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Use Independent Contractors Carefully

Small business owners often try to save money—especially in the early going—by using independent contractors instead of hiring full time employees. Using independent contractors, or “contract workers,” means the business doesn’t have to withhold taxes, pay Social Security or Medicare or meet numerous other employer responsibilities.

Many such arrangements, however, wilt under IRS scrutiny. And the strategy can backfire if someone later claims they should really have been treated, and paid, as an employee.

Deciding who can legitimately work as an independent contractor and who must be given employee status has become a difficult matter for small business owners. You can’t simply choose what’s best for you. The IRS and equivalent state agencies are strict on worker classification issues.

Remember that independent contractors work for themselves. They operate their own business. You are their client, not their employer. You don’t dictate their hours or control how they perform their work. In the eyes of most government agencies, a worker is an employee unless you can prove otherwise.

Contractors control when and where they work. Avoid setting a pattern of daily or weekly work hours dictated by your business. Also, independent contractors do not usually have a permanent or continuing relationship with the business and have time to pursue other clients. Plan to compensate contractors on a per-job basis, not weekly or monthly.

And since contractors are paid to complete a set task, they may bring in others to help, at their discretion and on their payroll. They also should use their own tools and technology and be responsible for their incremental expenses.

Contractors can’t be fired as long as they produce results that meet their contract specifications. Do not include them under any insurance or benefits coverage you have for employees. Independent contractors are subject to making a profit—or suffering a loss—based on their own skills and expertise. Always require an invoice before making payment.

Before you agree to an independent contractor relationship with anyone, make sure you understand what that means and carefully weigh the pros and cons. If you misclassify a worker, you could be liable for back employment taxes plus penalties.

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Get Trademark Savvy

If you have a business name, catch phrase, logo design or a combination of those that you want to legally protect, you’ll need to bone up on trademarks—a form of relatively low-cost legal protection for this type of “intellectual property.”

 Applying for a federal trademark, or its companion the service mark, is a crucial step toward protecting a business name. But trademarks are not the same as patents and copyrights, even though the differences are not widely understood. While there are similarities, they serve different purposes.

According to the U.S. Patent and Trademark Office (USPTO), a trademark is a word, name, symbol or device used in business to indicate a source of the goods, i.e. your business, and to distinguish those goods from those sold by another business. A service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product.

A patent for an invention grants a specific legal property right to the inventor—“the right to exclude others from making, using, offering for sale or selling” the same invention.

A copyright is harder to define. It is mainly a protection for authors of original works, including literary, dramatic, musical, artistic and other intellectual works, both published and unpublished.

The Internet has transformed the once mysterious process of applying for a trademark into something accessible to anyone willing to spend some time to understand the intricacies and get it right. But while no business skills or special legal knowledge are required to apply, the field is filled with potential pitfalls and wrong turns that could sabotage your trademark filing if you don’t know the intricacies of creating trademarks that can stand up to legal challenges later on.

For example, the application requires that you identify goods or services under specific categories. But misunderstanding these categories and filing too broadly or too narrowly can ruin your trademark and cause problems later on. Seeking help from a qualified trademark attorney will help prevent such problems.

The U.S. Patent and Trademark Office is the most authoritative source of information. Everything you need to research and apply for a trademark is at the USPTO Web site, www.uspto.gov. A section for beginners, available from the Home page, offers a simplified introduction to USPTO services.

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Tune-up Your Tax Smarts

Most likely, business taxes are not among your favorite topics. But as we all know, taxes are one of life’s inevitabilities, and small businesses face more than their fair share. For small business owners, multiple levels of taxation at the city, county, state and federal levels, as well as complex and ever-changing rules and requirements, form a gauntlet of potential pitfalls.

 Ironically, however, it is the Internal Revenue Service itself that has taken the initiative lately to try and clear some of the tax-related fog for business owners and the self-employed. After all, the IRS doesn’t make the tax laws, it just manages the mess.

One of the chief improvements is a special small business/self-employed (SB/SE) Web site created and updated by the IRS. Information on the site is free, easy to find and remarkably light on “gov-speak.” You’ll find it at www.irs.gov/smallbiz. This is a great place to give yourself a tax smarts tune-up. And what could be more authoritative than information coming from the chief tax honchos themselves?

 A section called “Starting, Operating or Closing a Business,” for example, covers a tremendous amount of tax territory and includes much of the site’s most useful information. This is where you’ll find IRS rules on hiring your own kids or other family members, record keeping, employer ID numbers and selecting a business structure.

There’s also help answering a key tax-related question: Is what you are doing a true business or merely a hobby? If the IRS decides your “business” is really just a hobby, your expenses may not be deductible. Look for their nine-point checklist to see how you stack up.

The advice and information under “Operating a Business” is helpful for just about any type of small business. And if you have employees, you’ll find resources on hiring, employment taxes and wage reporting requirements.

he “Filing and Paying Taxes” section offers an overview of business taxes you may face and the forms you’ll have to file. And you’ll gain important insight into business income and expenses, tax credits, estimated taxes and personal assets in a business. The “Tax Calendar for Small Business and Self-Employed” is a handy scheduling tool available at the site.

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