INCOME TAXES

“In this world, nothing can be said to be certain, except death and taxes” Benjamin Franklin
For example in ancient Egypt, (2400 B.C) peasants too poor to pay their taxes were required to provide
forced labor on public projects, such as the pyramids.
China (9A.D.) Tax rate was 10% on profit. The emperor was deposed 14 years later.
US history, the primary source of revenue was a tax on imports. This was called Tariffs. The first
income taxed weren’t collected until the American Civil war in the 1860’s. Income taxes were
not part of US government financing until 1913. It raised from just 1% to 7%
OTHER TAXES
 Property taxes
 Head taxes
 Import and export taxes.
TAX COLLECTION TROUBLES
 What is income?
 What deductions are acceptable?
 How will the tax be collected?
 Will the income be verified?

TYPES OF ACCOUNTING
 Bookkeeping data
 Financial Accounting
 Managerial Accounting
 Income tax Account

Income Tax
Required payment to a government based on a person’s income or a company's profit.
Kinds of Taxes
 Income tax
 Sales tax
 Value added tax or (Tax)
 Property tax
 Payroll
 Usage
 Estate tax
SET OF BOOKS LARGE COMPANIES KEEP
  Financial Reports (to outsiders)
 Managerial Accounting reports (for insiders)
 Tax accounting records (for government)

ECONOMIC INCOME
Subjective value of things
ACCOUNTING INCOME
Results from business transactions
Accrual
TAXABLE INCOME
Clear and objective
Ability to pay
Social thinkering
CASH FLOW
Objective cash flow

INCOME TAX ACCOUNTING

 Compliance
 Planning
 Paperwork

TAX BRACKET
 $0 - $50 --------------------------------No income tax
 $50 - $100 ------------------------------ 50%

AVERAGE TAX RATE

The average tax rate is a measure that represents the proportion of total taxes paid to the total
taxable income earned by an individual or a company over a specific period. It's often expressed
as a percentage.

To calculate the average tax rate:

Total Taxes Paid: This includes all taxes paid over the period, such as income tax, property tax,
sales tax, etc.
Total Taxable Income: This refers to the income that is subject to taxation. It might include
wages, salaries, investment income, etc., depending on the specific tax jurisdiction.
The formula for the average tax rate is:
Total Taxes paid
Average Tax Rate = ∗100
Total Taxable Income

For example, if an individual paid $10,000 in taxes on a taxable income of $80,000:

10,000
Average Tax Rate = ∗100 = 12.5%
80,000

MARGINAL TAX RATE

The marginal tax rate refers to the rate of tax applied to the last dollar earned within a specific
income tax bracket. It represents the percentage of tax that will be levied on an additional dollar
of income.

In progressive tax systems, different portions of income are taxed at different rates. As your
income increases and you move into higher income brackets, the marginal tax rate typically
increases.

For instance, in a simplified tax system with three brackets:

Bracket 1: 0% tax rate on income up to $20,000

Bracket 2: 10% tax rate on income from $20,001 to $50,000
Bracket 3: 20% tax rate on income above $50,000
If someone earns $60,000:

The first $20,000 is taxed at 0%.

The next $30,000 ($50,000 - $20,000) is taxed at 10%.
The remaining $10,000 ($60,000 - $50,000) is taxed at 20%.
In this scenario, the marginal tax rate for the individual's next dollar earned (beyond the $50,000
threshold) would be 20%, as it falls within the highest tax bracket they've reached.
Understanding the marginal tax rate is crucial for financial planning and decision-making
because it helps individuals and businesses predict the tax impact of additional income or
deductions.

PROGRESSIVE TAX SYSTEMS

Progressive tax systems are structures where tax rates increase as the taxable income increases.
In such systems, the tax rate tends to rise as individuals earn more money. This means higher-
income earners pay a larger percentage of their income in taxes compared to lower-income
individuals.

The progressive nature of these tax systems aims to distribute the tax burden more equitably
across different income levels. It's often associated with the concept of ability to pay, where those
who earn more can afford to contribute a higher percentage of their income toward taxes.

Here's a simplified example of how a progressive tax system might work:

Income Bracket 1: Tax rate of 10% on income up to $20,000

Income Bracket 2: Tax rate of 20% on income from $20,001 to $50,000
Income Bracket 3: Tax rate of 30% on income above $50,000
If someone earns $60,000 in such a system:

The first $20,000 is taxed at 10%.

