Independent Contractor vs Employee

As companies get started, they often delay hiring employees and instead use independent contractors. After all, once a contractor becomes an employee, the Company is now responsible for payroll taxes: federal income tax withholding; Social Security and Medicare (together, Federal Insurance Contributions Act (FICA)); and Federal Unemployment, not to mention new liabilities under the Patient Protection and Affordable Care Act (PPACA). Here are the general guidelines from the IRS:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. 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.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)?

If you answer no to the questions above, you’re likely fine keeping the individual as an independent contractor. However, I recommend speaking with your accountant to get specific advice.

The IRS Finds Pokémon Go

Over the past week, I’ve been watching my friends & colleagues chase little animated creatures around town, narrowly avoiding walls and cars. For those who don’t know how it works, players use Pokémon Go’s geo-location feature and their phone cameras to find virtual Pokémon in their area in real time and receive points. It’s amazing how Pokémon Go & augmented reality has become a “thing” in such a short period of time. As with many “things”, the IRS has decided to weigh in.

“If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income…when you spend more in a virtual world than you receive, you generally cannot claim a loss on an income tax return.”

Not exchanging cash? Swaps of goods for services or barter deals are taxable (unless it’s a like-kind exchange or for partnership and corporate formations). While it is taxable, a non-cash deal is harder for the IRS to find. I recommend consulting with your tax advisor. Now enough of this tax talk, time to get back to the game.

Business Accounting Basics Course

Square Root Financial is partnering with the LA Law Library and the Bixel Exchange to teach Business Accounting Basics to entrepreneurs. The course will cover:

  • Basic accounting terminology
  • Understanding key financial statements like income statement, balance sheet, and cash flow statement
  • Fundamentals of financial modeling

When: Tuesday, August 23rd, 12-2PM

Where: LA Law Library, 301 W. 1st Street Los Angeles CA 90012

For more information or to register please visit: http://bit.ly/296oDJl

Hope you can join us!

 

How does a company with significant revenue, run out of cash?

A few years ago I met with a new client who had raised several rounds of funding and had significant revenue (if you were looking at from an accrual method of accounting perspective). When I asked what the bank balance was, I realized we had a problem. In fact, it was going to be difficult for them to even make payroll the next month.

You see, the company was selling goods to its customers with credit cards but not collecting the cash from the credit card companies for months later. You can’t make payroll today with cash you will receive in three months even if the revenue is earned today.

Accrual accounting recognizes transactions when they occur regardless of when the cash is exchanged. Cash accounting, on the other hand, recognizes transactions only when there is an exchange of cash.
As your company is getting up and running it’s critical to look at your books from a cash flow perspective.