Independent Contractor or Employee?

This is a huge issue that causes much confusion. Independent contractors are NOT substitutes for employees, but a separate category altogether, and employees cannot be classified as independent contractors merely if they agree to it. That is not enough to satisfy the IRS, and if they should come checking, they will assess back payroll taxes if the independent contractor status has been used to avoid taxes.

The common law rules that determine if someone is an independent contractor or an employee now fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

(From the IRS: see this)

The IRS site states specifically that no one factor stands alone in making this determination, but that all factors must be considered. Consider all the factors, and document each of the factors. If you're still unsure, give us a call, and we can help you answer the questions to make the determination.

Profits vs. Cash

They are not the same thing. This may come as a surprise, but making a profit does not mean there is an abundance of cash to be had. Common misperception, and this is one reason why accoutants and bookkeepers come in handy. It's not just because we're so fun to have around, though that is a definite plus.

Did you end your year with a lot of inventory on hand? Inventory is not an expense, not until it's sold. So if you've bought inventory, you have an asset, and it'll stay an asset until you sell it. Until then, there's no expense, and therefore more profit. Perhaps you don't see it as a profit because you don't have the money to spend, but you spent it already, on inventory.

There are many reasons your idea of what you should show as profit and what you actually show as profit are different, and this is just one example. Look at your balance sheet. Look at what you paid for personal expenses out of your business account. We don't recommend you pay for personal expenses out of your business, but it does happen. Look at assets you've purchased.

It's like a puzzle, and you want to look at all aspects that make up the whole picture, or you're only seeing a part of the whole.