The next $30,000 ($50,000 - $20,000) is taxed at 20%.
The remaining $10,000 ($60,000 - $50,000) is taxed at 30%.
Progressive tax systems often include deductions, exemptions, and credits that can further reduce
the effective tax rate for individuals, particularly those in lower-income brackets.

Governments use progressive tax systems to fund public services, social welfare programs,
infrastructure, education, and other initiatives while aiming to reduce the burden on those with
lower incomes.
TAX DEDUCTIONS
Tax deductions refer to expenses, costs, or contributions that can be subtracted from a person's
gross income, reducing the total amount of income that is subject to taxation. These deductions
are permitted by tax authorities to help individuals and businesses lower their taxable income,
potentially decreasing the amount of tax they owe.

Common types of tax deductions include:

Standard Deduction: This is a fixed deduction amount available to taxpayers based on their filing
status (single, married filing jointly, head of household, etc.). Taxpayers can choose between
taking the standard deduction or itemizing deductions, whichever provides a greater reduction in
taxable income.

Itemized Deductions: These are specific expenses that individuals can claim on their tax returns
instead of taking the standard deduction. Itemized deductions may include:

Charitable contributions
Mortgage interest
Medical expenses exceeding a certain percentage of income
State and local taxes (SALT)
Education expenses
Certain job-related expenses
Above-the-Line Deductions: These deductions are subtracted from gross income to arrive at
adjusted gross income (AGI). They include expenses such as contributions to retirement accounts
(e.g., IRA, 401(k)), health savings accounts (HSAs), self-employment taxes, and student loan
interest.

Business Expenses: Self-employed individuals and business owners can deduct legitimate
business expenses, such as office supplies, equipment, travel expenses, and certain operational
costs, from their taxable income.

It's important to note that tax deductions can vary significantly based on tax laws, filing status,
specific circumstances, and changes in tax codes enacted by governments. Keeping accurate
records of expenses and understanding which deductions apply to your situation can help
optimize your tax position and reduce the amount of tax you owe. Consulting with a tax
professional or accountant is often advisable to maximize eligible deductions and ensure
compliance with tax regulations.

TAX CREDIT
Tax credits are direct reductions in the amount of tax a person or business owes to the
government. They differ from deductions, which reduce taxable income, in that tax credits
directly decrease the tax liability itself.

Here are a few key points about tax credits:

Types of Tax Credits: There are various types of tax credits, including:

Nonrefundable Tax Credits: These credits can reduce your tax liability to zero but won't result in
a refund if they exceed the amount you owe. For example, the Child Tax Credit.
Refundable Tax Credits: If the credit exceeds your tax liability, you may receive the excess
amount as a refund. The Earned Income Tax Credit (EITC) is an example of a refundable tax
credit.
Business Tax Credits: These are available to businesses for various purposes, such as research
and development, renewable energy investments, or hiring certain types of employees.
Types of Credits Individuals Might Qualify For:

Child Tax Credit: A credit for families with qualifying children.

Earned Income Tax Credit (EITC): Designed to help low-to-moderate-income working
individuals and families.
Education Credits: Such as the American Opportunity Tax Credit (AOTC) and the Lifetime
Learning Credit for qualifying education expenses.
Energy Efficiency Credits: For installing renewable energy systems or making energy-efficient
home improvements.
How They Work: Tax credits directly reduce the amount of tax owed. For example, if you owe
$5,000 in taxes and have a $1,000 tax credit, your tax liability decreases to $4,000.

Tax credits are valuable because they provide a dollar-for-dollar reduction in tax liability. Some
tax credits are refundable, which means they can result in a refund even if you have no tax
liability. Others can only reduce your tax liability to zero but won't result in a refund if they
exceed the amount you owe.

To claim tax credits, taxpayers usually need to meet specific eligibility criteria outlined by the
government and provide documentation or information supporting their eligibility for those
credits when filing their tax returns.

TYPES OF INCOME

Ordinary income refers to income earned from typical, recurring sources like employment,
business operations, or regular investments. It's the most common type of income and includes
various forms of compensation or earnings.

Here are some examples of ordinary income:

Wages and Salaries: Earnings from employment, including regular pay, bonuses, commissions,
and tips.

