Employee or Independent Contractor

Posted by Bruce Mc on Jun 10, 2011 in Employee, Independent contractor, Information | 0 comments

If you hire someone for a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees.

Why It Matters

The Internal Revenue Service and state regulators scrutinize the distinction between employees and independent contractors because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do this because independent contractors are not covered by unemployment and workers’ compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.

Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

The Difference Between Employees and Independent Contractors

Independent Contractors are individuals who contract with a business to perform a specific project or set of projects. You, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

Example: Sam Smith, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. He is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if he works more or less than 400 hours to complete the work, Sam will receive $6,400. He also performs additional electrical installations under contracts with other companies that he obtained through advertisements. Sam Smith is an independent contractor.

Employees provide work in an ongoing, structured basis. In general, anyone who performs services for you is your employee if you can control what will be done and how it will be done. A worker is still considered an employee even when you give them freedom of action. What matters is that you have the right to control the details of how the services are performed.

Example: Sally Jones is a salesperson employed on a full-time basis by Rob Robinson, an auto dealer. She works 6 days a week, and is on duty in Rob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Rob. Rob also pays the cost of health insurance and group term life insurance for Sally. Sally Jones is an employee of Rob Robinson.

Independent Contractor Qualification Checklist

The IRS, workers’ compensation boards, unemployment compensation boards, federal agencies, and even courts all have slightly different definitions of what an independent contractor is, though their means of categorizing workers as independent contractors are similar.

One of the most prevalent approaches used to categorize a worker as either an employee or independent contractor is the analysis created by the IRS. The IRS considers the following:

1. What instructions the employer gives the worker about when, where, and how to work. The more specific the instructions and the more control exercised, the more likely the worker will be considered an employee.
2. What training the employer gives the worker. Independent contractors generally do not receive training from an employer.
3. The extent to which the worker has business expenses that are not reimbursed. Independent contractors are more likely to have unreimbursed expenses.
4. The extent of the worker’s investment in the worker’s own business. Independent contractors typically invest their own money in equipment or facilities.
5. The extent to which the worker makes services available to other employers. Independent contractors are more likely to make their services available to other employers.
6. How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job.
7. The extent to which the worker can make a profit or incur a loss. An independent contractor can make a profit or loss, but an employee does not.
8. Whether there are written contracts describing the relationship the parties intended to create. Independent contractors generally sign written contracts stating that they are independent contractors and setting forth the terms of their employment.
9. Whether the business provides the worker with employee benefits, such as insurance, a pension plan, vacation pay, or sick pay. Independent contractors generally do not get benefits.
10. The terms of the working relationship. An employee generally is employed at will (meaning the relationship can be terminated by either party at any time). An independent contractor is usually hired for a set period.
11. Whether the worker’s services are a key aspect of the company’s regular business. If the services are necessary for regular business activity, it is more likely that the employer has the right to direct and control the worker’s activities. The more control an employer exerts over a worker, the more likely it is that the worker will be considered an employee.

Minimize the Risk of Misclassification

If you misclassify an employee as an independent contractor, you may end up before a state taxing authority or the IRS.

Sometimes the issue comes up when a terminated worker files for unemployment benefits and it’s unclear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost many thousands of dollars to defend, even if you successfully fight the challenge.

There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:

• Familiarize yourself with the rules. Ignorance of the rules is not a legitimate defense. Knowledge of the rules will allow you to structure and carefully manage your relationships with your workers to minimize risk.
• Document relationships with your workers and vendors. Although it won’t always save you, it helps to have a written contract stating the terms of employment.

If you have any questions about how to classify your employees, please give us a call. We can help guide you in the right direction in the eyes of the IRS.

Form 1099 Rules & Regulations

Posted by Bruce Mc on Dec 24, 2010 in Employee, Information, Payroll service | 0 comments

Here are some guidelines to help determine if a vendor needs to be set up as a 1099 vendor.

Who must file Form 1099?

Persons engaged in a trade or business must file Form 1099 MISC when certain payments are made. A person is engaged in business if he or she operates for profit; thus, personal payments aren’t reportable.

Payments to Report

A Form 1099 MISC must be filed for each person to whom payment is made of:

• $600 or more for services performed for a trade or business by people not treated as employees;
• Backup Withholding (all amounts);
• Rent or prizes and awards that are not for service ($600 or more) and royalties ($10 or more);
• All payments to crew members by owners or operators of fishing boats;
• Payments of $600 or more to a supplier of health and medical services; and
• Crop insurance proceeds.

