February 23, 2012

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Treating Employees as Independent Contractors for Tax Purposes can cause IRS Problems

September 23, 2011 By

According to the IRS rules, an employee is any worker whose work is controlled by the employer. In other words, the employer determines the scope of work, how the work is to be done, and provides the tools required for the job. On the other hand, an independent contractor is a worker who determines how to work, provides his or her own tools for the job, and controls the work at hand. However, in some instances, determining whether a worker is an employee or an independent contractor is not so clear in black and white, but in a gray area. However, some employers categorize obvious employees as independent workers so as to avoid paying payroll taxes. If an employer is found to have categorized employees as independent contractors, he or she will be liable to heavy penalties if caught by the IRS and the assessment taxes may well hit very high figures. For employers who find themselves in such a situation, there is still a way that they can avoid being implicated for the wrong-doing. They can take advantage of the tax relief provision under Section 530.

Tax Relief Provision under Section 530

Under this tax relief law, an employer can escape the IRS’s reprimand even after categorizing an employee as an independent contractor if he or she can prove all of the following:

  1. That the person was never treated as employee by the employer throughout their relationship
  2. That the employee is treated in the same manner as an independent contractor
  3. That all tax records for the person in question indicates that he or she is an independent contractor – records include From 1099 and tax returns.
  4. That the employer was reasonable when categorizing the person in question as staff. There are three things that can show that the employer was reasonable:
  • If the IRS or a tax court ruled that a person in a similar position was an independent contractor
  • If past IRS audits raised no problem with the person being an independent staff member
  • If it is an old practice in the industry for people in similar positions to be treated as independent contractors

Timing of the Section 530 Safe Harbor

For an employer to satisfactorily win a case under Section 530, they must show that they had considered all of the four above points before making the decision to determine an otherwise employee, as an independent contractor. Therefore, the employer must prove that since taking up the services of the person in question, the employer has never employed any person in a same or similar position and that he or she has never treated an employee in the same manner as the person in question. However, the tricky part to prove is usually the fourth rule of the Section 530 relief. Employers who find themselves in this situation must find court rulings that determined that a person in a similar position was deemed an independent contractor. Such ruling must have happened before the time the employer engaged the person in question.

Case in Point – Peno Trucking

In the case of Peno Trucking vs. the IRS Commissioner, Peno Trucking sort to avoid an IRS tax charge for a worker that they had categorized as an independent worker but the IRS considered to be an employee. The tax court ruled that the employer failed to provide any relevant judicial precedent and therefore ruled that the trucking company was liable to pay the due taxes. In a reversal of the ruling previously made by the tax court, the court ruled that Peno Trucking could have used an Ohio ruling (that happened prior to the trucking company hiring the worker) to categorize the worker as an independent contractor. The trucking company was thus released of any related taxes due.

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IRS Help: Valuable Small Business Taxation Tools

August 9, 2011 By

Taxes are a big deal for any small business owner. This is especially the case if you do not have enough funds to employ a full time accountant or tax specialist to manage tax issues concerning your business. However, the IRS is fully aware of this and provides sufficient tools and resources to assist small business owners to manage their taxes towards their prosperity. According to Faris Fink, the IRS Commissioner for the Small Business and Self-Employed Division, the IRS is always looking for more efficient and effective ways of educating and improving the tax experience for small businesses. Some of the tools that the IRS provides to assist small business with their taxes are provided below:

  • Training Webinar – Every now and then, the IRS provides live Webinars to provide information and answers for many of the questions raised by small business owners. To get an update on the next Webinar, you will need to go to the IRS website and go to the small business section. You can also search for “Webinar” in the search box on the IRS website to get to the Webinar section and register for a session.
  • The Small Business Tax Center – The IRS has also set aside a full section of their website to inform, educate, and provide the necessary tools to assist small businesses in their tax issues. The website – www.irs.gov/smallbiz provides all the information that a small business will need to comply with the Tax Law. Some of the tools available in the website section are provided below:
  • Virtue Small Business Workshop – One of the tools in the Small Business Tax Center website is the virtue small business workshop. The virtue workshop provides discussions on issues that affect small businesses when it comes to taxation. You can find practical answers to some of the tax issues you face as a small business owner.
  • Downloadable Tax Calendar – The downloadable calendar gives you reminders of various taxes deadline dates so as to alert you when these taxes are due. This ensures that you keep the deadlines and keeps you from paying unnecessary penalties for late submissions.
  • Common Tax Return Forms – You can also download the various forms that you need to pay taxes or make returns for your taxes. The forms also come with instructions as to the purpose of the form, who should fill the form, and how to fill it out.
  • General Information – The website also gives detailed information on tax issues including what to do if you get involved in an IRS audit, registration for an Employer Identification Number (EIN), and taxation on employees.