Self-Employment Income: Profits generated from running a business, providing services, or

being a freelancer or independent contractor.

Interest Income: Money earned from interest-bearing accounts such as savings accounts,
certificates of deposit (CDs), or bonds.

Dividend Income: Payments received from owning stocks or mutual funds.

Rental Income: Revenue earned from renting out property, such as real estate or equipment.

Royalties: Payments received for the use of intellectual property, such as patents, copyrights, or
trademarks.

Annuities: Regular payments received from an annuity contract, often purchased to provide a
stream of income in retirement.
Pensions: Payments received from a pension plan or retirement account, typically considered
ordinary income when withdrawn.

Capital Gains (Short-Term): While capital gains can fall under a different category, short-term
capital gains (from assets held for less than a year) are often treated as ordinary income and
taxed accordingly.

Ordinary income is usually taxed at different rates based on the source and amount of income.
Tax brackets and rates for ordinary income can vary depending on the country's tax laws and
filing status. In many tax systems, higher amounts of ordinary income may be subject to higher
tax rates, especially when income exceeds certain thresholds or brackets.

CAPITAL GAIN INCOME

Capital gains income refers to the profit realized from the sale or disposition of capital assets,
such as stocks, bonds, real estate, or other investments. When the selling price of the asset is
higher than its original purchase price, the difference represents the capital gain.

There are two types of capital gains:

Short-Term Capital Gains: These occur when an asset is held for one year or less before being
sold. Short-term capital gains are typically taxed at ordinary income tax rates, which means they
are subject to the same tax rates as regular income.

Long-Term Capital Gains: If an asset is held for more than one year before being sold, the
resulting gain is considered a long-term capital gain. Long-term capital gains often benefit from
preferential tax treatment, with generally lower tax rates compared to ordinary income tax rates.
In many tax systems, long-term capital gains are subject to specific tax rates that are typically
lower than ordinary income tax rates. The specific long-term capital gains tax rates can vary
based on income levels and tax laws.

It's important to note that not all assets are subject to capital gains tax. Personal-use assets like a
primary residence may qualify for special exemptions or exclusions from capital gains tax under
certain conditions, such as the home sale exclusion in the United States.
TAX SHELTERS
Tax shelters are legal strategies or investment vehicles designed to reduce or minimize an
individual's or a business's tax liability by sheltering income or gains from taxation. These
shelters aim to use legitimate methods within the tax code to lower the amount of taxable
income, resulting in reduced taxes owed.

There are various forms of tax shelters, each employing different mechanisms to achieve tax
savings:

Retirement Accounts: Retirement accounts, such as 401(k)s, IRAs (Individual Retirement

Accounts), and pensions, often provide tax advantages. Contributions to these accounts may be
tax-deductible, and the investment growth is tax-deferred until withdrawal during retirement,
potentially reducing current taxable income.

Real Estate Investments: Real estate can offer tax benefits through strategies like depreciation
deductions, which allow property owners to deduct a portion of the property's value each year as
an expense, reducing taxable income.

Municipal Bonds: Investments in municipal bonds issued by state or local governments may be
exempt from federal income tax and sometimes from state and local taxes, providing a tax-
advantaged source of income.

Tax-Advantaged Investments: Some investments, such as certain types of annuities or life

insurance policies, offer tax-deferred growth or tax-free withdrawals under specific conditions.

Business Expenses and Deductions: Businesses can use various legitimate deductions, credits,
and accounting methods to reduce taxable income, such as deductions for operating expenses,
research and development credits, or tax credits for hiring certain employees.

While tax shelters can be legal and advantageous, it's crucial to distinguish between legitimate
tax planning strategies and illegal tax evasion. Tax evasion involves intentionally
misrepresenting or concealing income or assets to avoid taxes illegally, which can result in
severe penalties or legal consequences.

The legality and effectiveness of tax shelters can depend on tax laws, regulations, and individual
circumstances. Utilizing tax shelters should always be done in compliance with tax laws and
under the guidance of a qualified tax professional or accountant to ensure adherence to
regulations and to maximize benefits while staying within legal boundaries.
 TAX BREAKS
Tax breaks refer to provisions in the tax code that reduce the amount of taxes an individual or
business owes. They are incentives or exemptions provided by governments to encourage
specific behaviors, investments, or activities that benefit society or the economy.

