Archive for January, 2013|Monthly archive page

Independent Contractor Vs. Employee: 1099s Due Jan. 31

Originally published in the Cedar Street Times

January 25, 2013

By the end of this month, business owners will have sent 1099s to their independent contractors and W-2s to their employees.  Many business owners think it is their choice, or perhaps a choice they can make together with the person performing the services on how they are to be treated.  It is not.

Business owners certainly see the savings to treat workers as independent contractors – no payroll taxes, no overtime, no break periods, no meal periods, no workers’ compensation insurance, no benefits, or a myriad of other California laws to follow.  Even if the worker gets higher pay to cover the extra taxes incurred as an independent contractor, he does not have to carry unemployment insurance or disability insurance on himself and sometimes thinks that is a personal benefit.  Of course, not having insurance is problematic for the worker and for the system as a whole, which depends on people paying premiums.

At the end of the day, people who are employees wearing the cloak of an independent contractor, are usually getting the short-end of the stick, because they really are dependent on the employer, and no longer have the ordinary benefits afforded by labor laws.  California knows this, and they come down hard on the employers when it is discovered that employees are misclassified as independent contractors.  Unfortunately, even for business owners that treat a misclassified independent contractor well, it can come back to haunt them if the individual becomes disgruntled.

Misclassification can get extremely expensive, or even sink a small business.  Besides legal fees, you could be hit with the tax liability, penalties, and interest from the IRS and FTB for all the back payroll taxes for the employee during the period misclassified.  You may also have to pay back wages and benefits the employee would have been entitled to.  The California Labor Commission can also fine you $5,000 to $25,000 per violation.

So, how do you know if someone is an employee or an independent contractor?  According to law it comes down to the right to direct and control the details and means of the work.  The IRS published Revenue Ruling 87-41 listing twenty points to consider as a guide.  They have also published their own internal auditor’s training guide, which provides more insight.  You can even file a Form SS-8 Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding to get an IRS determination in writing.  This form is most often used by disgruntled workers along with Form 8919 when they feel the employer misclassified them and they now owe tax or cannot get unemployment or disability benefits.  However, employers may also file the Form SS-8, or simply use it internally as a kind of double check to see if they feel they are classifying workers correctly.  All of these documents mentioned are available free online with a simple Google search.

Here is a simplified rundown of the twenty points from Revenue Ruling 87-41 which would help in the determination process.  You do not have to have all of them and no single one is decisive, but the first three are given a lot of weight. You may have an employee if: 1) you require the worker to follow specific instructions on when, where and how work is to do be done; 2) you provide formal or informal training for the worker; 3) the worker has predetermined earnings and always get paid for the work and does not have the ability to make a profit or incur a loss; 4) the services performed by the worker are highly integrated into your own and affect business success; 5) the worker is personally required to perform the services instead of having the option to have their own worker perform the services; 6) you hire, supervise, and pay for your worker’s assistants; 7) you have a continuous relationship with the worker – such as working with you every day; 8) you dictate the hours or days the worker performs services; 9) the worker works full-time for you; 10) you require the worker to perform services at your work site even though it could be done elsewhere;

11) you require the worker to perform services in a specific order or sequence; 12) you require written or oral reports regularly; 13) you pay hourly, weekly, or monthly versus by invoice or project completion; 14) you reimburse the worker’s travel and business expenses; 15) you provide the worker’s supplies, tools, computers, etc.; 16) you provide an office for the worker; 17)  the worker does not provide the same services to anyone else; 18) the worker does not advertise his own services to the general public, have business cards, etc.; 19) you can discharge the worker at any time instead of having to honor contract terms; 20) the worker can terminate his services without having to honor any contract terms.

Ultimately, the determination is a legal issue.  If you do not feel comfortable making the decision on your own, an attorney that focuses on employment practice matters should be consulted.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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American Taxpayer Relief Act of 2012

Originally published in the Cedar Street Times

January 11, 2013

The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013.  There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people.  I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers.  That patch has been kicked down the road for years.  The indexing will certainly alleviate concerns of a similar problem down the road.  Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.

The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property.  In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it.  Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust.  Family dynamics may of course still dictate a B trust is prudent.

Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.

Quite a few things were extended but not made permanent.  A big one was extending the exclusion from income of cancelled debt on personal residences for another year.  This could be a lifesaver for those still struggling with mortgages that are “underwater.”  Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013.  More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs.  Enhanced provisions of the child tax credit were also extended through 2018.

Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179.  This was slated to return to $25,000, but has been extended through 2013 at $500,000.  Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.

Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy.  For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%.  There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000.  Itemized deduction phaseouts have also returned for high income earners.

Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result.  Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%.  Individuals 65 and up will still enjoy the 7.5% rate for another three years.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.