Transcript Tax Issues for Start

Start-Up Law Talk
www.startuplawtalk.com
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Corporate Law
Carter Mackley
Mackley & Mackley, PLLC
(206) 249-9678
[email protected]
www.mackleylaw.com/
Immigration Law
Tahmina Watson
Watson Immigration Law
Seattle, WA, 98154
(206) 292-5237
[email protected]
www.watsonimmigrationlaw.com
Tax Law
Deniz Kiral
Turquoise Financial Advisory
(425) 945-6300
[email protected]
www.turquoisefinancialadvisory.com
Intellectual Property Law
Ashley K. Long
Ember Intellectual Property Law
Group, PLLC
(617) 513-8222
[email protected]
www.emberip.com
StartupLawTalk
INDEPENDENT CONTRATOR OR
EMPLOYEE?
Deniz Kiral
Turquoise Financial Advisory
[email protected]
425-945-6300
Current State Overview
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Current State of the IRS’s Focus
NEW IRS tax gap numbers highlight future audit areas
 $450 billion dollar tax gap in 2006, with 40% of the GAP, $179 Million
focused on Small Businesses.
 17% of the tax cap can be attributed to underpayment of employment taxes.
 86% of employment tax audits result in an adjustment.
IRS National Research Project on Employment Taxes from 2010-2012
 6000 employers are being audit in extensive review of employment tax
returns
 Audit focuses on Employees being misclassified as independent contractors
 Will lead to the conclusion that this issue is costing billions in tax revenues.
Eight Small Business IRS Audit Areas to Watch in 2013
 8. Proper Worker Classification – CPA Practice Advisory September, 2012
EXAMPLES OF CRIMINAL PENALTIES FOR
EMPLOYMENT TAX INVESTIGATIONS 2011
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Title
Company
President Connection
Newspapers
Owner
Employment
Agency
Owner
Temp Agency
Owner
Construction
Owner
Health Systems
Owner
WRG Electric
Owner
Health Care
Owner
Owner
Contractor
Health Care
Owner
Construction
Location
Virginia
Tax
Jail/Fine
Liability
NA
6 Months 647,000
Oklahoma
370 K
24 Months / $1 mil.
Minneapolis
Miami
Ohio
Seattle
Rhode
Island
Florida
North
Carolia
New York
400 K
NA
1 Mil.
377 K
1.3 Mil.
12 Months /
60 Months / 1.2 Mil.
25 Months
6 Months / $377 k
30 Months /1.21 M
504 K
1.3 Mil.
18 Months / 504 K
24 Months / $1.3
Mil.
12 Months / 460 K
460 K
TAX INCENTIVES TO
MISCLASSIFY EMPLOYEES:
Company not subject to withholding taxes
 FICA
 FUTA
 State and local income and unemployment taxes
 Health and welfare benefits
 Pensions
 Workers compensation
 Unemployment benefits
Classification
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DISTINGUISING EMPLOYEES FROM
INDEPENDENT CONTRACTOR
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MOST IMPORTANT CONSIDERATION:
 WHO CONTROLS THE PROVISION OF THE
SERVICES?
– COMPANY CONTROL: Employee
– INDIVIDUAL CONTROL: Independent Contractor
 The mere right to direct or control the work of the
service provider triggers the application of Code Sec.
3121(d)(2); whether or not the service provider
actually exercises the right is irrelevant.
the IRS grouped the 20 factors into three broad
categories:
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 Behavioral control factors - relate to the right of the
service recipient to direct or control the work of the
service provider.
 Financial control factors - involve the service
recipient’s risk of loss.
 Relationship control factors - Relationship control
factors focus on any agreements, particularly written
20 FACTOR TEST
(REVENUE RULING 87-41) :
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•Instruction
•Training
• Integration into company’s operations
•Services required to be performed by specific individual
•Hiring supervision and payment of assistants
•Continuing relationship
•Set hours of work
•Fulltime commitment required
•Work performed at company’s facilities
•Company determines order of performance
•Oral or written reports required
20 FACTOR TEST
(REVENUE RULING 87-41) :
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•Payment by hour, week, month (vs. lump sum or
percentage completion payments)
•Payment of business expenses
•Furnishing tools and materials
•Significant investment by individuals
•Potential for profit or loss
•Working for more than one firm
•Services available to public
•Right to discharge
•Worker’s right to terminate
7 FACTOR TEST USED BY TAX COURT:
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 Degree of control exercised by the principal






