every business should also create - and update - a general business plan so you know where you're going and what success looks like.

Before you set out that "Yard Sale" sign, you need to check on:

• City ordinances. You may need a permit from your city or town for your yard sale or garage sale.
• State sales taxes. Some states have requirements that sales taxes be paid on sales that are more than just "casual sales." Check with your state's taxing authority.
• Income taxes. Yes, the IRS wants to be sure you aren't turning a once-a-year event into a full-time business or that you are avoiding capital gains taxes.

One tip: Check with your local newspaper to see if they have a Garage Sale Package, with signs and ideas for newspaper ads. They may also include information about local ordinances or permits you need to comply with.

In general, it's up to you to do the research, if you plan on having a garage sale more than once a year. When the city inspector pulls up to your house, you need to know what's legal.

More on Garage Sales, Yard Sales: Taxes, Licenses, Permits

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Does it sounds like fun to grow produce or make crafts or baked goods and sell them at a local farmers market? It's not quite that simple. Seasonal businesses like booths at flea markets, farmers markets, and craft fairs must also pay taxes. Although each locality and state has different regulations, if you have a business where you sell to customers, you probably are going to have to pay taxes.

Flea Market and Farmers Market Booths are Businesses

If you have a booth at a farmers market you are creating or growing something, and you expect to sell it for a profit. And profits are taxable. If you are selling at a flea market booth, for example, you may be selling collectibles you picked up at garage sales for a low price, and you want to sell for a higher price and make a profit (otherwise, why would you bother?). Those profits are taxable.

What Taxes Must a Seasonal Business Pay?

A seasonal business must pay, at minimum:

• Income taxes on profits of the business, depending on your business type
• Sales taxes on sales of taxable items
• Self-employment taxes (social security and Medicare) for yourself as a business owner
• Employment taxes, if you have employees

Many localities charge other taxes, and your state may charge franchise taxes or other types of business taxes. As you start out, keep it simple, but do make sure you pay those taxes. Ask a CPA or tax advisor for help.

And don't forget that a cash business like a booth must verify income and expenses to avoid IRS audit. CPA Gail Rosen has some tips to help cash businesses.

More about Flea Market or Farmer's Market Booths - Taxes and other Issues

Read More About

How to sign up for sales taxes (then collect, report, and pay)

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In advertising, publicity, brochures, anywhere in your business: Using an image of anyone without their permission is a bad idea, and particularly using the image of a celebrity must be pre-approved, with a model release. Marie Loughran, Guide to Arts/Crafts Businesses,  discusses what can happen if you use a celebrity photo without first getting permission - lots of legal hassle, which translates into lots of money spent on attorneys.

Use of someone's photo is both a privacy issue and a copyright issue.

It's not just celebrities who require a release. ANY TIME you use someone's photo in your business, you must get a model release before the image is published. This includes photos of your own family and friends. You never know when the marriage or friendship can go sour and leave you with a nasty lawsuit ("You used my photo without my permission!"), and it's easier not to make exceptions.

A model release is basically a contract between you and the person whose photo is being used. A simple model release form gives a specific entity (your business) permission to use photographs of a specific named person. It's easiest to say "any photo taken on a specific date" for a specific purpose, which leaves you the flexibility to select which photo or photos you want to use. Releases for children should be signed by a parent or legal guardian.

Just to be clear, you don't need a release to take a photo of someone, but you do need a release if you are going to use that photo to promote your business. And, yes, this includes on your business blog or elsewhere on your business website.

Related information:

Business contracts

Copyrights

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Before you hire children as employees this summer, here are some laws and regulations you need to know about:

1. Check the child's age, using a driver's license or birth certificate. Don't rely on the child to give you this information. Check on work permits, depending on your state's requirements.

2. Understand restrictions on hours and types of work for young workers, both Federal (FLSA child labor laws) and your state laws).

3. Clearly define the child's status - part-time, summer worker, etc. - for wages and benefits purposes. For example, if you have a classification of "summer worker," you don't have to pay for holidays and vacations.

4. Make sure all new hire paperwork is completed, just as for all other employees.

5. Treat the child worker the same as other employees in the classification - same benefits and time off.

6. You must pay minimum wage, but there is a special minimum wage (currently $4.25) for summer workers for up to 90 days.

7. State child labor laws may be different from federal laws; the more protective law must be followed.

8. If you hire your own children in "necessary and essential jobs," and your business is not a corporation, some of the age restrictions don't apply, the child may not have to pay taxes, and you may receive some tax benefits.

For more information: Hiring Children as Employees

Read more about Federal and State Child Labor Laws

Read more about Youth and Labor, from the Department of Labor

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