If you are a small business owner, you may be aware that there are multiple different types of taxes that you need to pay. Self-employment taxes are the combined Social Security and Medicare taxes that sole proprietors, independent contractors, and other types of business owners must pay. Understanding the self-employment taxes that may apply to you can help you make sure you stay compliant with the law and will not be required to pay penalties or fees. 

Understanding Self-Employment Tax

You will generally be required to pay the self-employment tax (also known as SE tax) if you have net earnings of at least $400 from self-employment in a tax year. The SE tax rate is currently 15.3 percent, which consists of 12.4 percent for Social Security taxes and 2.9 percent for Medicare taxes. In 2022, the Social Security portion of the self-employment tax will apply to the first $147,000 of your net earnings, including wages or tips. All combined earnings will be subject to the Medicare portion of the self-employment tax.

Self-Employment Tax Vs. Income Taxes 

In addition to paying SE tax, small business owners also have the obligation of paying income taxes. These taxes will apply to the salary you pay yourself through your business. For businesses that are classified as pass-through entities, including S corporations or LLCs, the profits earned by the business will be "passed through" to the owner, and they will be subject to income taxes. If your business is a sole proprietorship, it will not be separate from the salary you pay yourself, and you will be required to pay income taxes on all business earnings.

The Criminal Investigation (CI) division of the IRS regularly investigates taxpayers who are suspected of tax evasion, tax fraud, and other offenses. These investigations may be related to tax audits, or they may be performed independently. Those who are accused of committing tax-related offenses may not only face penalties for non-payment of taxes or failure to submit the proper information to the IRS, but they may also be subject to criminal prosecution. In recent years, offenses related to cryptocurrency have been a significant concern for the IRS. Agency officials have stated that hundreds of cases involving virtual currency and tax evasion or other offenses are likely to be prosecuted within the next year.

The IRS's Increased Focus on Cryptocurrency

As more and more people invest in cryptocurrency, use virtual currencies to make payments and purchases, and receive digital assets as income, the IRS has begun to scrutinize these transactions and enforce compliance with tax laws. It has also been able to prosecute some major cases involving tax fraud and other related offenses. In just one example, the founders of Bitqyck, a cryptocurrency investment company, were convicted of tax evasion after defrauding investors of around $24 million. The defendants in this case had failed to file corporate tax returns, and they had underreported their income to the IRS, resulting in tax losses of more than $1.6 million. In addition to being sentenced to prison, the defendants were required to pay a civil penalty of $8.3 million to the U.S. Securities and Exchange Commission.

While high-profile cases prosecuted by the IRS that involve millions of dollars may receive the most attention in the news, the hundreds of cryptocurrency investigations that are currently being performed are likely to involve smaller amounts. Currently, the IRS is using "John Doe" summonses to gather information about cryptocurrency transactions, and in many cases, these summonses involve transactions of $20,000 or more. These summonses may be served on third parties, such as cryptocurrency exchanges, in order to identify virtual currency owners and determine whether they have violated tax laws. Summonses may be used to identify "off-ramping" transactions in which cryptocurrency is exchanged for legal currency issued by the U.S. or other countries, as well as virtual currency that was received as income and was not properly reported to the IRS.

Businesses that operate in the United States must meet a variety of legal requirements, including disclosing information to the government. In addition to submitting the proper information to the IRS when filing tax returns and other required forms, other types of disclosures need to be made to government agencies. This now includes reports required under the Corporate Transparency Act (CTA). This law was passed in 2019, and the final rule regarding reporting requirements was released in September 2022. Businesses will need to make sure to file the proper reports to avoid potential civil and criminal penalties.

What Is the Corporate Transparency Act?

Congress passed the CTA with the intent of preventing money laundering by people and organizations involved in drug trafficking, fraud, and other illegal activities. These activities often involve the creation of shell companies that conceal the identities of the owners and allow criminals to access and use assets in the United States. To combat these activities, the CTA requires companies to submit reports detailing their beneficial ownership information (BOI).

What Are the CTA's Reporting Requirements?

The new rule that was issued by the Financial Crimes Enforcement Network (FinCEN) goes into effect on January 1, 2024, and it states that "reporting companies" are required to file reports identifying a company's beneficial owners, as well as people who are considered "company applicants." Beneficial owners include any individuals who either exercise substantial control over how a company operates or who own or control at least 25 percent of a company's ownership interests. Company applicants include the individuals who file the documents that establish a company as a legal entity or those who direct or control applications filed by other parties.

Taxpayers who own foreign assets, earn income in more than one country, or may otherwise be required to pay taxes in multiple countries may need to address a variety of tax-related issues to ensure that they are in compliance with all applicable requirements. This can be a significant concern during tax audits, and in some cases, information about a person's finances and tax obligations may be shared with other countries by the IRS. By understanding when this can occur and how the sharing of information may affect tax liabilities, taxpayers can make sure they take the correct steps to avoid penalties in the United States or other countries.

Court Ruling Highlights Tax Information Sharing Practices

A recent court case that took place in California demonstrates the issues that taxpayers may face regarding the sharing of information by the IRS. In the case of Zhang v. United States, the Canadian government requested tax information from the IRS related to a married couple. The taxpayers challenged this request, claiming that the Canadian government made the request in bad faith. However, the Ninth Circuit Court of Appeals ruled against the taxpayers and found that the IRS had acted in good faith to provide the requested documents based on the terms of a bilateral treaty between the United States and Canada.

When Will the IRS Exchange Information With Foreign Tax Authorities?

The case described above demonstrates that when foreign countries request information from the IRS, taxpayers usually will not be able to challenge the release of this information. These types of information exchanges may occur in a variety of situations, including:

The classification of workers as employees or independent contractors is an important legal distinction that can have significant implications for employers. Employees are entitled to a number of rights and protections under the law, including minimum wage and overtime pay, while independent contractors are not. It is important for employers to ensure that workers are classified correctly, and they may face penalties if they fail to do so. Recently, the Department of Labor announced a proposed rule that may affect worker classification. Employers will need to understand how this rule could affect them and how they can avoid the potential risks of misclassifying workers.

Potential Changes to Federal Worker Classification Rules

The Department of Labor follows certain rules when determining worker status under the Fair Labor Standards Act (FLSA). During the administration of President Donald Trump, these rules were updated to focus on two "core factors": the degree of control that an employer and/or worker has regarding key aspects of the work being performed, and a person's opportunities for profits and losses when performing work. This rule was generally considered to favor employers, allowing them to classify more workers as independent contractors.

The administration of President Joe Biden is seeking to put new rules in place that will protect the rights of workers. The proposed new rule would look at the "totality of the circumstances" that may affect a worker, and it would include six factors to consider: