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Employee or Independent Contractor?

It isn’t easy deciding whether a worker should be treated as an employee or an independent contractor. But the IRS looks at the distinction closely.

Tax Obligations

For an employee, a business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and remit those taxes to the government. Additionally, the employer must pay FICA taxes for the employee (currently 7.65% of earnings up to $128,400 and 1.45% of earnings exceeding that amount). The business must also pay unemployment taxes for the worker. In contrast, for an independent contractor, a business is not required to withhold income or FICA taxes. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply.

Employees Versus Independent Contractors

To determine whether a worker is an independent contractor or employee, the IRS examines factors in three categories:

  • Behavioral control — the extent to which the business controls how the work is done, whether through instructions, training, or otherwise.
  • Financial control — the extent to which the worker has the ability to control the economic aspects of the job. Factors considered include the worker’s investment and whether he or she may realize a profit or loss.
  • Type of relationship — whether the worker’s services are essential to the business, the expected length of the relationship, and whether the business provides the worker with employee-type benefits, such as insurance, vacation pay or sick pay, etc.

In certain cases where a taxpayer has a reasonable basis for treating an individual as a non-employee (such as a prior IRS ruling), non-employee treatment may be allowed regardless of the three-prong test.

If the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Year-end Statements

Generally, if a business has made payments of $600 or more to an independent contractor for services, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.

Consequences of Misclassification

Where the employer misclassifies the employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold the employee’s income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.

Correcting Mistakes

Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program (VCSP). For employers that meet the program’s eligibility requirements, the VCSP provides the following benefits:

  • Workers improperly classified as independent contractors are treated as employees going forward.
  • The employer pays 10% of the most recent tax year’s employment-tax liability for the identified workers, determined under reduced rates (but no interest or penalties).
  • The government agrees not to raise the issue of the workers’ classification for prior years in an employment-tax audit.

Please contact us today for an appointment if you need help sorting through the IRS rules and fulfilling your tax reporting obligations.

Business Owners Beware: Scammers Are After Your Data

Business scammingFor years, we have heard stories about how identity thieves hack into computers and steal personal information. We have been assaulted with phishing scams where thieves impersonate IRS employees and intimidate innocent taxpayers into paying large sums of money for taxes they don’t owe. No one is immune to this threat. Individuals in all 50 states have been targeted.

Now the thieves are targeting business owners. To put things into perspective, through June 1, 2017, the IRS identified approximately 10,000 business returns as potentially theft-related compared to about 4,000 for calendar year 2016 and 350 for calendar year 2015.

This coming filing season, the IRS will be asking tax professionals to gather more information on their business clients. All the data being collected assists the IRS in authenticating that the tax return being submitted is the legitimate return and not an identity theft return. Some of the new information people may be asked to provide when filing their business, trust or estate client returns include:

• The name and social security number of the individual authorized to sign the business return. Is the person signing the return authorized to do so?
• Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
• Is there a parent company? If yes, what is its name?
• Additional information based on deductions claimed.
• Has the business filed Form(s) 940, 941 or other business-related tax forms?

Now is a good time to determine if you need an employer identification number. If you are required to have one, the IRS will ask for it.

An Age To Remember: Quick Tips

Tax birthdayKnowing key tax birthdays can help trim your annual tax bills. Below are some ages worth noting.

Age 0
If your child is born during the year, even as late as 11:59 p.m. on December 31, you can claim a dependency exemption for your child. This comes with one catch. You need to file for the child’s social security number (SSN) and include it on your tax return. If you don’t, the dependency exemption is denied, along with any potential for certain tax credits. If your dependent doesn’t have and can’t get an SSN, you must show the individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN) instead of an SSN.

Ages 0-12
The good news is you gain tax advantages by contributing to your employer’s flexible spending account to cover child care expenses, or you may qualify for a child care credit on your tax return. The bad news is that any investment income over $2,100 in your child’s name is taxed at your rate until the child reaches age 27.

Age 13 Once your child reaches age 13, you no longer qualify to take the child care credit. Eligibility is determined on a daily basis.

Age 16
This is the last year your child qualifies you for the $1,000 child tax credit.

Age 18
If you own a business, you can pay your children to work for you and avoid paying Social Security and Medicare taxes on their wages. Once they reach age 18, you are required to withhold payroll taxes like any other employee.

Age 27
At this age, children are taxed at their own rates on investment income. In addition, they are no longer eligible for their parents’ health insurance benefits.

Age 50
Congratulations. Not only have you reached the half century mark, you can contribute an additional $1,000 to your IRA, bringing the total contribution limit to $6,500.

Age 55
You and your covered spouse are eligible to make an additional $1,000 contribution to your HSA.

Age 59.5
This is the magic age when you may take money from IRAs and retirement plans without incurring the additional 10% penalty for early distributions. There are exceptions to the penalties if you are younger, but this is the age when you may take penalty-free distributions for any reason.

Age 65
Once you reach age 65, you qualify for an additional standard deduction and, if certain conditions exist, a tax credit. For tax purposes, you are considered to reach age 65 on the day before your 65th birthday.

Age 70.5
At this age, you are required to begin distributions from your traditional IRA. If you have a Roth IRA, this rule doesn’t apply. If you have a retirement plan with your employer, you are still working, and you do not own more than 5% of the company, you can delay distributions even if you reach age 70½.

January 2018 updates

* Gross Receipts Tax rates increased for all of Santa Fe County. > See the new rates here

* Albuquerque minimum wage increases to $8.95 effective 1/1/2018 ($7.95 if employer provides healthcare, $5.35 for tipped employees), details here. Santa Fe’s minimum wage remains at $11.09 until further notice.

* Also effective 1/1/2018, the standard mileage rates for the use of a car will be:

  • 54.5 cents for every mile of business travel driven, up 1 cent from the rate for 2017
  • 18 cents per mile driven for medical or moving purposes, up 1 cent from the rate for 2017
  • 14 cents per mile driven in service of charitable organizations

Automobile Expenses: Deduct Standard Mileage Rate or Claim Actual Expenses?

Standard mileage rate vs expensesWith the standard mileage at 53.5 cents per mile for 2017, it might be time to revisit what yields the more substantial deduction: the standard mileage rate for each business mile, or your actual car expenses. If this is the first year you have business use of an automobile, you don’t have to decide which method yields the better result until you file your return. If this is not the first year you have business use of an automobile, you cannot switch to the standard mileage rate in a later year if you started with deducting the actual expenses. On the other hand, if you started with deducting automobile expenses using the standard mileage rate, you can switch to the actual expense method.

Claiming the standard mileage rate is a lot easier for most of us — all we have to do is keep track of our business miles and multiply them by the current rate. In addition, you may also deduct your costs for parking and tolls and, if you are self-employed, the interest on your car loan. Claiming actual expenses requires a bit more diligence in your recordkeeping. Doing so, however, may pay off in the end by giving you a larger deduction.

First, you must keep receipts for all your gasoline and oil, repairs, tires, licensing and registration fees, insurance, garage rent, lease fees, parking, tolls, and rental fees. If you are self-employed, you may also take the business portion of any interest you are paying on a car loan. Luxury and sales taxes are not deductible under any circumstance, although the amounts you pay can be added to your cost and recovered through depreciation.

Regardless of the method you choose, the expenses are limited to your business-use percentage. This percentage is calculated by dividing your total business miles by your total miles driven for the year. It’s wise to make note of your odometer reading on January 1 and again on December 31.

Employer Identification Number: When Do You Need One?

There are several instances when you would need to apply for a federal employer identification number (EIN). The most common instance is when you are operating a business and you have employees. If you are operating a sole proprietorship and you do not have any employees, your social security number is typically all you need.

If you are a sole proprietor and you have an EIN, you’ll need to get a new one if you convert to a partnership or corporation. If you convert to a limited liability company, you’ll only need a new EIN if you choose to be taxed as a corporation or partnership.

You won’t need a new EIN if you only change the name or location of your business, or if you operate at more than one business location.