Available Tax Breaks for Small Businesses – The IRS also provides information as to areas that small businesses can capitalize on to take advantage of tax breaks.

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IRS Tax Implications on Dependents

July 26, 2011 By


Children and other dependents can choose to either have their guardians or parents file a return on their behalf or file a tax return for themselves. However, there are various rules that apply to the taxation of dependents. Some of these rules are provided below:

  • Claims on Personal Exemptions – In 2010, the personal exemption for all taxpayers was $3,650.00. However, dependents cannot claim personal exemptions on their tax return. Instead, their parents or guardian claim the exemptions on their tax returns on behalf of their dependents.
  • Age Limit for Dependent – There is no age limit to being a dependent – there is no bottom or top limit. A child can file a return as a dependents as early as possible and people even beyond the age of 18 can continue to be dependents in qualifying circumstances.
  • Earned Income Cap – If a dependent’s income is only comprised of earned income, they are expected to file a return if the amount is more than $5,700.00. However, if they had withheld income and received W2 forms, it may be in their interest to file a return as they may be eligible for various tax breaks. Earned income includes income made from personal labor such as wages, salaries, tips, and fees and commission earned from services provided.
  • Unearned Income Cap – Unearned income on the other hand, are incomes that are made without providing personal labor. This includes incomes such as dividends, capital gains, interest, and distribution from a trust. If a child or dependent received unearned income above $950.00, they are expected to file a tax return.
  • Cap on Income Mix – If a child or dependent has both earned and unearned incomes, they will be expected to file a return if their total income is more than $950.00 or if their earned income is at least $5,400.00 and the unearned income is more than $300.00, whichever is higher.
  • Circumstances that Dependent Must file return – There are circumstances in which a dependent is required to file a return, even if their income is below the aforementioned minimum incomes. These circumstances include when the dependent owes taxes for Social Security and Medicare. If the dependent receives any Earned Income Credit paid in advance, they will also file a return, regardless of one’s incomes. Dependents who earn more than $108.00 from religious organizations that do not withhold Medicare and Social Security and dependents that make more than $400.00 from self employment are also required to file tax returns.
  • Tax Credits for Dependents – A child or dependent can claim various tax credits, including Making Work Pay tax credit available in the 2011 tax year and education related tax credits and deductions.
  • Standard Deductions for Dependents – Dependents who choose to file their own returns can claim standard IRS tax deductions to whichever has the higher value: between $950.00 or earned income plus $300.00, to a cap of $5,700.00.
  • Children’s Tax Returns – Children can file their own tax returns. However, any penalties and audits will be addressed to the child. If the child is very young, the IRS expects that the guardian provides his or her signature next to that of the child and indicate that they are the parent or guardian. This way, in case of any recourse, the parent can take responsibility. When children file their own taxes, they get an early start to knowing about taxation and personal financing.

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Tax Help for Those Seeking Overseas Opportunities

July 14, 2011 By

Getting an opportunity to work in an overseas nation can be quite rewarding. An employee gets international exposure and at the same time, the compensation package for such expatriate employees is usually significantly high. However, before taking up the opportunity, there are certain factors that you will need to consider.

Income Tax Implications

Before taking up the job, ensure that you have thoroughly reviewed the income tax implications of the move. Incomes received in foreign nations are taxable by the U.S. as a rule. However, much of the employment income received abroad could be eligible for various tax relief, including credits, exclusions, and deductions. This ideally is set to avoid double taxation for U.S. citizens who are taxed by the local authority as well. Therefore, it is advisable that you consult with your tax preparer to review your specific situation and determine the tax implications of your move (so as to have this covered in your compensation package). Most employers will hire a tax consultant for you to calculate the tax implications of your overseas job relocation.

