Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation and other employee benefits. It also frees the business from responsibility for withholding income taxes and the worker’s share of payroll taxes.
For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor unfavorably. If the IRS reclassifies a worker as an employee, your business could be hit with back taxes, interest and penalties.
When assessing worker classification, the IRS typically looks at the:
Level of behavioral control. This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.
Level of financial control. Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.
Relationship of the parties. Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.
The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.
Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk.
From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home.
Also, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.
Handle with care
Keep in mind that taxes, interest and penalties aren’t the only possible negative consequences of a worker being reclassified as an employee. In addition, your business could be liable for employee benefits that should have been provided but weren’t. Fortunately, careful handling of contractors can help ensure that independent contractor status will pass IRS scrutiny. Contact us if you have questions about worker classification.
For small businesses, managing payroll can be one of the most arduous tasks. Adding to the burden earlier this year was adjusting income tax withholding based on the new tables issued by the IRS. (Those tables account for changes under the Tax Cuts and Jobs Act.) But it’s crucial not only to withhold the appropriate taxes — including both income tax and employment taxes — but also to remit them on time to the federal government.
If you don’t, you, personally, could face harsh penalties. This is true even if your business is an entity that normally shields owners from personal liability, such as a corporation or limited liability company.
The 100% penalty
Employers must withhold federal income and employment taxes (such as Social Security) as well as applicable state and local taxes on wages paid to their employees. The federal taxes must then be remitted to the federal government according to a deposit schedule.
If a business makes payments late, there are escalating penalties. And if it fails to make them, the Trust Fund Recovery Penalty could apply. Under this penalty, also known as the 100% penalty, the IRS can assess the entire unpaid amount against a “responsible person.”
The corporate veil won’t shield corporate owners in this instance. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.
When the IRS assesses the 100% penalty, it can file a lien or take levy or seizure action against personal assets of a responsible person.
“Responsible person,” defined
The penalty can be assessed against a shareholder, owner, director, officer or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must:
1. Be responsible for collecting, accounting for and remitting withheld federal taxes, and
2. Willfully fail to remit those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.
Prevention is the best medicine
When it comes to the 100% penalty, prevention is the best medicine. So make sure that federal taxes are being properly withheld from employees’ paychecks and are being timely remitted to the federal government. (It’s a good idea to also check state and local requirements and potential penalties.)
If you aren’t already using a payroll service, consider hiring one. A good payroll service provider relieves you of the burden of withholding the proper amounts, taking care of the tax payments and handling recordkeeping. Contact us for more information.
The Tax Cuts and Jobs Act (TCJA) was packed with goodies for businesses, but it also seemed to eliminate the popular meal expense deduction in some situations. Now, the IRS has issued transitional guidance — while it works on proposed regulations — that confirms the deduction remains allowable in certain circumstances and clarifies when businesses can claim it.
The need for guidance
Before the TCJA, Section 274 of the Internal Revenue Code generally prohibited deductions for expenses related to entertainment, amusement or recreation (commonly referred to as entertainment expenses). It provided exceptions, though, for entertainment expenses “directly related” to or “associated” with conducting business.
Sec. 274(k) further limited deductions for food and beverage expenses that satisfied one of the exceptions. A deduction was allowed only if 1) the expense wasn’t lavish or extravagant under the circumstances, and 2) the taxpayer (or an employee of the taxpayer) was present when the food or beverages were furnished. Section 274(n)(1) limited the amount of the deduction to 50% of the expense.
The TCJA amends Sec. 274 to disallow a deduction for expenses related to entertainment expenses, regardless of whether they’re directly related to or associated with conducting business. Some taxpayers interpreted the amendment to ban deductions for business meal expenses as though they were deemed to be entertainment expenses. According to the new guidance, though, the law doesn’t specifically eliminate all of these expenses.
Rather, the law merely repeals the two exceptions and amends the 50% limitation to remove the reference to entertainment expenses. The TCJA doesn’t address the circumstances in which providing food and beverages might constitute nondeductible entertainment, the IRS says, but its legislative history “clarifies that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.”
Until the IRS publishes its proposed regulations explaining when business meal expenses are nondeductible entertainment expenses and when they’re 50% deductible expenses, businesses may deduct 50% of business meal amounts if:
The IRS recognized that the fifth criterion above could create some confusion. The guidance, therefore, includes illustrative examples.
