Sole Proprietor Basic Questions

[Princess1988]

Hello!

I just finished my first full year of my new business. I have a princess party business. I want to make sure that I am doing everything legally and correctly now that I am getting so much more business going into our second year. I perform as various princess characters at customer's party venue or home for birthday parties.

I have a DBA bank account, and liability insurance.

I'm under the impression that I do not need a EIN.

Do I need to register with my state or town? Or, have any type of licensing?

Also, if I start using independent contractors as performers, what will I need to do differently. Will I just 1099 them at the end of next year?

Thank you in advance!

[vangogh]

Welcome to the forum Princess1988. First congrats on getting more business in year 2. You're right you don't need an EIN. It'll be necessary if you have employees, though not if you hire independent contractors. However, it's really easy to get one and there isn't any downside. There's no cost and it only takes a few minutes to get one. You can apply through the link at the bottom of this page (http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Apply-for-an-Employer-Identification-Number-%28EIN%29-Online). One nice reason to get one is you'll be able to use the EIN on some forms instead of giving out your social security number.

If you haven't you'll want to register a trade name with your state. I'm not sure about licensing. It'll depend on your state. You can usually find the information and register a name if you need to through the website of the Secretary of State of your state,

With independent contractors you're right you'll send a 1099 to each you've paid over a certain amount for the year. I think it's $600, but don't hold me to that. There are some rules about whether or not the people you work with are really independent contractors. The people need to be self employed and have clients other than you. You also shouldn't have to provide them with tools of the trade. There's some information about it here (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee).

Hope that helps.

[Princess1988]

Thank you for taking the time to look over and respond. I'm feeling very happy and almost overwhelmed at how fast the business has grown, allowing me to leave my full time job after a few months. Now this is entirely a full-time job and I wouldn't have it any other way. I'm reading through these links now, very much appreciated. Thank you!

I'm not sure if I can have the girls who work for me be considered as independent contractors or not. I do almost all of our performances myself, but I was having to turn away too much work so hired a few performers who work very much part time. They can perform elsewhere, they have not signed non-competes or any formal agreement with me. Can I charge them a "rental fee" to use my materials? They do buy some of their own materials. Or, is that still considered them being employees if I did it that way. I'm a little unsure on the line of how the "behavioral" common law is. To some extent they are not controlled as to how they perform at each event, although typically they do follow a certain format (singing, story, magic tricks...etc).

My business is not dependent on them, they are not required to be available any specific number of days. If I have work for them and they want it, then I book it and pay them. They don't get vacation time or any benefits of course.

What do you think?

I believe each girl that works for me will probably make about 10k each from me this year.

If I do indeed need to classify them as employees, then what do I need to do differently?

[huggytree]

those are all questions for your accountant...not strangers on the internet

find a good accountant and he will set you up with all you need

every type of business is different....each one handles taxes differently....

[tallen]

As for determining whether your workers are Independent Contractors or not, you might check with your State's Worker's Compensation Board. At least in my state, the default position is that all workers are to be considered employees (for whom you have liability in case they are injured on the job) unless you have obtained pre-approval of Independent Contractor status from the board. In my state, they recently aligned the rules for Independent Contractors so that the Worker's Comp Board, Department of Labor (unemployment compensation), and Revenue Service were all on the same page, and a determination of IC status by any one of them would apply across the board.

[vangogh]

They can perform elsewhere, they have not signed non-competes or any formal agreement with me.

I don't think it's about whether or not they can work elsewhere. It's about whether or not they do. Typically for someone to be defined as an independent contractor by the IRS they need to have more than one client and they supply their own tools. If these people only work for you then the IRS will likely see them as employees.


If I have work for them and they want it, then I book it and pay them

Hmm? That might lean toward them being contractors. It probably is best to ask an accountant. I can see how from your point of view you're not taking on employees, but giving out work to independent contractors. I don't think it's your responsibility to know what these people do in the hours they aren't doing work for you. My guess is you can call them independent contractors and send them 1099s, but it's probably best to check with an accountant to be sure.

[tallen]

I don't think it's about whether or not they can work elsewhere. It's about whether or not they do. Typically for someone to be defined as an independent contractor by the IRS they need to have more than one client and they supply their own tools. If these people only work for you then the IRS will likely see them as employees.

No, they don't have to actually have other clients -- they just have to have the freedom to take on other clients (i.e., without seeking your permission first).

From the IRS (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Financial-Control): "An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market."

[vangogh]

Interesting. I was always under the impression they needed other clients, but it makes sense they wouldn't have to have any. Otherwise they'd be considered an employee for their first client or if they're between clients.