Inheritance Taxes

Another area of taxation you should consider before taking up a job overseas is the implication of inheritance for any property that you acquire in the foreign land. Different countries have differing rules as to the taxation process of assets acquired in their country by foreigners. You need to carefully review “the laws of the land” that you will be posted to so as to understand such regulations. Countries like the U.K. will have the property acquired in the nation by expatriates taxed in the country of the beneficiaries for inheritance purposes. In other words, if the beneficiaries are U.K. residents, the U.K. taxation on inheritance will apply. If the beneficiaries are in the U.S., they will have to adhere to the U.S. law in relation to the inheritance.

Retirement Savings and Investments

Another consideration that you will need to keep in mind is your savings and investments for your retirement or otherwise. This is an important area to remember, as many people take up such jobs away from home mainly to accumulate savings and investments. Some advisers say that it is best to keep savings and investments in U.S. accounts to avoid any foreign exchange losses and to avoid any confrontation with the IRS. If you prefer to have your savings and investments in the U.S., it is best to have the accounts opened while you are still in the U.S. (as some banks and brokerage companies may not open accounts for persons residing in certain states, even if they are U.S. citizens). However, if you choose to have your investments and savings in the foreign country, ensure that you comply with the Treasury and IRS’s rules for disclosure of foreign accounts.

Foreign Exchange

Another important aspect you should consider before taking an overseas job is the foreign exchange between the local currency and the dollar. You need to ensure that you are well shielded from any foreign currency fluctuations. Employment consultants advise the expatriate to get a portion of the employment consideration in U.S. dollars and the rest in the local currency. You can then have the portion in the local currency used for your regular expenses and then repatriate the dollar portion for your savings and investments. This will ensure that you do not lose in case the exchange rates become unfavorable.

Accommodations and Insurance

Other factors that you will need to consider include the insurance coverage and your accommodations. Ensure that the local insurance allows for foreigners to be sufficiently covered. You should especially be mindful about nations such as Canada, where health care is primarily provided to its local citizens by the government. You may need U.S. insurance coverage as local coverage may be limited in such cases. You also need to decide on whether to buy or rent your home in the foreign country; factors to consider include the real estate transfer taxes, whether you can deduct your rent expense, and how favorable mortgages are for foreigners in the country in which you will be working.

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Tax Help for Employers of Household Workers

June 24, 2011 By

Employees who work in your household may qualify as household workers. If they qualify as household employees, you will be required to apply various taxation processes. The IRS provides qualifications for what determines household employees and also provides the guidelines on how to withhold various taxes from the workers’ wages. These details are explained below:

Who Qualifies as a Household Employee?

Not all people who work for you qualify as household employees. The IRS provides a guideline to check whether a worker qualifies as a household employee or as an independent contractor. According to the IRS, a household employee is any household worker for whom you control the amount of work that he or she does and how the work is done. You also provide the tools necessary for the work. The worker is an employee irrespective of the number of hours that he or she works for you or the payment structure. In most cases babysitters, cleaning people, drivers, caretakers, domestic workers, housekeepers, health aides, nannies, yard workers, maids, and private nurses will qualify as household employees. However, the dividing rule is whether you give these workers specific instructions as to what to do and how to do it.

Who Does Not Qualify as a Household Employee?

If on the other hand, the worker defines the scope of work to be done, then they will be self-employed and you will not need to take any tax action. This applies to such people as gardeners who work on multiple lawns and who come with their own tools, plumbers, home repairs help, painters, and car mechanics. If you obtain your worker from an agency for whatever household services (including those who would otherwise qualify as household employees) and the agency determines the scope and procedure of the work, then such a worker does not qualify as a household employee. If you take your children to a childcare facility or to the house of the babysitter, then they also will not qualify as your employees.

