The Recovery Act increased the monthly exclusion for employer-provided transit and vanpool benefits from $120 to $230 for March 1, 2009 through December 31, 2010. After 2010, the amounts will be adjusted for inflation.

If you currently pay more than $120 per month in qualified transportation costs, you may now increase your contribution to a pretax transportation account up to $230 per month. If you are not currently taking advantage of this benefit, now is a great time to start.

A small business can save a good deal of money by not having employees. According to the U.S. Department of Commerce, it costs businesses 20-40% more per worker to classify someone as an employee versus an independent contractor. Although calling someone an independent contractor can save a businesses a lot of time and money, the consequences of re-classification by the IRS can be severe if the person is actually acting in the capacity of an employee.

Classifying individuals as non-employees is tricky. It is very risky to directly engage individual contractors who do not have a business license, a state business identification number, their own place of business, their own equipment, and who are solely dependent upon your business for their livelihood.

Hallmarks of an Independent Contractor
Bona fide independent contractors meet the following criteria, among others:

1. They are in business for themselves;
2. They typically have multiple clients;
3. They determine whether they will do the work themselves and/or use employees or subcontractors;
4. They furnish their own tools, equipment and materials; and
5. They pay income and business taxes on business revenues and payroll taxes on employee compensation.

In short, independent contractors should not be working full time at your business, using your equipment and supplies and doing the same work as your employees.

The Risk
The IRS can order offenders to pay all employment taxes that should have been paid plus a penalty that ranges from 12-35% of the tax bill. And that’s just the federal side of the equation. Your state will likely weigh in and take a bite out of you for back state payroll taxes and fees, plus their own penalty for non-compliance.

The Tip
If you are using independent contractors to assist with your business, make sure you are treating them as contractors and not employees. A few things you should do to protect the classification are:

1. Pay them by the job, not the hour;
2. Don’t require all work to be done on your premises;
3. Make sure they have their own business licenses;
4. Have all contractors sign a contract detailing the terms of the relationship.

Contractors come in all shapes and sizes; the ones you hire directly should be bona fide contractors with established business credentials to avoid the risk of re-classification by the IRS.

If your business is organized as a Limited Liability Company (LLC), you may have the option of choosing how you want the company taxed by the IRS. This means that you may choose to have your LLC taxed as a partnership, corporation or disregarded entity at the time of formation or at a later date.

If you choose to make the election at a later date, the default tax status of an LLC will be that of a partnership. Should you want to change it after formation, you must file an Entity Classification Election (Form 8882) by March 15th for the election to be retroactive to January 1st. If the election is made anytime after March 15th, the new status will be effective as of the filing date of the election form.

Two complications arise if you make the election after March 15th:

1. Reasonable cause explanation. You must explain to the IRS why you did not file the election on time. This is normally not much of a factor, if you can articulate, in writing to the IRS, a “reasonable cause” for not filing on time.
2. Short-year tax return. If the timing of your election is not retroactive to January 1st, you will have to file two tax returns: one for the partnership until the effective date of the filing and one for the new tax entity for the remainder of the year. The necessity of filing “short-year” tax returns raises the complexity of allocating profits and losses throughout the year and will consequently raise the cost of accounting and tax return preparation.

The Tip
Are you considering changing the taxable classification of your LLC? If so, plan on filing the election by March 15th. Even better – file the election now to be effective as of January 1, 2010 and you won’t have to worry about it again.

This tip does not include the reasons you may want to change your taxable classification. We will touch on that in a later tip.

For most individual taxpayers, tax day comes just once a year — on April 15. But for many businesses and self-employed taxpayers, Uncle Sam expects a check four times a year.

Who pays
Unfortunately, you are one of those poor quarterly taxpayers if you are a sole proprietor, partnership or S corp and any of the following applies to your situation:

• You expect to owe at least $1,000 in tax at the end of the tax year; or
• You expect your withholding to be less than:
  1. 90% of your tax this year, or
  2. 100% of your tax last year

Essentially, if you think you will owe over $1,000 in tax, be prepared to calculate and make estimate tax payments.

If your business is a C corporation, you must make estimated tax payments if you expect to owe more than $500 in tax at the end of the year.

When payments are due
Estimated tax payments are due on April 15, June 15, September 15 and January 15. If you underpay one or more installments, you get charged interest until the day you catch up.

How much to pay
Unfortunately, there isn’t an easy answer to this question. The official answer is you must calculate your expected AGI, taxable income, taxes, deductions, and credits for the year, then use Form 1040-ES to figure your estimated tax.

To simplify things, you can withhold 100% of the tax you paid last year and make payments of 1/4 of that amount each quarter, instead of trying to estimate how much your tax burden will be this year.

The Tip
If you haven’t done so already, calculate your estimated tax payment for January. January 15th will sneak up on you faster than you expect, so it’s best to have this task taken care of early.

I’ve tried to be brief, but the rules are complex. So, anyone wanting more information should download IRS Publication 505 or IRS Publication 542 for corporations from the IRS website.

A very important part of the organizational documents that is regularly overlooked by business owners are the buy/sell provisions. For most closely held businesses, the buy/sell provisions among the co-owners define how and when individual owners will ultimately realize a return on their investment in the venture. Although many owners are initially confused by the need to give significant attention to provisions dealing with exit scenarios during the early planning stages of the business, the confusion usually disappears very quickly as the owners begin to realize that these provisions define what they may ultimately get in return for all of their invested capital and effort.

Business owners need to prepare early for the day when they will part company for whatever reason. At some point down the road, every entrepreneur is going to have to, or want to, cash out or transfer his or her equity interest in the business. Someone is going to leave the business, die, become disabled, or experience a messy divorce.

Potential separation issues are just one very important part of the initial planning and documentation process that should be addressed in a calm, planning-oriented atmosphere and not at a point of crisis. Taking the effort to address these types of issues at the outset is also the most logical time to do so, when the business organizers are making other important decisions about their devotion of capital and energy to the business enterprise. Thinking and discussing key issues upfront often will bring to the surface the different expectations of the owners. It helps to have these expectations out in the open before irrevocable commitments are made to the business.