Tax breaks can take various forms:

Deductions: These reduce the amount of income subject to taxation. Common deductions include
those for mortgage interest, charitable contributions, certain medical expenses, and certain
business expenses.
Credits: Tax credits directly reduce the amount of tax owed. They can be refundable (resulting in
a refund if the credit exceeds the tax liability) or non-refundable (only reducing tax liability to
zero but not resulting in a refund if the credit is more than the taxes owed). Examples include the
Child Tax Credit, Earned Income Tax Credit (EITC), and education credits.
Exemptions: Exemptions excuse specific types of income or transactions from taxation. For
instance, certain types of income, like municipal bond interest or specific retirement account
contributions, might be exempt from taxation.
Incentives for Investments or Activities: Governments often provide tax breaks to encourage
behaviors that are considered beneficial. These may include credits for investing in renewable
energy, deductions for education expenses, or tax breaks for businesses hiring in specific sectors
or locations.
Capital Gains Tax Benefits: Lower tax rates are often applied to long-term capital gains
compared to ordinary income, encouraging long-term investments.
Tax breaks can serve various purposes, including promoting economic growth, encouraging
savings, supporting specific industries or initiatives, or providing relief to certain groups of
taxpayers.
However, tax breaks can be subject to specific limitations, conditions, or phase-out thresholds
based on income or other criteria. Tax laws and regulations governing these breaks can change
over time, impacting their availability and extent.
Individuals and businesses should stay informed about tax laws and consult with tax
professionals to understand and take advantage of available tax breaks while ensuring
compliance with tax regulations.

COMMON INDIVIDUAL TAX BREAKS

 Your first $12,000 of income
  Employer-provided healthcare
 Home mortgage interest

TAX LOOPHOLES

Tax loopholes refer to legal provisions or strategies within tax laws that allow individuals or
businesses to reduce their tax liabilities by exploiting gaps, ambiguities, or inconsistencies in the
tax code. These loopholes are often used to minimize tax payments without violating the law,
although their use might go against the intended spirit of the tax system.

Some characteristics of tax loopholes include:

Legal Ambiguities: Loopholes can arise due to unclear language or unintended gaps in tax laws,
allowing taxpayers to interpret the rules in ways that provide tax advantages.
Specific Conditions or Criteria: Tax laws often contain provisions that offer tax benefits under
certain conditions or criteria. Taxpayers might exploit these conditions to legally minimize taxes.
Complex Transactions or Structures: Tax avoidance schemes sometimes involve complex
financial structures, transactions, or strategies that take advantage of tax laws to reduce tax
obligations.
International Tax Planning: Multinational corporations or high-net-worth individuals may use
international tax planning strategies to shift profits to low-tax jurisdictions or take advantage of
tax treaties between countries to minimize overall tax liabilities.
Timing of Transactions: Some loopholes can be exploited by timing transactions strategically to
take advantage of specific tax rules or periods.

BUSINESS TAX BREAKS

 Income generated outside the United States. (Not allowed for individual citizens )
 US corporation are not allowed to pay taxes on income generated outside the United
States.
 Investment fund managers “carried interest.”
 Depreciation on equipments

INDIVIDUAL INCOME TAX EXPENDITURES (2018 ESTIMATE)

PROVISION REVENUE ($ IN BILLIONS)
 Exclusion of pension contributions and earnings 251
Exclusion of employer contribution for medical insurance and 146
medical care.
Reduced tax rates on dividends and capital gains 129
Child tax credit 104
Earned income tax credit 70
Deductibility of Charitable contributions 50
Deductibility of mortgage interest on owner- occupied homes 34

CORPORATE INCOME TAX EXPENDITURES (2018 ESTIMATE)

PROVISION REVENUE ($ IN BILLIONS)
Reduced tax rate on foreign income of US based corporations 74
Accelerated deprecation of machinery and equipment 57
Reduced tax rate on US based income generated in the export 10
of goods and services
Credit for increasing research and development activities 9
Credit for low-income housing investments 9
Exclusion of taxation of interest on state and municipal bond 7

