Business Taxes & Licenses: 5 Things Everyone Should Consider
“…In this world nothing can be said to be certain, except death and taxes.”
Fresh-faced solo cleaner or seasoned professional, we all need to think about taxes and licenses. “Which ones are really necessary?” or “I’m new I don’t need to worry about that yet.” might be thoughts you have had. There are a few things to consider no matter what your company size or level of experience.
1. Holding all required licenses for your profession sets you apart especially when new.
For many in the cleaning industry, this means a simple business license/registration with their state, county, and/or municipality. Often these are very inexpensive ($50 or less) and are required annually or less often. Showing client prospects that you are registered and an active participant in the economy of your state/county/locality is important because it signifies you’re serious about being a professional. And it’s the professional that can produce high-quality services and are viewed as more valuable, especially when just starting out and you don’t have very many reviews or clients yet.
2. Paying all required taxes also increases your professional standing & legitimacy.
The advent of the internet and Google has increased the barrier to entry into being a professional. If you hold yourself up as a cleaner, but there’s no record of you anywhere on the internet (reviews, website, etc) then people are more suspect of your ability to be a professional. They are more wary of letting you into their homes to clean, because they’re aware that you could just as easily be a scammer trying to gain entrance into their home. All else being equal, being a legal entity provides a certain amount of legitimacy all on it’s own.
3. Not paying taxes, or not paying the full amount, leaves you vulnerable to audit.
According to Publication on Topic 756, the IRS defines “household employees include housekeepers, maids, babysitters, gardeners, and others who work in or around your private residence as your employee. Repairmen, plumbers, contractors, and other business people who provide their services as independent contractors, are not your employees.” If the homeowner has a household employee, they are required to pay the employer portion of social security and FICA taxes (7.65%) to the IRS. If they DO THAT, and you do NOT report their income, then the IRS will eventually catch up to you and that’s not a fight we mere humans can win lol.
In order to prove that you’re an independent contractor, you may need to provide a client with a W-9 that proves you’re a business and you file and pay your own taxes (both the employer and employee portion of taxes).
4. If you get audited, all your clients will get audited too and you may be vulnerable to lawsuits.
If you do get chosen for whatever reason to be audited by the IRS, as a possible condition of lowering your penalty or potential criminal charges (YIKES!!) the IRS may ask you to provide names of allllll your clients so they can be penalized for not withholding employer taxes. IRS general fraud statutes reads:
Any person who willfully attempts to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof:
- Shall be imprisoned not more than 5 years
- Or fined not more than $250,000 for individuals ($500,000 for corporations)
- Or both, together with the costs of prosecution
And if found guilty of a felony, I cannot begin to count the ways your life will be ruined, only beginning with financially.
5. Not paying into the social security fund on earned income only decreases the social security benefits you deserve to receive.
Social security benefits when you retire is solely dependent on how much you paid into the system. The comparison of SS to a traditional self-directed retirement account (like an IRA or 401K) is not comparing apples to apples – they aren’t exactly the same. A traditional retirement account is able to have returns at greater amounts because of greater risk, however the income from it will be 100% dependent on the value and how long you live. Social Security income, in contract, is more like an annuity or life insurance policy. The income from it is guaranteed to have a COLA (Cost Of Living Adjustment – generally increases) AND last as long as you’re alive. And that alone could mean a greater overall return vs a conservative investment strategy.
Investment returns aside, it’s a good thing to have social security income and by not paying into SS you only deplete what you could earn in retirement.