Payments made to corporations, except those made for medical or health care services and attorney fees, are not required to be reported on Form 1099 MISC.

Non-Employee payments – Non-employee payments are reported in Box 7 of Form 1099 MISC. Non-employee payments include fees, commissions, prizes and awards, and other forms of compensation provided for services performed for a trade or business by an individual who is not an employee. If the following four conditions are met, a payment generally is reportable as non-employee compensation:

• The taxpayer made the payment to someone who is not an employee;
• The payment was made for services in the course of a trade or business;
• The payment was made to someone other than a corporation; and
• Payments of at least $600 were made to the payee during the year.

Real Estate Agents

Real estate agents must report on Form 1099 MISC rents collected for property owners before deduction of commissions, fees, or other expenses if the amount paid to any one property owner totals $600 or more during the calendar year.

Payments for Services

When a business pays an independent contractor for services performed in the course of that business, the service recipient must file Form 1099 MISC if the payment is $600 or more for the year, unless the service provider is a Corporation.

Direct Sales

The law requires information reporting on Form 1099 MISC for certain direct sellers. This requirement applies to persons who, in the course of a business, sell consumer products on a buy/sell basis, deposit/commission basis, or any similar basis to any buyer who (1) sells such product in a home or other than in a store or (2) sells these products to another seller. Sales of $5000 or more are reportable.

Deceased Employee Wages

If an employee dies during the year, the employer must report the accrued wages, annual leave pay, and other compensation paid to an estate or beneficiary after death on Form 1099 MISC; this applies whether the payment is made in the year of death or after the year of death.

Listed below are a few examples of payments that should be reported on Form 1099-MISC

Medical Services

• Medical & Dental Services
• Hospitalization
• Medical Assistance Benefits
• All payments to Medical Service Corporations

Non-Employee Compensation

• Occasional Salaries & Wages (to Non-Employees)
• Professional Service Payments
• Advertising
• Appraisal
• Architectural
• Attorney
• Auditing
• Board Members
• Chaplains
• Computer Programming
• Consulting
• Design & Testing
• Engineering
• Evaluation Consultant
• Graphic Artist
• Institution Contracts
• Teacher/Instructor

Maintenance & Repairs

• Commercial Repairs – Hwy Vehicles
• Contracted Repairs
• Computer Repairs
• Extermination Services
• Janitorial Services
• Maintenance Agreements
• Protection & Security Services

Law Enforcement & Court Services

• Court Reporters
• Court Appointed Workers
• Expert Witnesses
• Prison Labor Allowance
• Non-Employee Allowance

Other Services

• Armored Car
• Cleaning
• Construction
• Keypunch
• Laundry
• Parcel & Delivery
• Printing
• Refuse Collection
• Security

Rents (except rent paid to real estate brokers)

• Real Property
• Other Property

Note: This is only a partial listing of accepted 1099 MISC Vendors. If a vendor is entered as a 1099 vendor and it doesn’t look correct, the Vendor Maintenance team will research the problem. It may mean a phone call to the person who entered the vendor or a phone call to the vendor directly.

For more information Please visit my company website. L & R Tax Preparation.

Tax Benefits for Job Seekers

Posted by Bruce Mc on Aug 24, 2010 in Deductions, Information, Opinions | 0 comments

Some people- especially these days – are polishing their resumes and attending career fairs in search of employment. If you are searching for a job this summer, you may be able to deduct some of those expenses on your tax return.

Here are six things you need to know about deducting costs related to your job search.

 
1. To deduct job search costs, the expenses must be spent on a job search in your current occupation. You may not deduct expenses related to looking for a job in a new occupation. 
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. 
3. You can deduct amounts you spend for preparing and mailing copies of a resume to prospective employers as long as you are looking for a new job in your present occupation. 
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the time spent looking for work is important in determining whether the trip is primarily personal or is related to your job search. (If you have questions about how to figure this, call us.) 
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one. 
6. You cannot deduct job search expenses if you are looking for a job for the first time. 

Where to Learn About Job Openings

• Personal contacts
• School career planning and placement offices
• Employers
• Classified ads:
  • National and local newspapers
  • Professional journals
  • Trade magazines
• Internet resources
• Professional associations
• Labor unions
• State employment service offices
• Federal Government
• Community agencies
• Private employment agencies and career consultants
• Internships

Here are some job-seeking goals:

- 3 prospects per-day

- 4 phone calls each morning

- 10 resumes sent out each week

- 4 informational interviews per-week

- 3 interviews per-month