THE LAFFER CURVE

The Laffer Curve is a theoretical concept that illustrates the relationship between tax rates and
government revenue. Named after economist Arthur Laffer, this curve suggests that there's an
optimal tax rate that maximizes revenue for the government.
The curve portrays the idea that as tax rates increase from low levels, government revenue also
increases. However, at a certain point, raising tax rates further beyond a specific threshold will
eventually lead to a decrease in government revenue. This decline occurs because excessively
high tax rates can discourage economic activity, production, investment, and innovation, thereby
reducing taxable income and overall economic output.
The key points of the Laffer Curve are:
Low Tax Rates: At very low tax rates, increasing tax rates will likely lead to an increase in
government revenue, as it doesn't significantly deter individuals or businesses from engaging in
economic activities.
Optimal Tax Rate: There exists an optimal tax rate where government revenue is maximized.
This rate strikes a balance between generating sufficient revenue and avoiding negative impacts
on economic incentives and productivity.
Diminishing Returns: Beyond the optimal rate, further tax rate increases may lead to diminishing
returns and a decline in government revenue. High tax rates can disincentivize work, investment,
and entrepreneurship, leading to reduced taxable income and economic activity.
Complexity and Real-World Application: Determining the precise point of the optimal tax rate on
the Laffer Curve is challenging. It varies based on economic conditions, the tax structure,
individual behavior, and other factors.
The Laffer Curve is often used as a concept to illustrate the trade-offs associated with tax policy.
It suggests that excessively high tax rates might not necessarily lead to increased government
revenue and could potentially harm economic growth. However, identifying the precise point on
the curve where the optimal tax rate lies remains a subject of debate among economists and
policymakers.

FILING TAXES (1040)

 Need to know the current tax bracket (2023 tax bracket)
  Current Standard deductions or (itemized deductions)

EXAMPLE
FAMILY OF 5
 Romana and Kay
 3 children
 $91,000 family income

INDIVIDUAL WITH 3 CHILDREN

 Kay
 3 children
 $70,300 family income

FAMILY OF 3
Assuming Patrick and Priscilla
 1 child
 $100,000 family income

In the dependent section, If child is above 17 years, check in Credit for other dependents
Documents required
 W2s (wages, salaries from employer)
 1099s (side jobs, freelance work, consulting, commissions)
 Interest earned on bank accounts
 Money from investments (capital gains)

SCHEDULE 1
Schedule 1, also known as "Additional Income and Adjustments to Income," is one of the six
schedules of the IRS Form 1040 used for individual income tax returns in the United States. It's
used to report additional income sources, adjustments to income, and certain tax deductions or
credits that don't fit directly on the main Form 1040.

Schedule 1 covers several types of income and adjustments, including:

Additional Income: This section includes various types of income that might not be reported
elsewhere on the main Form 1040, such as:

Business income from a side job or self-employment (reported on Schedule C)

Rental income
Gambling winnings
Alimony received
Income from partnerships, S corporations, estates, trusts, etc.
Adjustments to Income: Certain adjustments to income, also known as above-the-line
deductions, are reported here. These deductions can reduce your total taxable income and include
items like:

Educator expenses
Health savings account (HSA) deductions
Contributions to traditional IRAs
Student loan interest deduction
Other Payments and Refundable Credits: This section might include specific tax credits or
payments, such as:

Excess Social Security tax withheld

Additional child tax credit
American Opportunity Tax Credit or Lifetime Learning Credit for education expenses
Schedule 1 is filed along with the main Form 1040 when individuals have additional income
sources or need to claim specific deductions or credits that require separate reporting. It's part of
the overall tax return package used to calculate an individual's taxable income and determine the
final tax liability or refund owed to the taxpayer.
IRA distributions maximum $11,000 and this money will not be taxed until retirement.

ADJUSTED GROSS INCOME

AGI stands for Adjusted Gross Income. It's a crucial figure used in the U.S. tax system to calculate an
individual's or a household's taxable income. AGI is calculated before applying deductions and credits
and serves as the starting point for determining the total income on which taxes are calculated.

To arrive at your Adjusted Gross Income (AGI), you start with your total gross income, which includes all
types of income sources such as wages, salaries, interest, dividends, business income, capital gains, rental
income, and more. From this total gross income, you subtract certain allowable deductions known as
"above-the-line deductions" or adjustments to income. These deductions include items like contributions
to retirement accounts (e.g., traditional IRA, 401(k)), health savings account (HSA) contributions, certain
business expenses, student loan interest, educator expenses, and others.

The resulting figure after subtracting these above-the-line deductions from your total gross income gives
you your Adjusted Gross Income (AGI).

