Contract Analysis & Insurance for Business Owners in Austin

Start with the boundary, because it matters more than the service description. The Reed Corporation is a CPA and tax firm. We do not practice law, we do not draft or interpret contracts as a legal matter, and we do not sell insurance or earn a commission on any policy. Your attorney owns the legal questions. Your broker owns the coverage placement. What we read a contract for is money and tax, meaning how the agreement will show up in your books, on your return, and in your cash timing. Those are accounting questions that live inside the same document as the legal ones, and they routinely go unasked because the lawyer is not looking at your tax position and the broker never sees the contract at all.

In practice the review runs across a few concrete items. Payment terms, because when you get paid drives when you are taxed and whether you fund an estimated payment on time under Form 1040-ES. Worker classification language, because an agreement that calls someone a contractor does not make them one, and the federal cost of being wrong runs through the IRS employment taxes page. Documentation duties, meaning who collects a Form W-9 from whom and who issues the year-end information return. Indemnity and hold-harmless clauses, because they create an exposure your policy either covers or does not. That is the whole territory of contract analysis for business owners in Austin as we practice it.

A short example shows why it pays. A client signed a subcontract with net-90 payment terms and a 10 percent retainage held until final acceptance. On a 120,000 dollar job that meant 12,000 dollars sitting unpaid for months past completion. The client was on the accrual method, so the full amount was income when billed, and the accrual rules in Publication 538 did not care that the cash had not arrived. He owed tax on 12,000 dollars he had not received, roughly 3,700 dollars at his combined rate, in a quarter when he was already tight. Reading that clause before signing would have turned it into a negotiation instead of a surprise. Retainage is negotiable far more often than owners believe, and even moving the release trigger from final acceptance to substantial completion would have pulled the cash into the same year as the tax on it.

The mistake owners make is treating the contract review as a legal errand that ends when the attorney signs off. The lawyer protects you from being sued. Nobody in that conversation is asking what the deal does to your quarterly cash or your books, and the answer is often significant. Texas helps here, since there is no state personal income tax to layer on top, though an entity may still owe the franchise or margin tax reported to the Texas Comptroller on total revenue regardless of what you collected. Owners who route a draft past their accountant and their attorney together, before signature, spend far less time fixing terms afterward. Clean underlying books from our bookkeeping service make that review fast, and the terms you agree to now will shape what tax strategy consulting can actually do for you next year.

Payment terms decide timing, and timing is most of what a small business can control about its tax bill. The mechanism depends on your accounting method. A cash-method business reports income when it is actually or constructively received and deducts expenses when paid. An accrual-method business reports income when the right to it becomes fixed and the amount is determinable, which is usually when you bill, and deducts expenses when the obligation is set and economic performance has occurred. The rules sit in Publication 538, with the business-level overview at Publication 334 and the general small business hub at the IRS small business page. Method changes are not a free choice you make each April either, since switching generally requires filing for consent rather than simply reporting differently. The same signed contract produces two different tax years depending on which method you are on, and most owners have never been told which one they use.

Constructive receipt is the trap inside the cash method. Income is yours when it is available to you without substantial restriction, not when you get around to depositing it. A check sitting in your desk on December 30 is December income. A client who offers to pay in December and is asked to wait until January has generally still made the money available to you. Deferral by delay is not a plan. Deferral written into the contract, where the milestone genuinely does not occur until the following year, is a different thing entirely, and that distinction is the difference between planning and a problem on Schedule C.

Take the arithmetic. A design studio bills 12,000 dollars on December 20 with net-30 terms. On the accrual method that 12,000 dollars is income in the year billed, and tax of roughly 3,700 dollars is due even though the money arrives in late January. On the cash method the same 12,000 dollars is income the following year, and the tax moves with it. Neither answer is wrong. What is wrong is not knowing which one applies before you agree to the terms, then discovering in April that you funded a January payroll with money the return already taxed. Deposits and progress billings move the same lever, and so does retainage. Each one is a term you can ask for before signature and cannot touch afterward, which is the entire reason this review happens early rather than at filing.

