Option 1: DBA or Doing Business AsBy John Hazard | Print
Many VAR and reseller businesses start with an individual providing IT services to clients and getting paid and cashing a check. But just how that individual cashes the check will determine how much of the money he gets to keep come April 15. Here's a look at the best tax structures for VAR businesses.
Out of the starting blocks most VARs elect to operate as a DBA, an acronym for "Doing Business As," and most of them are wrong, said Sweeney and several tax preparers. A DBA entity means you are operating as yourself, or perhaps you’ve gotten a business license under a company name. You might have separate bank accounts and letterhead with the company name. But you and the business are one.
For tax purposes, the IRS recognizes no difference between you and your business. The business revenue and your personal income are filed on the same 1040 IRS form. The DBA option is rather inflexible and disqualify you from many some of the advantages and deductions of business ownership.
It also increases your chanced of being audited 800 percent, according to Sweeney. Because the IRS computer programs and human reviewers are programmed and trained to treat 1040 returns as individuals, standard business deductions will jump out as anomalies, Sweeney said. The rate of audit for incorporated businesses is 0.3 percent, but 2.7 percent for DBA/sole proprietors.
A DBA also places a tremendous risk on you and your family, said Gordon W. Ulen, a certified professional accountant and head of the Tax Planning & Preparation Department at the Retirement Financial Center in Danvers, Mass.
"In a DBA, or sole proprietorship, you’re wide open for losses," he said. "If you are sued or audited as a business, you are sued and audited personally. Unless you have a lot of insurance coverage to protect your personal assets, I wouldn’t recommend people operate as a DBA."
The biggest shock for small business owners in their first year of business as a DBA is what is known as the "self-employment tax," which is about 15.3 percent, said Scott Berger, a tax principal at the accounting firm Kaufman-Rossin, in Boca Raton, Fla. Berger is a specialist in entrepreneurs and business owners.
"Until now they’ve had an employer who cut them a paycheck and automatically took out their federal and state withholding taxes.That doesn’t change; you still pay that," Berger said. "What changes is the social security and medicare withholding. Yes, you paid for about half of it out of your paycheck, but employers pick up the other half. Entrepreneurs forget about this and they’re usually surprised at the end of the year when they have to pay it.