AGI is significant because many tax calculations, deductions, and credits are based on this figure. It's a
key determinant for various tax benefits, such as the calculation of certain deductions, eligibility for
certain credits, and phase-out limits for various tax benefits. AGI is reported on the tax return form,
typically found on line 11 of Form 1040 for the federal income tax return in the United States.

STANDARD DEDUCTION OR ITEMIZED DEDUCTIONS (FROM SCHEDULE A)

When filing U.S. federal income taxes, taxpayers have the option to claim either the standard
deduction or itemized deductions, but not both. They choose the method that provides the greater
tax benefit—reducing their taxable income and, consequently, their tax liability.

Here's a breakdown of each:

STANDARD DEDUCTION:
The standard deduction is a predetermined, fixed amount set by the IRS based on filing status
(single, married filing jointly, head of household, etc.).
It simplifies the tax-filing process by providing a basic deduction without the need for detailed
record-keeping of expenses.
The standard deduction amount varies depending on the taxpayer's filing status. It's designed to
cover various deductible expenses, such as state and local taxes, mortgage interest, charitable
contributions, and medical expenses, in a lump sum.
For the tax year, taxpayers can choose to take the standard deduction if it provides a greater tax
benefit than their total itemized deductions.

ITEMIZED DEDUCTIONS:
Itemized deductions are specific expenses that taxpayers can claim on Schedule A of Form 1040.
These deductions can include expenses such as:
State and local taxes (income or sales tax and property tax)
Mortgage interest
Charitable contributions
Medical and dental expenses (above a certain threshold)
Unreimbursed employee business expenses
Casualty or theft losses
Taxpayers would need to maintain detailed records and receipts for their expenses to claim
itemized deductions.
Itemizing deductions can potentially result in a higher total deduction than the standard
deduction but requires more documentation and effort.
When deciding between the standard deduction and itemized deductions, taxpayers typically
choose the option that minimizes their tax liability the most. Taxpayers can evaluate their
specific situation by calculating both the standard deduction and their potential itemized
deductions to determine which option provides the greatest tax benefit.

Taxpayers can't claim both the standard deduction and itemized deductions in the same tax year
—they must choose the one that yields the most significant tax advantage.
 GOLDILOCKS PRINCIPLE OF INCOME TAXES
 You don't want to pay too little
 You don't want to pay too much
 Pay the right amount of income tax
 TAX PLANNING STRATEGIES
 Time shifting and income.
1. Individual Retirement Account (IRA): Created and managed by an individual.
2. 401(k) created and managed by an employer on behalf of an individual.
3. IRA and 401k is not taxed now but taxed after retirement.

 Shifting income to low tax place.

Example. Microsoft has its Regional Operating Centers to Puerto Rico, Ireland and
Singapore

 Changing the character of income.

Ordinary Income. Income earned from working.
Capital gains. Income earned from buying and selling assets.
Investment fund. Investment fund manager is paid in the form of additional shares.
Incentive stock Options (ISOs): Employees are paid with incentive stock options rather
than salary.

COMPORATE INCOME TAXES

 Sole proprietorship
 Partnership
 Corporation

BEWARE OF ILLEGAL STRATEGIES.

Tax evasion: concealing income or falsifying deductions in order to pay less tax done is legally
required.
Tax planning: thata smart:
Tax Evasion is crime.

COMMON EVASION SCHEMES

  Refusing to file income taxes or refusing to pay income taxes based on the belief that it is
illegal for government to collect taxes.
 Understate business income, sometimes by hiding cash collected.
 Hidden income or investments offshore
 Claiming personal expenses are tax deductible business expenses
 Deduction for personal car used for businesses is only the cost of its business use
 Paying above market compensation to family members working in the business
 Keep routine family chores separate from work.
 Deducting the routine cost of supporting children, meal, education etc.

COMMON ISSUES WITH SMALL BUSINESSES

 Maintain good records.
1. Burden of proof is on you
2. Track car mileage, cost of meals
3. Paper records (or use an app)
 Don’t hide income.
1. Report cash only deal
2. Report foreign country bank accounts
3. Report income earned oversees.

WHY REPORT HIDDEN INCOME?

 Ethically right
 IRS can find out
 Strong penalties

 Proper distinguish between employees and independent contractors.

 Plan your business structure.