Social Security and Medicare Withholding

For those who qualify as your employees, you will need to withhold Social Security and Medicare taxes from the wages to pay them. You will withhold these taxes if the wage amount is above $1,700.00 for 2009 and 2010, and $1,600.00 for 2008. You can choose to take up the tax burden and pay for the Social Security and Medicare taxes from your pocket. If you do so, such payments need to be included as part of their earned income for taxation purposes. However, these taxes that you shoulder on behalf of the worker do not need to be reported or deducted off any Federal unemployment wages or any Social Security and Medicare wages received. You should also not withhold any taxes if the workers working for your household are your parents, your spouse, your children, any worker below 18 years of age, or any worker who is a student. To submit the Social Security and Medicare taxes, you will need to fill out both Form W-2, “Wage and Tax Statement Form” and the Form W-3, “Transmittal of Wage and Tax Statement Form”. You will need to provide the workers’ Social Security numbers and your Employer Identification Number (EIN). If you do not have an EIN, you can apply for one from the IRS tax website.

Besides Social Security and Medicare tax withholding, you may also be expected to pay Federal Unemployment Taxes based on various qualifications. You are, however, not expected to withhold Federal Income Taxes unless the worker explicitly requests you to withhold them.

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Refunds for those who did Not File a 2007 Federal Income Tax Return

March 2, 2011 By

The IRS has announced that nearly 1.1 million people who did not file Federal Income Taxes in 2007 could be entitled to refunds adding up to $1.1 billion! There is a catch: in order to collect this refund, you must file a return for 2007 no later than Monday, April 18, 2011 so do not delay in filing!

Some who did not file in 2007 may have done so because their income was too small to require filing even though they had withholdings from their wages. IRS tax law allows most taxpayers with a 3-year period where they can claim a refund in cases like these, where returns are not filed. However, once these 3 years pass, the money goes back to the U.S. Treasury, so do not miss out on this opportunity! There is no penalty to file a late return which qualifies for a refund, so do not fear filing for 2007. However, if you have not filed returns for 2008 and 2009, the IRS may hold your refund check and it will be applied to any debt owed to them. Furthermore, it may also be used to pay other debts, such as unpaid child support or past-due student loans.

Additionally, by failing to file in 2007, many low-income workers may not have claimed the Earned Income Tax Credit (EITC), which could help them get some more money from the IRS.

You can find prior year tax forms and instructions on the Forms and Publications page of IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676). Also, if you are missing your Forms W-2, 1098, 1099, or 5498 for 2007, 2008, or 2009, you should request copies from your employer, bank, or other payer. If you have difficulty finding these documents, you can request free transcripts by ordering online or calling 1-800-908-9946 or by filing Form 4506-T.

Refer to the chart below (from IRS Publications) for the potential refunds for 2007:

Do not delay! Get your refund now if this applies to you!

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IRS Audits: Employee Misclassification

November 8, 2010 By

It Is Essential to File Independent Contractors or Employees Correctly

The IRS wants to audit six thousand big and small enterprises for each year between 2010 and 2013. This is according to a program for legal education by the American Bar Association on IRS Employment Tax National Research Project.

The IRS will inspect within the audits the organization of workers, specifically, if they are classed as independent contractors or workers. If it’s shown there is a misclassification of a worker, then tax responsibilities and consequences could be serious. To avoid this, an employer must show their workers are placed in a specific category.

It may require complex analysis of bank records, work measures, corporate structures etc. If an employer has the authority to control the person concerning what and how a task is carried out then that person is an employee. It does not matter if that authority is implemented or not.

If you believe you are dealing with contractors and not employees and are not obligated to keep back federal income and payroll taxes, it’s essential to send a form 1099 for the contractor to report. Should the IRS audit your enterprise and see you have employees and not independent contractors then completing and submitting a form 1099 may entitle your enterprise to the safety given by section 530 of Revenue Act of 1978.

It has become very important to ensure your company is up to speed regarding filing status of employees and contractors. The IRS is determined to pass the Employment Tax National Research Project.

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Tax Relief Help: New 1099 Form Revisions Are Confusing

October 27, 2010 By

Revisions to Forms 1099 Are Confusing Tax Payers

A new law will become effective regarding the health care bill on 1 January 2012. The IR Code 1986 is revised as follows:

a) Application to Corporations – in spite of any rule set by the Secretary prior to the date of the passing of this subsection, for intentions of this section the term ‘person’ is inclusive of any corporation not an association spared from tax under section 501(a).

b) Regulations – the secretary may specify such rules and other direction as apt or required to perform the intentions of this section as well as rules to stop doubling up on coverage of dealings.

c) Payment for Property and Other Gross Proceeds – amendments:

put in ‘amounts in consideration for property’ following ‘wages’
put in ‘gross proceeds’ following ‘emoluments, or other
put in ‘gross proceeds’ following ‘setting forth the amount of such’

d) Effective Date – revisions to this section pertain to payments completed prior to December 31, 2011.

