Employee or Independent Contractor—An Illustrated Guide

If you hire people to do work for your horse business, one of the first and most important questions you need to answer is whether the person is legally an employee or an independent contractor. It’s an important distinction—employees must be paid in compliance with labor laws, have taxes withheld, and be covered by workers comp insurance, at a minimum. Independent contractors usually just need to be paid at the agreed rate. Instead of restating the many guides and “rulebooks” already on the web, here are some examples of similar work done by people who fall into each category. The Barn Worker: Kat feeds and cleans stalls five mornings a week for the Friendly Farm boarding stable. She is required to start at 8am, and works till finished. She uses the farm’s feed cart, shovels, and forks to do the work. Friendly Farm pays her by the hour for the …

New Payroll Rules Coming Soon! What to do about salaries, pay raises, and paperwork.

Do you have staff members who are paid a fixed weekly or monthly salary, regardless of how many hours they work? If so, consider this your heads-up notice—the US Department of Labor has updated rules for who can be paid this way. The new rules take effect December 1, 2016. It’s a BIG change. Currently, all employees making less than $455 per week must be paid overtime. Under the new rule, that jumps to anyone making less than $913 per week. If your overtime-exempt person makes close to the new $913 cutoff, your cheapest option may be to give them a pay raise. The other thing to consider, though, is whether their job duties really qualify for one of the exemption categories. Hint—if they spend most of their time caring for horses, they don’t qualify. So you have some people who are great, but they’re not $913 a week great. …

Trying to decide between an LLC and S-Corp, Part 2

“I’m trying to decide between an LLC and an S-Corp.” said a riding instructor I talked to recently. She’s making the transition from freelancing to having her own school, and the mother of a student had emphasized the importance of “having the right structure”. Until she could figure out what was ‘right’, her plans were on hold. Unfortunately, she had fallen victim to a very common confusion. LLC is a legal structure. S-Corp is a tax structure. It’s like asking if you want a Quarter Horse or a mare. In Part One (link) we looked at various legal structures. Now we’ll consider common tax structure options. TAX STRUCTURES FOR BUSINESS Sole Proprietor  Just as sole proprietor is the simplest legal structure, it’s the simplest tax structure. Pros: No separate tax return required. Business income and expenses are reported on Schedule C in the owner’s personal Form 1040. Usually cheaper if …

Trying to decide between an LLC and S-Corp

“I’m trying to decide between an LLC and an S-Corp.”  said a riding instructor I talked to recently.  She’s making the transition from freelancing to having her own school, and the mother of a student had emphasized the importance of “having the right structure”.   Until she could figure out what was ‘right’, her plans were on hold. Unfortunately, she had fallen victim to a very common confusion.  LLC is a legal structure.  S-Corp is a tax structure.  It’s like asking if you want a Quarter Horse or a mare. We’ll look at legal structures first, and consider tax structures in Part 2. Legal Structures For business Sole Proprietor is the oldest and simplest form of business structure.  It’s one person, in business for him- or herself.  In a sole proprietorship, the owner is the business and the business is the owner.  There is no distinction. Pros:  It’s quick, cheap, and …

…In a Businesslike Manner

The IRS defines business as an activity “engaged in for profit”. When the business consists of an activity that many people enjoy as a hobby, the presence of a profit motive is often questioned. Because horse related businesses fall into this category, their owners need to be diligent about operating in a “businesslike manner”. The dictionary defines “businesslike” as “efficient, practical, or realistic”. Do any of these words describe your horse business? A “businesslike” approach begins with having the knowledge needed to be successful in your venture, and putting in the time and effort required to make it work. Hiring the expertise and/or the labor is acceptable, but it makes a profit harder to come by. Are you getting (and following) professional advice on improving the profitability of your business? There’s two sides to this—advice on the horses, and advice on the business side of things. Professional guidance on the …

Where Did All My Money Go?

“Where did all my money go?” and “If I’m making that much, why don’t I have anything left?” are comments I hear far too often from business owners.  Having a business built around horses—given their need to eat and their penchant for getting hurt—makes it even more challenging to have money left at the end of the month. So how DO you figure out where the money went?  The answers are in your accounting records, aka your business “books”.   The Income Statement (sometimes called a Statement of Profit & Loss) has a whole section devoted to Expenses.   That’s basically a list of where your money went. If you haven’t already, take the time to get familiar with your Expenses.  Which ones have the biggest amounts?  Which ones have changed the most, when compared to last month or last year?  Do you understand why? One useful way to analyze costs is …

Why Don’t I Have Enough Money?

“If I’m making that much, why don’t I have enough money?” is a question I hear frequently when business owners look at their income statement. The bottom number there is profit, and we all want to make a profit. But profits only matter if they translate to money coming in the door—that’s cash flow. If you’re showing a profit but suffering a shortage of money coming in the door, one of the first places to look is at your Accounts Receivable. That’s money that clients owe that you haven’t received yet. The very best kind of cash flows are those received in advance. Board & training fees for June that are due & paid June 1. This is the low-hanging fruit of cash flow—if you don’t already have this in place, look no farther for a big boost to your business. The next-best kind of cash flows are those received …

Are my riding clothes a business expense?

Quite often people ask me if their riding clothes qualify as a business expense.  Usually what they’re really trying to ask is whether they can deduct those clothes as an expense on their business tax return. The short answer is ‘it depends’.  Not very helpful, I know.  So here’s a longer answer. The IRS has two conditions for being able to deduct the cost of work clothes as a business expense: The clothing is not suitable for ordinary wear The clothing is required for the job There’s also a special provision for protective clothing and equipment required on the job. So how does this apply to riding clothes?   English riders fare better under this rule than western folks. Not suitable for ordinary wear: Tall riding boots, breeches, and show coats are reasonable examples of ‘special purpose clothing’.   But riding shirts don’t—they are not enough different from regular casual shirts.  If …

The Tax-Smart Approach to Staff Housing

I cringe every time I see “Housing Optional” or “Housing possibly included” in ads for grooms, barn managers, and other horse-farm staff. Not because staff housing at the farm is a bad idea. Because housing that’s *optional* is taxable to the employee. Yep, the IRS expects you to add the rental value of the room or house your employee occupies to the income on their W2 at the end of the year. And expects them to pay tax on it. However, it does not have to be that way. If you structure your jobs right, that same housing can be a tax-free benefit for your employee, without costing you a penny more. Win-Win. There are three conditions you must meet to offer your people tax-free housing: 1) It must be on your “business premises”. Roughly that means on the same property where the employee works. A barn apartment or a …

Are you leaving money on the floor of your truck?

If there were $20 bills sitting on the floor of your truck, would you notice? Is leaving money on the floor something you would do? Would you lean over and pick them up, straighten them out and put them in your wallet? Of course you would! So….why are you leaving your business receipts there to gather dust (and worse)? If you use your truck for business, and pretty much every horse person does, then those receipts represent money. Yes, money you spent, that’s obvious. But that’s not all. If they’re related to your business, they can put money in your pocket by reducing the taxes you have to pay. If you’re thinking it’s not worth the bother, think again. A $50 business expense, properly documented, can save you $7.50 to $20 or more in tax liability! If you’d lean over to pick a $20 bill off the floor, surely you’d …