Preparing for Your Tax Appointment: Get Organized, Save Time

Hanging foldersTax time seems to come around sooner each year, and if you’re like most people, you make a vow to be better prepared for next year. Well next year is here, and it’s time to gather together all those tax records you’ve been saving. You can help your preparer by sorting through your papers and separating them between income and expenses.

Make sure you have all your W-2s if you held more than one job during the year. Employers are required to issue a W-2 to all employees by January 31. If you are self-employed, make sure you have received all your 1099-MISC forms from each person for whom you provided services and were paid $600 or more. If you were paid less than $600 from one or more persons, the income is still taxable even though there is nothing issued to you reporting it.

If your tax situation has not changed significantly from last year, you can use your 2016 income tax return as a guide for organizing your information. By looking over last year’s return, you’ll be reminded of what investments you have, if any were sold, and which statements to bring to your tax appointment. If investments were sold during the year, the broker will issue you a Form 1099-B reporting the sale date and the sales proceeds. Our office will need the cost of investments so we can determine the proper gain or loss.

If you have added a family member this past year, be sure to have that person’s social security number on hand. A social security number, or some other taxpayer identification number, is required for all persons for whom you claim a personal exemption.

Working With Your Spouse: Is Your Spouse Your Employee?

Husband and wife businessOne of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees can vary from those that apply to other employees. There are a couple of different ways a married couple can operate a business together.

If you operate a sole proprietorship and you hire your spouse as an employee, you have an employee/employer relationship. This means one spouse substantially controls the business in terms of management decisions and the other spouse is under his or her direction and control. If such a relationship exists, then the nonowner spouse is an employee subject to income tax withholding, social security and Medicare tax, but not to FUTA tax. If this type of arrangement exists, you can provide benefits to your spouse and deduct them on your business return. One of these benefits can be health insurance. If your spouse is a bona fide employee and is paid a reasonable wage for the services that he or she performs, you can provide health insurance to your spouse with a policy that covers both of you. This way you are allowed a deduction for the coverage on your business return and, in turn, reduce your self-employment tax. You can also provide retirement benefits to your spouse.

On the other hand, if your spouse has an equal say in the business affairs, provides substantially equal services to the business, and contributes capital to the business, then a partnership relationship exists and the business’s income should be reported on Form 1065. When spouses carry on a business together and share in the profits and losses, they are partners in a partnership regardless of whether they have a formal partnership agreement. They should not report the income on a Form 1040, Schedule C, in the name of one spouse as a sole proprietor nor should they file a joint Schedule C. In a partnership, each spouse reports their separate share of the partnership income and pays their own self-employment tax. This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based.

Selling Your Business: Know the Tax Consequences Beforehand

The tax consequences of selling a business depend on whether you operate as a sole proprietor or a corporation. As a sole proprietor, selling your business means you are selling the individual assets of the business. The sale of a business is not usually a sale of one asset. Instead, some or all of the business’s assets are sold. When this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.

If you are incorporated, you can either sell your stock to another individual, or the corporation can sell the assets. If the assets are sold, the corporation pays the tax on any gain. You, as a shareholder of the corporation, do not have a tax consequence unless the corporation liquidates and distributes the proceeds of the sale to you in exchange for your stock.

In any case, if you sell your business, you may need to complete additional tax forms with your annual tax return. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory. The sale of capital assets results in capital gain or loss. The sale of inventory results in ordinary income or loss.

It’s important to determine what the potential tax consequences are prior to signing the sales contract. If you want to defer the gain on the sale, an installment agreement might be an option. Let us help you understand your options so we can discuss the tax consequences before you sell.

Substantiating Business Expenses: Save Those Receipts

Substantiate business expensesAs a business owner, one of the most important things you should do is keep good records. Without them, the IRS may disallow some of the expenses you incur if it chooses your return for a closer look. Maintaining good records should be done throughout the year. Keeping receipts, credit card statements, bank statements, and canceled checks is a must. Set aside a spot in your office for expenses and sort through them periodically. Group similar expenses together and total them. Keep receipts for large purchases, such as equipment or capital improvements, separate because they are reported differently on your tax return. Staying organized will give you a better idea of the expenses you are incurring and what your bottom line will be. An added benefit is that when it comes time to file your tax return, you’ll be more prepared.