The common mistake is negotiating price and ignoring terms. Owners fight for an extra 5 percent on the rate and accept net-90 without blinking, when the terms often cost more than the discount they refused. Late-payment interest, kill fees, and change-order procedures all have dollar consequences that show up in your books long before anyone reads the contract again. Every one of those numbers needs to trace to a reconciled account, which is why our bookkeeping service tracks receivables against terms rather than against hope, and why an owner’s individual tax return gets easier once the timing is deliberate. Contract analysis for business owners in Austin starts with a plain question that almost nobody asks before signing, which is when does this money actually land and what year does it belong to. Answer that before signature and next December stops being a guessing game.

Because it is the single most expensive thing a small business contract can get wrong, and the contract is where owners think they solved it. Writing the word contractor into an agreement does not make someone a contractor. The federal test looks at the actual relationship, principally how much control you have over what gets done and how, whether the worker has a real opportunity for profit or loss, and how permanent the arrangement is. A signed paper stating that a worker is independent carries very little weight against a set of facts that says otherwise. The classification rules and the taxes that ride on them are set out on the IRS employment taxes page, with broader context on the operating a business page. Contract language can support a classification when it matches reality. It cannot create one.

The paperwork follows the classification, not your preference. A genuine contractor gives you a Form W-9 before you pay them, and if you pay 600 dollars or more for services in the year you issue a Form 1099-NEC. Rent and certain other payments go on Form 1099-MISC instead. An employee gets a Form W-2, and you withhold and deposit tax and file Form 941 each quarter along with Form 940 annually. The contract review checks whether your agreements match what you are actually filing, because a mismatch between the two documents is the easiest thing in the world for an examiner to spot.

Run the money. You pay a worker 12,000 dollars over a year and treat him as a contractor. If he was really an employee, the employer share of Social Security and Medicare alone is 7.65 percent of that 12,000 dollars, about 918 dollars, plus federal unemployment tax, plus the income tax you failed to withhold, plus penalties that scale with how long it ran. On one worker at 12,000 dollars the exposure is manageable. On six workers over three years it is not, and that is the version we usually get called about. Texas has no state income tax withholding to compound it, which softens the state side without touching the federal bill at all. The worker also has a claim in this, since he paid the full 15.3 percent of self-employment tax on that 12,000 dollars himself while an employee would have split it with you.

The mistake is the W-9 nobody collected. Owners pay a vendor all year, then reach January and cannot issue a 1099-NEC because they never got a taxpayer identification number, and now the vendor is not returning calls. Collect the W-9 before the first payment, always, and make it a condition of the contract rather than a favor. Backup withholding exists precisely for the owner who did not, and it means holding a percentage of every payment and remitting it, which no vendor enjoys discovering after the fact. The penalty for a late or missing information return is charged per form, and it climbs the longer you wait. A payments file that ties every vendor to a signed W-9 is a five-minute January instead of a two-week one, which is what our bookkeeping service maintains and what makes tax strategy consulting possible on real numbers. Fix the classification while the relationship is young, and 2027 will not arrive with a bill for 2025.

Often it does not, and the gap usually opened years ago. Owners pick a structure at formation based on what the business was then, sign it into place, and never look again while the work changes underneath. A single-member LLC that consulted from a laptop is a different risk in every sense once it has employees and a warehouse lease. The federal classification of your entity is separate from the Texas filing that created it, a distinction explained on the IRS business structures page. Texas grants the liability shield. The IRS decides how the profit gets taxed, and it applies default rules that an election on Form 8832 or Form 2553 can override.

The contract side of that question is about who signs and who is exposed. If the agreement names you personally rather than the entity, the shield you paid for is doing nothing on that deal. If it contains a personal guarantee, you have voluntarily set the shield aside, and no entity election fixes that. If it requires certificates of insurance at limits your policy does not carry, you are in breach the day you sign. Those are legal and coverage questions we do not answer, which is exactly why we send them to your attorney and your broker rather than around them. What we do flag is the pattern, because an owner signing personally on every contract has a structure that exists on paper only. The same goes for an entity that never opened its own bank account, which is a bookkeeping failure before it is a legal one, and one our bookkeeping service fixes in the first month.

