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SAN DIEGO - Very few people like April 15, and this is generally because they owe the federal government money on this day each year. Robert West, a certified public accountant with West & Co., Cleveland, Ohio, told Lawn & Landscape School of Management attendees in San Diego, Calif., that “Tax Day” doesn’t have to be so painful each year.
“If I can’t give you at least one idea that is worth more to you than what you paid to attend this conference, then I’ll be very disappointed,” he told the crowd.
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In addition to the annual winter School of Management conference, Lawn & Landscape holds an annual fall conference titled Business Strategies. Named “Managing Human Resources In Your Company,” this year’s conference is ideal for businesses of any size and will cover a variety of human resources issues. Business Strategies attendees in 2001 will hear from the leading experts on human resources from inside and outside the green industry, network with fellow industry professionals and walk away with the tools to make employee recruitment and retention a profitable part of their businesses. The 2001 Lawn & Landscape Business Strategies Conference: Managing Human Resources In Your Company conference will be held Oct. 7-9, 2001, in Scottsdale, Ariz. Details about this conference will soon be available at www.lawnbusinessstrategies.com. Additionally, the 2002 Lawn & Landscape School of Management will be held Feb. 17-19, 2002, in Charlotte, N.C. Details about this conference will be available later this year at www.lawnschool.com. For more information about Lawn & Landscape’s annual conferences, contact Maria Miller at 800/456-0707 or mmiller@gie.net. |
One of his biggest points to the attendees was that businesses should be managed proactively rather than reactively, and this calls for a healthy relationship between companies and their accountants. “Reacting to a calamity doesn’t work,” he asserted. “I make it a policy to meet with my clients between Sept. 1 and the end of October so we can go over their nine-month statement and a fourth quarter projection. That way we all know what is going to happen on April 15, and we can do anything we need to do between now and then.”
When contractors are considering tax planning for their businesses, there are three primary taxes to be cognizant of: payroll taxes (including Medicare and FICA), income taxes and estate taxes. West’s presentation focused on payroll taxes. “The problem with payroll taxes is that they may not provide you with any economic benefit and they don’t have any impact on your own eventual Medicare or retirement payments,” he explained. “For example, a salary of $300,000 vs. $100,000 costs you an extra $2,500 in Medicare because there isn’t any cap on Medicare taxes. And if the employee receiving that salary is also the employer, then the Medicare rate doubles.
“The key to be aware of is that these taxes are paid on your earned income, and one advantage of owning your own business is deciding exactly how you take income,” West continued. “There are alternative ways of taking money out of the business than just a salary.”
In general, West explained that there are three primary types of income that are subject to both FICA and Medicare taxes: salary and wages; net Schedule C income; and net partnerships earnings. However, he also identified a range of income that isn’t taxed as heavily.
“Interest is income that isn’t subject to these taxes,” he noted. “So you can loan money to your company, which can be a nice way to go if you’re the sole owner, but it tends to create problems if you have partners.
“Dividends are another form of income to consider, as is rent,” he continued, adding that fringe benefits and profit sharing are also taxed less. “If you own land that the company uses, put it in a separate company and have your landscape company rent it from you. Plus, doing this means creditors can’t get at the land if something bad happens, and you can still use it to earn income if you sell the landscape company.”
Some attendees asked about the idea of renting or leasing equipment to their own company in a similar model, and West said that they could do so but that they should consider the liability issues associated with that equipment. “[Contractors] use a lot of equipment that could hurt people, so if you rent equipment to your landscape company then go through the work of setting up the separate company and actually writing a check or checks from one company to the other to protect yourself,” he recommended.
What contractors have to realize is that how they withdraw earnings from the business is a function of the legal form of the business. “The Internal Revenue Service views partnerships and proprietorships the same way, and says that an owner cannot also be an employee,” West related. “That means all earnings are taxed to you and subject to FICA and Medicare.
“A corporation, however, is a ‘legal person’ that is separate from its owners,” he continued. “A corporation earns its own income and may distribute some or all of it as salary, dividends, rent or interest, which gives the owners some discretion in how they take money out of the business.”
Because of the complexity associated with incorporation and tax planning, West encouraged all attendees to develop a beneficial relationship with their accountants. “I think you should look for an accountant who doesn’t charge you for phone calls,” he explained. “I don’t do that because I don’t think you should have to pay to ask a question.
“Along those lines, don’t be afraid to ask a stupid question,” he noted. “I’m going to ask my mechanic stupid questions if my car breaks down because I don’t understand cars. Well, you’re not supposed to understand accounting at the level your accountant does. And ask for a fee estimate up front for all of the work you’ll need done for the coming year.”
The author is Editor of Lawn & Landscape magazine.