Business owners may be able to transfer wealth more tax efficiently by gifting ownership interests to family members. For 2026, the gift tax annual exclusion is $19,000 per recipient.
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As year end approaches, businesses have plenty of tax and payroll tasks competing for attention. One easy-to-overlook area is employee and owner benefits.
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Access to capital helps small businesses succeed and grow. Whether you need to cover cash flow gaps, fund expansion plans or invest in long-term assets, it’s important to understand all your financing options.
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When business owners think about risk, they often focus on market pressures or operational challenges. An IRS audit usually isn’t top of mind — but it can be costly, disruptive and time-consuming.
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A recent survey found that 45% of small businesses reported growth, but 78% wanted to grow. This January 2026 data from Intuit QuickBooks Small Business Insights suggests that many small businesses are struggling to achieve their expansion goals.
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The consequences of misclassifying an employee as an independent contractor can be costly. You could be liable for back taxes (including the employee’s shares of unpaid payroll and income taxes), penalties and interest. There may be serious nontax consequences as well.
Businesses must withhold federal and state income taxes and the employee’s share of Social Security and Medicare taxes from employee wages. They must also pay the employer’s portion of Social Security, Medicare and unemployment taxes for employees. Generally, none of these obligations apply to the business for workers who are independent contractors.
Misclassifying an employee as an independent contractor can result in liability for unpaid payroll taxes, penalties and interest. You may also owe the employee’s share of taxes.
Beyond taxes, misclassification can mean liability for minimum wages, overtime pay, benefits, workers’ compensation, and state disability insurance. Ensuring proper classification helps avoid costly legal and financial consequences.
Determining the correct classification requires reviewing the key factors that the IRS evaluates. No single factor is conclusive; all must be taken into account.
Here are the three categories of factors the IRS assesses:
Who controls what work is done and how it’s performed? A higher degree of control suggests the worker is likely an employee. It’s important to consider how much training and education the business provides a worker to do the job.
Who controls the economic aspects, such as how the worker is paid and how expenses are reimbursed? Independent contractors generally have financial risk. They may work for flat fees and work for more than one business.
Workers hired for an indefinite period and performing core business functions are more likely to be employees.
Labeling a worker as an independent contractor in a written contract doesn’t make it so. However, it may serve as evidence in a dispute between parties.
It’s tempting to think that if a person works for you remotely, he or she automatically qualifies as an independent contractor. Not so fast! Even if the individual chooses to work remotely, the classification is still subject to scrutiny.
The key considerations are the same as for on-site workers, such as whether you, as the business owner, have the right to control the details of the worker’s services and how they’re performed.
Don’t underestimate the importance of this issue. The consequences of misclassification can indeed be severe. Using a reasonable basis for classifying workers may relieve penalties and employment taxes.
You can ask the IRS to weigh in by filing Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Before you do this, contact the office and ask for a review of the details.
Even if you’re confident in your classification of workers for federal tax purposes, it’s essential to consider how they’re treated under state taxation and federal and state wage and hour regulations. Classifying workers as employees in some cases and independent contractors in others can create significant administrative challenges, so evaluate their status comprehensively before making a final decision. Don’t risk a mistake. Answers to your questions are a phone call away.
408-252-1800
Photo by Ivan Radic via Flickr.com.
If you own or manage a business with employees, you could be personally responsible for paying a harsh tax penalty. It’s called the Trust Fund Recovery Penalty (TFRP). It applies to the mishandling of Social Security and income taxes that must be withheld from employees’ wages.
These taxes are government property employers collect and hold in “trust” for the government until payment. If the funds aren’t properly handled, the IRS can impose a TFRP equal to 100% of the unpaid taxes on each responsible party. Consequently, the penalty amounts can be significant.
The TFRP is among the more dangerous tax penalties not only because it’s large but also because it applies to many actions and people involved in a business, and historically, the IRS has aggressively enforced it. Here are some questions and answers to help avoid incurring the penalty:
The TFRP applies to willful failures to collect or truthfully account for and pay over Social Security and income taxes required to be withheld from employees’ wages.
The IRS can impose the 100% penalty on anyone “responsible” for collecting and paying taxes. This includes corporate officers, directors, shareholders, partners and employees with such duties. Even voluntary board members of tax-exempt organizations may be liable under certain circumstances. Sometimes, responsibility has been extended to family members close to the business, attorneys and accountants.
Responsibility depends on status, duty and authority. Anyone with the power to ensure taxes are paid can be held liable. Multiple people within a business can be deemed responsible, and each is at risk of a full penalty. If you know unpaid payroll taxes exist and have the authority to pay them but prioritize other payments instead, you could be deemed a responsible person.
While a taxpayer held liable may sue others for contribution, this must occur after paying the penalty in full. Such lawsuits are entirely separate from the IRS’s collection process.
Willful actions don’t require intent to evade taxes. The IRS defines “willfully” as knowingly prioritizing other expenses over withheld taxes. For example, bending to pressure to pay other bills instead of taxes is considered willful behavior.
Delegating actual tax responsibilities is no defense. Failing to deal with tax tasks can also be deemed willful.
