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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘independent contractor’

6 Tax Facts for Self-Employed Taxpayers

Posted by William Byrnes on April 23, 2014


In Tax Tip 2014-34, the IRS provided 6 tax tips for self employed taxpayers.

  1. Self-employment income includes income received for part-time work.  This is in addition to income from a regular job.
  2. A self employed taxpayer must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040.
  3. A self employed taxpayer may have to pay self-employment tax as well as income tax if a profit was earned.  Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to calculate whether any self employment tax is due.
  4. A self employed taxpayer may need to make estimated tax payments. Taxpayers typically make these payments on income that is not subject to withholding.  A taxpayer may be charged a penalty if not paying enough estimated taxes throughout the entire year.
  5. A self employed taxpayer can deduct some expenses paid to run your trade or business. A self employed taxpayer can deduct most business expenses in full, but some must be ’capitalized.’  Capitalization means that the deduction will be limited to just a portion of the expense each year over a period of years.  By example, only the first $5,000 of the “start-up” expenses for a new business of the taxpayer is potentially deductible, and not until the year in which the active trade or business begins.  All other start up expenses must be amortized over a 180-month period, beginning with the month the business starts.  Thus, start up expenses in general are only deductible over this 180 month period, and not in the year actually incurred.
  6. A self employed taxpayer can deduct business expenses only if the expenses are both ordinary and necessary.  An ordinary expense is one that is common and accepted in an industry.  A necessary expense is one that is helpful and proper for the trade or business.

tax-facts-online_medium

Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

“Our brand-new Tax Facts title is exciting in many ways,” says Rick Kravitz, Vice President & Managing Director of Summit Professional Network’s Professional Publishing Division. “First of all, it fills a huge gap in the resources available to today’s advisors. Small business is a big market, and this book enables advisors to get up-and-running right away, with proven guidance that will help them serve their clients’ needs. Secondly, it addresses the biggest questions facing all taxpayers and provides absolutely reliable answers that help advisors solve today’s biggest problems with confidence.”

Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.  The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

Posted in Taxation | Tagged: , , , | Leave a Comment »

Employers Face Stiff Obama Care Excise Taxes (aka Penalties)

Posted by William Byrnes on April 4, 2014


The Affordable Health Care Act (ACA) (“Obama Care”) may lead to stiff excise taxes for midsize and larger employers that misclassify employees as independent contractors (see §4980H Shared responsibility for employers regarding health coverage).  The term “applicable large employer” means, with respect to a calendar year, an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.  The term “full-time employee” means, with respect to any month, an employee who is employed on average at least 30 hours of service per week.  However, employers with less than a 100 employees have a transition period until 2016 for the application of §4980H.

Employers that misclassify employees as independent contractors already face potential tax liability and tax penalties for each misclassified employee.  In addition to these current potential liabilities and penalties for misclassification, employers will now face excise tax assessments under the ACA.   This new excise tax is $2,000 per employee not covered by a qualifying employer medical plan.  However, to encourage compliance with the ACA, if less than 95% of the employees of an employer are covered by a qualified medical employer plan, then a stiffer penalty of $2,000 for every employee of the company may be imposed, albeit with an exemption of the excise tax applying to the first 30 employees.

By example, an employer has 50 workers of which the employer has classified 80% (40) as employees and the remaining 20% (10) as independent contractors.  The employer provides a medical insurance plan for the 40 employees that qualifies for purposes of the ACA.  The §4980H issue is moot, meaning it does not need to be considered, because the employer does not reach the minimum 50 employee threshold.  But now the problem …

The IRS audits the employer and determines that the employer has misclassified the 10 independent contractors, and re-classifies them as employees.  The employer has employment tax issues, and penalties to contend with, regarding the 10 employees.  But also, §4980H now applies because the employer has reached 50 employees.  Worse yet, the employer has not covered 95% of its employees with qualified medical coverage.  Instead of 40 employees covered out of 40 covered for 100% coverage, after audit the employer is determined to have only covered 80% of employees (40 out of 50), missing the minimum 95% threshold.   Thus, the excise tax does not apply to just the 10 employees but instead applies to all employees, with an allowance for the first 30.  How much excise tax will be owed then?  50 employees, subtracting the allowance for the first 30, leaves 20 employees multiplied by the excise  tax of $2,000, thus $40,000 for the year (on top of normal employment taxes and penalties for the 10 misclassified employees).

Classification of a worker as either an “employee” or an “independent contractor” is based on the common law standard of an examination of the facts and circumstances of the relationship between the employer and the worker to assess whether the employer has the right to direct and control the performance of services.  Substantial case law has developed from disputes between employers and the IRS, and between workers, who may want to be classified as independent contractors to better leverage tax deductions, and the IRS.

tax-facts-online_medium

Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

“Our brand-new Tax Facts title is exciting in many ways,” says Rick Kravitz, Vice President & Managing Director of Summit Professional Network’s Professional Publishing Division. “First of all, it fills a huge gap in the resources available to today’s advisors. Small business is a big market, and this book enables advisors to get up-and-running right away, with proven guidance that will help them serve their clients’ needs. Secondly, it addresses the biggest questions facing all taxpayers and provides absolutely reliable answers that help advisors solve today’s biggest problems with confidence.”

Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.  The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

Posted in Compliance, Taxation | Tagged: , , , , , , | Leave a Comment »

U.S. Tightens Scrutiny of Small Businesses Skirting Obamacare Mandate

Posted by William Byrnes on November 6, 2013


The Affordable Care Act (ACA) mandate that will require employers with more than 50 full-time employees to provide health coverage for those employees or pay a penalty that can reach $3,000 per employee has many small business clients scrambling to plan for years ahead.  Because independent contractors are not counted toward the 50-employee limit, some small business clients may be tempted to reclassify common law employees as independent contractors to avoid the mandate.

Read Professor William Byrnes and Robert Bloink’s analysis of the issues, challenges, pitfalls and solutions for addressing a business’ future in a world of Obama Care at > Think Advisor <

 

Posted in Compliance, Tax Policy | Tagged: , , , , , , , | Leave a Comment »

Employees and Independent Contactors

Posted by William Byrnes on August 9, 2013


Why is this Topic Important to Financial Professionals? Many small business owners are faced with issues surrounding Form 1099 and how the rules apply to their businesses.  

What are some distinctions of the employees versus independent contractors?

An independent contractor, in general, has a majority of control over the details of his job function and only the end result is dictated by the company or individual who hires.  This is what is commonly known as “the degree of behavioral control.”  Another category used by the IRS and the courts to determine the status of an individual as either an employee or independent contractor is “financial control”.  Financial control involves examining the financial relationship between the parties such as reimbursement, and/or if any materials or space has been provided to accomplish the job.  Other relationship factors such as having a contract or agreement between the parties, as well as the terms of any contract, must also be examined in determining the employment status of the individual.

One of the issues that is often overlooked in the area of an employee relationship instead of an independent contractor relationship is that employees have X number of hours to dedicate to employment each week, whether that number is 40, 50, or anything else that an employment agreement might state.  Independent contracts are often not required to expend a set number of hours to accomplish a task, but instead enough hours to accomplish the task.

Another relevant issue to be considered in determining which of the two employment relations exist is that of termination.  An “At-Will” employee can normally be terminated and generally has no cause for a breach of contract and cannot sue for damages.  An independent contractor cannot usually be terminated without a breach of contract.

Tax Distinctions

Taxation of the two dissimilar positions is significantly different.  Independent contractors essentially work for themselves, and the business that pays them is, in effect, a client.  Generally, and independent contractor will file a tax return as a sole proprietor or closely held corporation, such as a Subchapter S Corporation.  An employee is subject to federal income tax withholding and the employer is subject to payroll taxes, included in the general W-2 process.

Independent contractors, like other businesses, recognize revenue and expenses. The independent contractor usually receives a Form 1099 from the source that pays him.  The Code and Regulations state that when a trade or business pays an individual for certain “services” over $600 that a Form 1099 is required to be filed with the Secretary of the Treasury.[1] And just as other businesses realize “legislative graces of Congress,” such as Section 162 deductions, the sole proprietor too may have expenses that generally qualify as trade or business expenses.

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?


[1] Internal Revenue Code Section (IRC) 6041, Treasury Regulations (TR) 1.6041-1(a)(1)(i), TR 1.6041-1(a)(2).  

Posted in Taxation, Wealth Management | Tagged: , , , , , , , , | Leave a Comment »

Battle Brewing Over Employments Status of Financial Advisors

Posted by William Byrnes on February 7, 2012


Are you an employee or independent contractor of your firm? If you’re doing business in California and get the classification wrong, you could be in for criminal charges and up to a $25,000 fine.

California State Bill 459—which would impose strict recordkeeping requirements and severe penalties on firms that misclassify employees as independent contractors—passed the state senate on June 2. The bill moved to the Assembly and went on to a hearing at the Assembly Committee on Labor and Employment two weeks later. The bill is expected to come to a vote in the Assembly later this summer.

Under the bill, firms that mischaracterize employees as independent contractors can be subject to fines of up to $25,000. They also will be required to keep records verifying independent contractor status for at least two years or face a fine of $500 per employee and misdemeanor criminal charges.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of income taxation, see Advisor’s Main Library: Income Taxes.

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Independent Contractors Tax and Reporting Issues

Posted by William Byrnes on August 28, 2010


Why is this Topic Important to Financial Professionals:  A general understanding of classification of employees versus independent contractors will not only save your client aggravation, but could also avoid additional taxes and penalties.  In addition, the tax consequences of this determination can be far reaching, and an understanding of the concepts of income and types of allowable deductions can help enable more comprehensive planning for the Financial professional and clients.

Please read my blogticle at Advisor FYI Independent Contractors Tax and Reporting Issues

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?

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Employees, Independent Contactors, 1099s and New Legislation That Your Clients Should Know About

Posted by William Byrnes on August 27, 2010


Why is this Topic Important to Financial Professionals? Many small business owners are faced with issues surrounding Form 1099 and how the rules apply to their businesses.  New regulations passed as part of Health Care Reform will change the past Form 1099 standard, requiring its applicability to many more situations and persons.

Please read my blogticle at Advisor FYI Employees, Independent Contactors, 1099s and New Legislation That Your Clients Should Know About

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?

Posted in Taxation | Tagged: , , | Leave a Comment »

 
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