Whether you are a shop owner or a booth renter (independent contractor), you need to know your federal tax responsibilities, including how to report your income and tips you receive from your customers.
As a shop owner you can elect to structure your business in different forms. You can choose to operate your business as a sole proprietorship, partnership, or as a corporation. Your business may have employees who work for you or you may decide to operate without employees. Another common arrangement is renting space to another individual who operates an independent business. This is commonly referred to as a booth renter and will be discussed later in this article.
It doesn’t matter which business structure you choose; there are basic principles that do not change. Income received in the course of your business is taxable income and must be reported on the appropriate income tax return form.
If you operate your business without employees, where you are the only worker, then your federal tax responsibilities would be limited to reporting your income earned and expenses. For example, a sole proprietorship would file Form 1040, using Schedule C to report business income and expenses and Schedule SE to report Self-Employment tax.
Once you decide to hire workers, you must make a determination if they are your employees or if they will operate their own independent business (booth renters). Simply stated, an employee is an individual who works at the control and direction of another. It is important to remember that as the employer, you do not have to control the worker all of the time. You simply have to have the right to control. If you give extensive instructions as to how, when, or where to do the work and where to purchase the supplies, then more than likely you are the employer and the worker is your employee.
As an employer, federal law requires you to withhold taxes from your employees’ paychecks. Depending on the wages, you must take out of your employees’ paychecks certain amounts for Federal Income Tax, Social Security Tax, and Medicare Tax. You must then pay any liability for the employer’s share of Social Security and Medicare Taxes. This portion, your share, is not withheld from employees. You may also be required to pay unemployment (FUTA) taxes on these wages. In addition to reporting all taxable income on the appropriate income tax form, you would also have the responsibility for issuing Form W-2, Wage and Tax Statement.
A booth renter is someone who leases space from an existing business and operates their own business as an independent contractor. You are responsible for your own record keeping and timely filing of returns and payments of taxes related to your business.
As a booth renter, or independent contractor, you may need to make estimated tax payments during the year to cover your tax liabilities. This is because as a booth renter (independent contractor), the business does not withhold taxes from your pay. Estimated tax is the method used to pay tax on income that is not subject to withholding, such as earnings from self-employment you receive as a booth renter. Estimated tax payments are made each quarter using Form 1040-ES, Estimated Tax for Individuals.
If you operate your own business as a sole proprietor or booth renter, any tips received in the normal course of your business must be reported in your gross receipts and reported on the appropriate income tax form. You may have had challenges in being compliant with your tax responsibilities in the past and may be receiving letters from the IRS. But remember, for every tax problem there is a solution.
Constant W. Watson III, CPA, CTRS, is both a Certified Public Accountant and one of only ten Certified Tax Resolution Specialists in the State of Illinois certified by the ASTPS. Watson has more than 30 years of income tax and accounting experience. You can hear his radio program, “Watson On Taxes,” every Saturday morning at 10 a.m. by tuning in to AM 1390. For more information, visit WatsonOnTaxes.com or call (708) 206-9900.