Have you ever watched the game show, The Price is Right? It’s been on TV for a long time. The winner is the contestant who guesses closest to the actual price of an appliance, car, vacation or other item (without going over). Over the years, winning contestants seem to have done their homework. People who guess without doing any homework generally don’t win.
Something similar happens with business. When launching a new business or a new service or product line, how do you know that your price is right? Too high, no one will buy from you. Too low, you’ll be out of money – and business – pretty quickly. You’ve got to do your homework or you could guess wrong.
Getting your price right boils down to three elements: Cost, Competition, and Value
- Cost – Start by figuring out all the costs you need to cover, both direct and indirect. Direct costs are usually the most obvious, like materials and labor. Indirect costs, like rent and marketing, also need to be included in the total cost per service or product. Don’t forget to also recover the cost to replace equipment that wears out every five to ten years.
- Competition – Once you know your costs, check out the competition to get some perspective. Take care not to use competitor prices as your only guide. You don’t know enough about how their situation or profitability. Consider unmet market demand, competitive pricing and customer service when establishing your prices.
- Value – Should your price reflect your superior quality, experience and qualifications? Absolutely! Don’t hesitate to charge more than the competition as long as you can distinguish your service or product from the others. Identify your value to your customers and reflect it in your price structure.
Want to make sure that Your Price is Right? Consider Cost, Competition, and Value. It’s not as simple as covering your costs and checking out competitor’s prices. Reflect your value and what distinguishes you from your competitors in your price while covering your costs and you’ll win the game.
When your organization needs more help, worker classification — employee or contractor — takes a back seat to more immediate concerns, like the worker’s start date and assignments. In reality, how your workers are classified should be your first consideration because it impacts the worker relationship, the on-boarding process and your organization’s overall cost.
What does “Worker Classification” mean?
Workers can be employees or independent contractors. The IRS spells out around 20 tests to determine worker classification. But they all boil down to the amount of control over the worker and the work itself in three ways:
- Behavioral: Do you control what the worker does and how the job is done? For example, do you determine work hours and processes to perform work tasks? If you set work hours and procedures, your worker is an employee.
- Financial: Do you provide the tools for the worker to perform the job, such as a work space and computer? Your worker is an employee.
- Relationship: Is the work permanent or temporary? Are employee-type benefits provided? Permanent workers who receive employer-provided benefits are employees. Temporary worker? Depends on #1 and #2.
What is the Cost Impact of Worker Classification?
Costs can be higher when workers are classified as employees vs. contractors. Employee wages are subject to the employer portion of social security taxes and any federal and state unemployment taxes. Employees may also get employer-provided benefits, such as insurance. An independent contractor is responsible for paying all of her or his social security taxes and insurance. Do some cost projections based on worker classification to know how it impacts your bottom line.
What If a Worker is Misclassified?
Even if the costs are higher, workers whose job duties are controlled by the organization must be classified as employees. No choice. Organizations that misclassify employees as independent contractors to save on employment taxes may be held liable for unpaid employment taxes, plus interest and penalties. Making a worker classification error, accidentally or intentionally, can get pretty expensive.
Worker classification is an important consideration to your organization’s overall cost and worker relationship, so it’s essential to get it right. The IRS has helpful to do just that at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. Still have questions? Consider consulting a qualified tax professional to help you figure it out.
Labor Day marks the unofficial end of summer. So does the September 15th deadline for individuals to pay their third quarterly estimated income tax payments for 2019. That’s right; those tax payments are due before your sun tan fades. The sad news is, the IRS and state tax agencies want you to pay your taxes as income comes in.
Estimated tax payments are due April 15, June 15, September 15, and January 15, unless, those dates fall on a weekend or a holiday. Technology makes the process a little less painful, with various online payment options. Of course, the IRS and state tax agencies still take checks. Some options, like credit cards, add service fees.
Three things to know about estimated tax payments:
Who Needs to Pay Estimated Taxes?
If all of your income comes from wages, the taxes that your employer withholds and remits for you probably cover your income tax liability. (More on withholdings later.) If you are self-employed or receive investment or rental income, you should check whether you need to make estimated income tax payments. The IRS website explains how to see if estimated payments apply to you and how to estimate federal income tax at this link
How Much Do You Need to Pay?
Estimated tax payments are based on your estimated income and tax liability. To avoid underpayment penalties, pay estimated taxes if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits. Total withholdings and estimated payments must equal or exceed the lesser of 90% of your current year tax liability, or 100% of your prior year tax liability. Figure your 2019 federal income tax bill with the IRS Withholding Estimator – https://www.irs.gov/individuals/tax-withholding-estimator.
What if You Don’t Pay Enough?
Interest is calculated on the unpaid balance due, accrued daily from the time the tax liability was created (aka when your income was earned or received) and when it is paid. Daily interest accruals can really add to your tax bill, so staying on top of your income tax payments is important. Annualized interest rates charged vary with market rates. At this writing, the IRS accrues 5% annual interest on unpaid individual income tax balances. Clearly, the IRS is serious about getting paid on time.
If you paid a lot when you filed your 2018 income tax return or have income from which taxes are not withheld, use the links above to see if you need to make estimated tax payments for 2019. Don’t feel comfortable doing this yourself? The IRS can also help you find a qualified tax professional – here https://www.irs.gov/tax-professionals/choosing-a-tax-professional.