Archive for the ‘employee’ Tag

Home Office Part II – Do I Qualify?

Originally published in the Cedar Street Times

August 9, 2013

Two weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013.  (You can find the article on my website at www.tlongcpa.com/blog if you missed it.)  The rules to qualify for a home office, however, have remained unchanged, and still complicated!  At the end of the last article I promised I would discuss the basic rules to qualify – so let’s get to it!

The purpose of the home office deduction is to offset the costs of maintaining a dedicated office space in a home related to a business owned by an individual, or in some cases for an employee’s job.

Let’s talk about employees first.  Many employees these days work from home, but more often than not, they are not entitled to the deduction because it is their personal choice to work from home.  The law requires that the office be for the employer’s convenience – not yours.  If your employer does not require you to work from home and provides space for you at the main office which you choose not to utilize, you are generally barred from taking the deduction.

An employer hiring for telecommuting position so it can save on corporate office rent or obtain/retain talent in distant places would certainly be for the employer’s convenience.  Or perhaps an employer would like to have a presence in a particular area, so it hires somebody to work out of his or her own home office, and meet clients there, instead of having to rent another space.  This would also be for the employer’s convenience.  Often, people work a couple days from home, and a couple days in the office.  They could be closer to a customer base from their home for appointments, for instance, but then also come to the main offices for staff meetings, etc.  Many times, it is certainly convenient for both parties.

The key thing employees would want to have is an expectation in writing from the employer about maintaining and using their own office.  Rationalizing in your own mind that the employer is benefiting will not help, even though it may be true.  If it does seem the employer is better off as a result of your home office, and your job description does not discuss maintaining your own office, you may want to talk to the employer about changing your job description to include this.

Now let’s discuss people running their own business.  In this circumstance, the IRS says the office must be one of three things: 1) the principal place of business, 2) a place of business that is used to meet customers, or 3) a separate structure from the home, but used for the business.  If you have a business, and your home is the only office, it is pretty clear you meet one of these three.  When someone has an office space outside the home, but also has a home office it gets a little trickier, especially if you don’t regularly meet with customers at your home (occasional use won’t qualify) and you don’t have a detached building at your home.

Digging further into item one you find that the IRS distinguishes your principal place of business from other offices as the place where your administrative and management activities such as billing, accounting, ordering supplies, making appointments, etc. takes place.  If you have no other fixed location where you conduct substantial administrative and management activities then your home office would qualify as your principal place of business.  For instance, if you were a personal trainer and rented space for you and your staff to meet with clients and use your exercise equipment, but you did all of your accounting, billing, appointment making, etc. from your home office, your home office would qualify as the principal place of business.

For any home office, whether it be for employees or business owners, the office must be used “exclusively and regularly” as an office for that business.  The rules are very rigid.  You can’t use a room a couple times a year and write it off, even if you did not use it for anything else.  It needs to be used with regular frequency, and be substantial and integral.  You also can’t double up your living room as an office during the day and a TV room at night.  You can’t have a family office where the kids use it for computer games on the weekends, dad uses it to work on the finances in the evening, and then mom uses it as her office during the day and tries to deduct it.  People often try to write off the whole guest bedroom which also houses there office, but courts have typically denied this if they have a bed in there and admit to having guests on occasion.   Technically, any nonbusiness purpose use disqualifies the space (special rules apply to childcare providers, however).

In practice there is at least de minimis personal use of virtually every office space, and at the end of the day, it is quite difficult to know if someone uses an office for some personal purposes.  However, if the auditor shows up and the kids are playing games on your computer and your in-laws’ suitcases are next to the bed in your “office,” I think you will have a problem!  Stick to the spirit of the law, carve out a dedicated space, and everyone will be happy.  Keep in mind that you don’t have to use an entire room, but you can define a portion of a room as the dedicated space, write off closet space for storage, etc.

If you have multiple businesses, you can use the same space for all of them, but if one business fails to qualify, then it is seen as personal use and thus none of the businesses qualify to claim the home office deduction.  (Note, in calculating the deduction, you would allocate the allowable deduction to the businesses – you would not get a double or triple deduction for the same space.)

In the final installment on home offices in two weeks, I will discuss the normal method of calculating the home office deduction and what expenses generally qualify.

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.

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.

Do You Know if You Need to File a 1099-Misc by January 31st?

Originally Published in the Pacific Grove Hometown Bulletin

January 4, 2012

Happy New Year!   Now that the holidays are over and you are starting those New Year’s Resolutions, perhaps you should add one more to the mix – reviewing whether or not you need to file 1099s.  Penalties have doubled this year, and if you paid a non-employee over $600 in the course of your business during 2011, you likely need to file a 1099-Misc by the end of this month.

Penalties

Due to the strain of the economy, pressure is being put on taxing authorities to collect revenue wherever they can.  One way of collecting this revenue is through penalties for failure to comply with regulations.  This year we are witnessing increasing penalties, the creation of new penalties, and the enforcement of old penalties not previously enforced.  The filing of 1099s is no exception and is a large target because it also helps the taxing authorities identify people who fail to report income (and pay tax) of their own volition.  You may think, “I have never done this before,” but given the increased enforcement, this is a hollow reason for not reconsidering your position.

The federal penalties have doubled this year to $100 per 1099 for failure to provide a 1099 to a recipient, and another $100 for failure to file a copy with the IRS (I am sure you will find it a relief to know that the combined penalties are capped at $3 million for most of us!).  California has matching penalties of $50 each and they can also disallow the deduction for the amount you paid the person in question.

Who Gets 1099-Misc Forms

Generally, 1099-Misc forms are filed for service-providers that your business (sole proprietorship, nonprofit, or other business entity) pays to someone other than a corporation over $600 during a year.  There are many exceptions and reading through the instructions for form 1099-Misc (available online) is a great way to find out if you have filing requirements.  Exceptions include payments to attorneys, medical service providers, royalties, fish payments, direct sellers, and many more.  Just because you have a CPA or someone else prepare your taxes does not mean they know all the people for which you need to file 1099s.

When to File

Form 1099-Misc is required to be mailed to recipients by January 31st.  You also have to file a copy with the IRS by February 29th.  Copies mailed to the IRS have to be filed on specific forms printed in red ink, unless they are electronically filed by professionals or other online service providers.  The printed forms and software can be found at your local office supply store.

If you need additional help with a 1099 filing determination or with actually filing the 1099s this year, you should seek professional help as soon as possible.

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.