In owning one’s own business, it can be devilishly easy to make innocent, yet costly mistakes. There are many seemingly minute issues that North Carolina business owners must take into consideration, for which hefty penalties could result if they are handled incorrectly. Unfortunately, many of these issues are easy to overlook, as they can often be hidden or be misunderstood and therefore, mishandled. The following are three of the sneakiest, yet most common traps for which N.C. business owners should be on the lookout.
Trap #1: Use Tax Trap
Most businesses buy some supplies or equipment from out of state. In many out-of-state buying situations, sales tax is often not paid on the items purchased, especially when the items are ordered online. When that happens, the purchasing business is held liable for paying USE TAX to North Carolina. The N.C. Department of Revenue is actively auditing small businesses and, as part of the auditing process, they look for out-of-state purchases without sales tax. When discovered, the business owner could owe 7% use tax in addition to other penalties and interest, resulting in considerable fines. For example, $100,000 in out-of-state purchases could easily cost $7,000 in use tax plus penalties and interest. To avoid those penalties, make sure to pay sales tax or use tax on all out-of-state purchases.
Trap #2: ITIN Withholding Trap
For businesses that employ sub-contractors such as cleaning services, lawncare companies, or construction workers, it is standard practice to ask these sub-contractors for their social security numbers for their 1099 reporting. It is crucial to note that if a sub-contractor provides a social security number that begins with the number “9,” that the number is not actually a social security number. Rather, the number beginning with “9” is an ITIN, which is an identification number given to individuals who do not qualify for a social security number. For individuals with ITIN numbers, business owners are required to have a 4% tax withholding which must be remitted to the state of North Carolina.
While many businesses like to use sub-contractors because they are not typically required to withhold taxes and because tax filing requirements are minimal, the use of ITIN numbers can complicate the game a bit. The N.C. Department of Revenue tends to audit small businesses looking specifically for contractors who have ID numbers starting in “9.” In the event of an audit, the 4% withholding, if not already collected and remitted, can add up quickly, especially when combined with the resulting penalties and interest, and can result in a hefty financial blow. To avoid this trap, search for your sub-contractor identification numbers beginning with a “9” and begin 4% N.C. withholding when required.
Trap #3: Workers’ Compensation Trap
For most large employers, the legal requirement to pay worker’s compensation insurance is treated as a given, but for many smaller businesses, the requirements regarding worker’s comp insurance can seem rather hazy, and if mishandled, can result in considerable fines. The state of North Carolina requires worker’s comp insurance for businesses with three or more employees. The tricky part of this requirement is that while corporate officers can be exempt from having worker’s compensation coverage premiums paid on them, they are not exempt from the company employee count to determine if coverage is required for the company.
For example, a hypothetical company-Acme Inc.-has three employees, including two corporate officers (a president and a secretary) and one regular employee. Because the total employee count is three, Acme Inc. must have workers’ compensation coverage in place even though they only must pay premiums on the one regular employee. The fact that officers are included in the employee count for the coverage requirement for the company but can themselves be personally exempted from coverage is a small but important delineation that we have seen create confusion for some small businesses, costing them sometimes $15,000 or more to rectify. In addition, business owners are liable for worker’s compensation for all sub-contractors unless those individuals provide their own insurance. It is always best to retain proof of worker’s compensation coverage from all sub- contractors to avoid a large, unexpected bill.
For NC businesses, paying close attention to these three sneaky traps can save a great deal of headache and financial stress in the event of an audit. The fixes for these silent lurkers are quite easy to implement, as long as these issues do not fly under the radar until it is too late. Simply remain aware and abreast of these issues and take proper action where needed, and any potential penalties resulting from these issues should be averted, creating greater security and peace of mind for you!
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