In the first example, a taxpayer invites a business contact to a baseball game, paying for both tickets. While at the game, the taxpayer also pays for hot dogs and drinks. The game is entertainment, so the cost of the tickets is a nondeductible entertainment expense. However, the cost of the hot dogs and drinks, purchased separately from the tickets, isn’t an entertainment expense. Therefore, the taxpayer can deduct 50% of the cost as a meal expense.
The second example employs a similar scenario, with the taxpayer inviting a contact to a basketball game. This time, though, the taxpayer buys tickets to watch the game from a suite, with access to food and beverages included. The game again represents entertainment, and the cost of the tickets is nondeductible. The cost of the food and beverages isn’t stated separately on the invoice, rendering it a disallowed entertainment expense, as well.
The final example uses the scenario above, except that the cost of the food and beverages is stated separately on the invoice for the basketball game tickets. The cost of the tickets remains nondeductible, but the taxpayer can deduct 50% of the cost of the food and beverages.
The TCJA doesn’t change the definition of “entertainment.” Under the applicable regulations, the term continues to include, for example, entertaining at:
Entertainment also includes hunting, fishing, vacation and similar trips. It may include providing food and beverages, a hotel suite or an automobile to a customer or the customer’s family.
Be aware that the determination of whether an activity is entertainment considers the taxpayer’s business. For example, a ticket to a play normally would be deemed entertainment. If the taxpayer is a theater critic, however, it wouldn’t. Similarly, a fashion show wouldn’t be considered entertainment if conducted by an apparel manufacturer to introduce its new clothing line to a group of store buyers.
Request for comments
The IRS has requested comments on future guidance clarifying the treatment of business meal expenses and entertainment expenses, including input on whether and what additional guidance is required and the definition of “entertainment.” Businesses should submit comments to the IRS by December 2, 2018. If you have questions on how this guidance may affect your business, please don’t hesitate to call us. We’d be pleased to help.
The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. There were many gaps in the legislation due to the rush to get it passed. So, there will likely be a technical corrections bill passed by Congress and the IRS will need to issue regulations based on the bill later this year. However, here's a look at some of the more important elements of the new law that have an impact on individuals and businesses. Unless otherwise noted, the changes are effective for tax years beginning in 2018.
To understand how these changes may affect your specific tax situation, please call us at 417-881-6919 to set up a meeting with your advisor.
Health reimbursement arrangements (HRAs) enable small businesses to contribute to employee health care expenses, including premiums, deductibles and other out-of-pocket costs. Unfortunately, up until now, employers with HRAs have faced the threat of potential hefty penalties of up to $36,500 per employee per year because the arrangements violate the rules for group health plans under the Affordable Care Act.
The law exempts qualified small employer HRAs as long as the employer is not already subject to the ACA’s employer mandate and doesn’t offer an employee group health plan. Qualifying HRAs must also be funded only by an eligible employer and reimburse medical expenses that don’t exceed $4,950 a year ($10,000 for families). HRAs can help small companies attract and retain great people because they demonstrate their commitment to employees. If you would like more information about HRAs or other health care coverage options for your business, be sure to contact us today.
Just days before the implementation date, a federal judge in Texas put the brakes on the Department of Labor’s (DOL’s) new federal overtime rule, which was to take effect December 1, 2016 and would have doubled the Fair Labor Standard’s Act’s (FSLA’s) salary threshold for exemption from overtime pay. This threshold would have been the first significant change in four decades. The entire article can be found here.
Business owners, large and small, are left with uncertainty and where to go from here. A preliminary injunction isn’t permanent, as it simply preserves the existing overtime rule—which was last updated in 2004—until the court has a chance to review the merits of the case objecting to the revisions to the regulation.
In the meantime, business owners and HR professionals will have to consider what to do now. Click here for an excellent FAQ article with the highlights.
As always, if you have any concerns or questions, please feel free to contact our office 417-881-6919.
HTSG was recently featured in a Springfield Business Journal Article showcasing the merger of Tucker and Company, PC with O'Dell, Hagan & Company, LLP to form our new firm Hagan, Tucker, Schmitt & Gintz, LLC. Click here to read article.
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