By SueCanyon | September 15, 2007
I recently read an article published on CNBC.com that stated that “Small business is having a love affair with credit cards…” which could not be further from the truth. It continued, “…and paying tax on plastic is the latest phase,” as if small business owners WANT to pay their taxes on credit cards. The article went on to assert that paying credit card rates could be more expensive than paying penalties and interest on the tax debt. This article is another in a long line of bad advice coming from so-called experts in small business.
Having worked with owners of small businesses for the past thirty years, I have seen much of what goes on there, and I can tell you for certain that business owners are not happy using credit cards to pay for anything. They are not happy using their personal credit, they are not happy using second mortgages to fund their companies, and they are not happy spending their retirement funds.
The article mentions that there has been an “80% rise in tax related payments” over the past year. They fail to mention that this time frame coincides with stepped-up collections efforts the government recently initiated. I have personally spoken to IRS collections agents for some of my clients, and they are recommending that business owners put the debt on credit cards.
Whoever led the author of this article to believe that credit card debt is more expensive than tax penalties and interest has never held the hand, so to speak, of a business owner as they struggle to get out from under a debt that they were innocent about in the first place. Sure, once the license is in place, the business receives tax forms and (confusing) instructions in the mail. Forms ─ which will always be relegated to the bookkeeper or office manager ─ cannot substitute for owner education.
We don’t teach our small business owners how to run a business. They sign a paper, pay a small processing fee, and we give them a license to operate. There is no training and no competency measurement.
The article states that business owners don’t take the time to plan for these costs. Many of them don’t know how. We don’t give them the tools nor the training to plan properly. They are so busy shoveling coal into the engine that they can’t take time to see the where the train is going.
Business owners trust their bookkeepers to pay the taxes. They shouldn’t. The question, “How much is payroll this week?” is often answered, “$20,000,” but that figure rarely includes the payroll taxes. The bookkeeper considers payroll and payroll taxes to be two different bills. Owners should consider them as one bill. But there is no one to teach these semantic differences to owners, nor what should be expected from their scorekeepers.
The American small business system sets up fledgling business owners to fail. And it begins with something as pervasive as the process of paying employment taxes. With this requirement placed upon every business owner, one would think we would require training classes in figuring and paying employment taxes. But we don’t. We also don’t require compliance until the employer is so far behind that it takes borrowing the funds to pay the debt.
I was asked recently to help a business owner understand why he can’t keep employees. What he wanted to hear was that there must be something wrong with employees. The problem lies instead with the financial treatment of his employees. In an effort to be competitive with other companies in his line of work, the owner is paying his employees as contractors… making them responsible for their own taxes.
There are three main tests, among others, to determine whether an employer can legally pay workers as contractors: the contractor must dictate their own hours, have their own tools, and work for other clients. An ‘employee’ who is getting paid under these rules will, naturally, come to think of the ‘job’ as temporary.
True employees have an expectation that an employer will handle the tax payment situation for them. In the case of paying a worker as a contractor, neither is there tax handling, nor any other benefits. ‘Employees’ such as these don’t want to be in business for themselves. The benefits of business ownership in this case are lost on these folks, they simply want a job. They know less about handling their own taxes than their delinquent employer. They know nothing about tracking their mileage, keeping receipts, or being a business owner.
And the ‘employer’ doesn’t necessarily want the contractor working for anyone else. The complaint was, “Why can’t I keep employees?” Because, in this case, you don’t treat them as employees.
The article agrees with me that employers need training in cash flow, in strategy, and in many other subjects… but they need that training to come from experts who understand the problems better than to say that ‘small business is having a love affair with credit cards’.
Knowing how to manage taxes, knowing how to plan and price for the paying of taxes, knowing how to hire a bookkeeper who knows how to keep books, understanding how cash behaves and how to retain employees are fundamental concepts that business owners should comprehend before they are allowed a business license.
Very often, a business owner who knows many of these things, but chooses to ignore them, does so because their competition also ignores planning for taxes and overhead. To manage the business legally might cause the business to lose market share to less legitimate owners.
The answer to this quandary lies in requiring every business owner to understand the concepts, play by the same rules, and pay their taxes on time, every time. In this way, competition from those who shouldn’t be in business, would disappear. Those who should be in business would be free to operate legally and profitably, and business owners could stop using credit cards, their mortgages, and their retirement moneys to continue funding businesses that are otherwise forced to struggle.
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