Under pressure, it may be tempting to “borrow” from a tax withholding fund to pay an urgent expense. But don’t do it. The importance of paying all funds withheld from employee paychecks over to the government can’t be understated. Failure to pay can result in multiple people owing the hefty 100% TFRP, including people who didn’t realize they were considered responsible. Contact the office with any questions.
408-252-1800
Photo by Andrew_Pons from Freerange Stock.
Thanks to the Tax Cuts and Jobs Act, sole proprietors and owners of pass-through entities, such as partnerships, S corporations and, generally, limited liability companies, may be able to claim tax deductions based on their qualified business income (QBI deduction) and certain other income.
This deduction can be up to 20% of your QBI, subject to limits that apply at higher income levels. However, some tax planning strategies can increase or decrease your allowable QBI deduction for 2024. So if you’re eligible for this deduction, it’s important to consider the impact other year-end strategies will have on it before executing them. Also keep in mind that this deduction is scheduled to expire at the end of 2025 unless Congress acts to extend it.
Contact the office for help optimizing your overall tax results.
408-252-1800
Photo by StartupStockPhotos from Freerange Stock
It’s a challenging time for many businesses. Therefore, any help you can get, such as tax incentives and sales tax exemptions, can make a big difference. Unfortunately, these benefits often go unclaimed because businesses don’t know about them or erroneously think they’re ineligible.
Some credits are available “as of right.” That is, if your business meets the specified requirements, you just need to claim the benefit on a timely filed tax return to receive it.
State and federal tax credits and exemptions are designed as incentives for businesses to engage in certain activities or invest in specific economically distressed areas. Here are a few:
Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities. Other steps must also be taken, such as completing paperwork.
State and federal research and development tax credits. These credits may be available to an eligible business that invests in developing new products or techniques, improving processes, or developing software for internal use, regardless of size. The federal “increasing research activities” credit is generally equal to 20% of the amount by which the business increases qualified research expenditures, compared to a base amount.
The credit is available even to businesses with no income tax liability and may be carried forward to offset taxable income in future years. If eligible, a start-up company can claim the federal research credit against up to $500,000 in employer-paid payroll taxes.
Empowerment zone incentives. Certain tax breaks are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each eligible employee.
Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. Jurisdictions may also offer investment tax credits for capital investments within their borders.
Discretionary tax breaks must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in or relocate to a certain state or locality.
To secure these incentives, a business must show it’ll bring benefits to the jurisdiction, such as job creation and revenue generation. Discretionary incentives may include income and payroll tax credits, property tax abatements and utility rate reductions.
States with sales taxes provide exemptions for some business purchases. Common exemptions include purchases by:
Businesses should familiarize themselves with the exemptions available where they do business and what it takes to qualify. For example, they may need to prove to the sellers that they have a resale or exemption certificate.
Every year, a vast amount of tax credits and incentives aren’t claimed because businesses are unaware of them or erroneously believe they’re ineligible. Many more examples exist. Contact the office for help ensuring that your business receives all the tax breaks it deserves.
(408) 252-1800
If you’re a business owner, your company is likely your most valuable asset. To ensure it survives after you’re gone, you first need a succession plan that will provide a smooth transition of the business to one or more of your children (assuming you want to keep it in the family). In addition, you need an estate plan that effectively addresses the tax impact of transferring your ownership interests to the next generation.
If you’re like many business owners, you may dream of the day you can transfer ownership to your children. A succession plan can provide a smooth transition of power when you retire and be used in the event of unexpected death before retirement.
Typically, a succession plan will outline the structure going forward and prepare for the eventual transfer of ownership interests in the business, whether through selling, gifting or a combination of the two. Make sure the plan is in writing. Identify training opportunities and special compensation arrangements for your successors. Include in the plan financial details reflecting assets, liabilities and current value, and update the plan periodically. Also, coordinate your succession plan with your estate plan.
A comprehensive estate plan should be supported by several key documents, starting with a basic will. A will specifies how your assets will be distributed to designated beneficiaries and meets other objectives. Without a will or having assets otherwise titled, your business and other assets will be distributed under the prevailing state law, regardless of your wishes.
A financial power of attorney (POA) appoints someone to manage your affairs in case you become incapacitated and allows this “attorney-in-fact” to conduct business transactions. (Other important documents include health care powers of attorney and advanced directives.)
If you own significant business assets, consider taking maximum advantage of currently available federal estate tax breaks. These include the unlimited marital deduction and the federal gift and estate tax exemption, which in 2024 shields up to $13.61 million. Some states also impose their own state estate or inheritance taxes.
You may be able to minimize federal and state taxes by using trusts or setting up a family limited partnership (FLP). With a tax-favored FLP, assets are removed from your taxable estate and limited partner interests can be gifted to loved ones, often at a discounted value.
As you develop your succession and estate plans, you may face family challenges. Unfortunately, elevating one child to run the business and leaving another out, or giving someone a secondary role, may create hard feelings.
One estate planning strategy is to attempt to even things out. For example, let’s say that you own a business valued at $5 million and you have $5 million in other assets. You might give $5 million in business assets to the child who’s taking the helm of your business and give other assets worth $5 million to the child who isn’t active (or is less active) in the business.
There’s no universal plan for family business succession. What’s right depends on your circumstances and goals. Contact the office for help.
(408) 252-1800