Plainly put it revises IR Code section 6041. It’s wrong to assume forms 1099 (covers most data communicated in section 6041) are needed for every future transaction. The two sections combined mean the following (more or less):

All corporations and persons exempt from tax or not involved in trade or business and creating payment due to such trade or business to another corporation or person of income, rent, profits, salaries, determinable gains, wages, other gross proceedings, amounts connected to property, emoluments, premiums, compensation, premiums, remunerations and annuities … putting forward the totals of such gross earnings, income, gains, proceeds, profits and the personal details of the receiver of such sum.

The meaning of the revised section 6041:

  1. Before, forms 1099 were given to persons and partnerships and not corporations. Corporations are now integrated.
  2. Before, forms 1099 were given for financial dealings, rents and services but now the sale of actual goods are possibly reportable.

The threshold of reportable $600 stays. More paperwork will result from including goods. Congress wants to make it harder for items sold online to remain hidden. However, the IRS will probably offer direction when they distribute regs. It is suspected there could be a type of exception for bigger national retailers or recurring transactions i.e. monthly buys won’t be reported with a form 1099. You can send your personal opinions and comments to the IRS by email or US mail.

Continue to follow our daily blog to receive more useful tax relief tips!

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IRS Penalties | Business Employment Taxes

September 7, 2010 By

What do I do about IRS collections for a closed business?

Sometimes, a business may be in debt to the IRS with employment taxes and will therefore be subject to IRS collections even if that business has closed down. The worry for those previously involved in the business is that they could be held personally responsible, and IRS collections could therefore be directed towards them.

If a business is closed, the IRS likely will not be overly interested in it. In most cases, the taxes owed by the business will have been deemed as not collectible, so long as the business closed in the normal way and no suspicious activity had taken place. Any notices you receive about IRS collections are most likely automated, since these are simply sent out when taxes are owed, regardless.

If there was a decision to not pay the IRS for employment taxes, it is possible that they will demand payment. If you have been deemed as one of the people who decided to not pay the tax, the IRS will likely issue you a trust fund recovery penalty. This will be given to the business too, but of course, it is most likely that it cannot collect anything from the business – so it will have to come from those personally involved and held liable for the withheld payments.
The important thing to know about this is that if one person pays off the full debt, no one else will have to pay anything. You should note however that the IRS manages to collect very little from its trust fund penalties. In fact, from 2002 until 2007, it only collected 13.5% of the value of trust fund penalties, which is a figure that might be able to ease your worry slightly if you find yourself in this situation.

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Small Business Tax Relief Help

August 30, 2010 By

Correct Classification of Employees

Incorrect classification of workers can end in problems with the IRS.  You must understand ‘IRS audits and employee classification assessments’.   The IRS regards an incorrect classification as an attempt to deny workers their tax advantages e.g. saying an employee is an independent contractor.  In such a situation the IRS will expect the employer to reimburse the worker for any tax benefits denied.

According to TheStreet.com, US businesses underpay worker taxes by more than $14 billion annually.  There are those purposefully doing this to skip out on giving 401K plans and health insurance to workers.  Others simply don’t know how to correctly classify their employees.  Only accuracy can avoid tax troubles and audits.  If the right tax forms containing accurate information are not filed in time the IRS assessment is regarded as the right one. There are a number of actions you can take as a safety measure.  It does help to plan your taxes in advance and to make use of existing IRS electronic payment schemes.
A small company without a tax expert is vulnerable. In one instance, a company failed to recognize mistakes in IRS employment tax appraisals. They filed 1099 Form (payments to employees) when the IRS appraised the taxes.  The IRS appraisal was incorrect however, because the company’s forms were filed after the appraisal, not before, the company was not allowed to use section 503 as a safety mechanism at a federal district court.  This was due to not filing the right forms in time.

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