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I uncovered a business for my business buyer clients that is engulfed in a “disagreement” with the Washington State Department of Labor. Disagreement is putting it mildly as there’s a judgment for well over $100,000 against the company for classifying people as independent contractors not employees.

This is not an isolated issue. A couple weeks ago the Wall Street Journal had an article on how the IRS is getting very aggressive in this area. The state wants money from every source they can find and the IRS knows that contractors tend to not report (all) their income.

The company in question has made a lot of money by not having to pay payroll taxes. Their customers have lower prices than they should because of this. And the model is about to be broken.

Just think if the owner had put his thoughts and energy into growing the business, creating a value proposition based on higher quality not just price and paid people enough so turnover dropped significantly?

Too many business owners are shortsighted because of taxes. Often because they are mad at the IRS or government in general. It often hurts them when it’s time to sell. This shortsightedness may have some rationality to it, “We bought some new equipment (we really didn’t need) at the end of the year to reduce taxes,” to outright fraud, like not reporting income or blending the business and personal checkbooks by writing off massive amounts of personal expenses.

Buyers and banks like to see a lot of profit on the tax return. They don’t like having to justify explanations for why the income is lower than the owner/seller says it really is.

“Anger makes dull men witty, but it keeps them poor.” Francis Bacon

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