Here is the tax half. Take 12,000 dollars of profit above a reasonable owner salary. Left in a sole proprietorship, that 12,000 dollars carries self-employment tax at 15.3 percent under Schedule SE, roughly 1,836 dollars, on top of income tax. Inside an S corporation reporting on Form 1120-S, that same 12,000 dollars passes through as a distributive share that is not subject to self-employment tax, though it still requires a defensible salary, a real payroll, and a separate return that costs money to prepare. The 1,836 dollars is not free, and below a certain profit level the election costs more than it saves.

The mistake is running an S corporation election that nobody honors in practice. Owners elect S status, skip payroll entirely, take draws all year, and hand us a set of books where personal and business money share one account. That is not an S corporation, it is a reclassification waiting to happen. The structure has to be lived, not filed, and the payroll is the part that proves it. Reasonable compensation is a facts question the IRS is happy to answer for you if you decline to, and their answer is rarely the generous one, which is why the salary figure belongs in tax strategy consulting rather than in a guess. Contract analysis for business owners in Austin includes checking that the entity on the signature block is the entity on the return and the entity that owns the bank account, because when those three disagree the cheapest outcome is confusion. If the shape of your agreements has drifted from the shape of your entity, Request Private Consultation and we will map one against the other. Aligning them now is far cheaper than unwinding a bad year later.

To be plain about it first, we do not sell insurance, we hold no appointment with any carrier, and we earn nothing whether you buy a policy or cancel one. Coverage decisions belong to your licensed broker. What we look at is the gap between what your contracts obligate you to carry and what you actually carry, plus how the premiums and any recovery land on your return. Those are bookkeeping and tax questions. A broker rarely reads your subcontract. An attorney rarely reads your declarations page. Somebody should read both in the same afternoon, and that is the part we can do.

The tax treatment is less obvious than owners expect. Ordinary business insurance premiums are generally deductible as a business expense under the rules in Publication 535, with the small business overview at Publication 334. A sole proprietor reports them on Schedule C. Some policies are not deductible business expenses at all, and life insurance where the business is the beneficiary is the usual example. Coverage on a home office follows its own path through Publication 587 and Form 8829, where only the business portion counts. A proceeds payment on a casualty loss is not automatically tax-free money either, since it reduces basis and can produce gain when it exceeds what the damaged property was carried at.

An example makes the exposure real. A contract required 2 million dollars of general liability coverage. The client carried 1 million dollars and had not read the requirement since the first renewal. He also carried an indemnity obligation running back to the customer, uncapped. Raising the limit would have cost roughly 12,000 dollars a year in additional premium, fully deductible, so the after-tax cost at a 24 percent effective rate was closer to 9,100 dollars. He was one claim away from an uninsured obligation that dwarfed both numbers. We flagged the mismatch and his broker priced it, and his attorney rewrote the indemnity cap before the next renewal cycle. That division of labor is the correct one, and it only works when all three people see the same document in the same month rather than in three separate years.

The mistake is buying a policy once and treating it as permanent. Revenue triples, payroll starts, a vehicle gets added, and the coverage still reflects a business that stopped existing four years ago. Contracts signed in the meantime quietly raised the bar. Set an annual review with your broker on the same calendar as your tax planning, and bring the actual agreements rather than a summary of them. Bring the certificates your customers are holding too, because those are the promises being relied on, and they age badly. A certificate issued in 2023 says nothing about the policy you carry today. Our bookkeeping service keeps the premium and claim activity coded so the deduction is right, and tax strategy consulting uses those figures when we look at structure and risk together. Contract analysis for business owners in Austin ends where legal and coverage advice begins, and the handoff to your own advisors is the point. Get the review on the calendar for 2027 and the gaps will be found by you rather than by a claim.