(company)
Which party owns the work facilities?
The opportunity for loss as well as profit
The right to discharge the individual
Determining if work is part of the principal’s normal
business
Permanency of the relationship
Intent of the parties in creating the relationship
530 Safe Harbor
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SECTION 530 SAFEHARBOR
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 Independent contractors will not be reclassified as
employees if:
a) The employer is not treating the worker, or anyone in a similar
position, as an employee at any time
b) The employer filed all required information returns (Forms
1099); and
c) The employer had a reasonable basis for treating the worker as
an independent contractor
SECTION 530 SAFEHARBOR
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 Reasonable Basis – Employer prospectively relied
on any of the 4 criteria




Court decisions, IRS rulings, laws,
Past IRS audit decisions,
Industry Practices, or
Reliance on a qualified tax professional (attorney, cpa)
 Act Sec. 530 relief, while an option for the service
recipient, is not an option for the worker.
UNDER SECTION 1760,
530 RELIEF DOES NOT APPLY TO:
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 Technical workers who are subject to a three-party
arrangement (i.e., the company, an engineering firm
and the worker)






Engineer
Designer
Drafter
Computer programmer
Systems analyst
Other similarly skilled worker engaged in a similar line of
work.
Settlement
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Classification Settlement Program (CSP)
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 Filed 1099, but no Reasonable Basis - 100%
Employment Tax Penalty
 Filed 1099, but not a convincing basis - 25% of
Employment Tax Penalty
 + Future Years Employee Classification
 VCSP = Voluntary Program a good idea for blatant
disregard.
CSP Analysis Chart
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Are the
Workers
Employees?
Were Forms
1099 Timely
Filed?
Is Taxpayer
Entitled to 530
Relief
Type of CSP
Offer
Yes
No
No
None
Yes
Yes
No
1 Year Tax + CSP
Yes
Yes
Maybe
25% Tax + CSP
Code Section 3509(a) Example
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1099
No 1099
Company’s Share of FICA
7.65%
7.65%
Employee’s share of FICA
(0.2/0.4)
1.13%
2.26%
Total FICA
8.878%
9.91%
Income Tax Withholding
1.50%
3.0%
Total Code Sec. 3509(a)
10.28%
12.91%
CONSEQUENCES OF IMPROPER
CLASSIFICATION OF EMPLOYEES
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 TAX CONSEQUENCES OF MISCLASSIFYING EMPLOYEES
 Employer liable for a percentage of the withholding taxes
 Employer liable for employer’s share of FICA (Social Security)
taxes
 Employer liable for a portion of the employee’s FICA taxes
 Interest and penalties
 Reclassified Employees May Qualify For Various Benefits
– Health insurance and other benefits
– Pension plan
– Workers compensation
– Unemployment compensation
 Reclassification Could Affect Status of Pension Plans
– May cause violations of discrimination provisions under ERISA
OTHER CONSEQUENCES OF
MISCLASSIFYING EMPLOYEES
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 Workers have been suing employers in a number of
states to be reclassified as employees.
 FedEx Cases:
– Federal Express has been sued in multiple state and federal
courts by its drivers, challenging their status as independent
contractors
Disclaimer
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This presentation is a summary and is not intended as tax or legal advice. You
should consult with your tax advisor to obtain specific advice with respect to
your fact pattern.
Based on the most recent "best practice" standards for tax advisors issued by
the Treasury Department, commonly referred to as Circular 230, we wish to
advise you that this presentation has not been prepared to be used, and cannot
be used, to provide assurance that penalties which may be assessed by the IRS
or other taxing authority (including specifically section 6662 understatement
penalties) will not be upheld.
Start-Up Law Talk
www.startuplawtalk.com
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Corporate Law
Carter Mackley
Mackley & Mackley, PLLC
(206) 249-9678
[email protected]
www.mackleylaw.com/
Immigration Law
Tahmina Watson
Watson Immigration Law
Seattle, WA, 98154
(206) 292-5237
[email protected]
www.watsonimmigrationlaw.com
Tax Law
Deniz Kiral
Turquoise Tax Advisory
(425) 945-6300
[email protected]
www.turquoisefinancialadvisory.com
Intellectual Property Law
Ashley K. Long
Ember Intellectual Property Law
Group, PLLC
(617) 513-8222
[email protected]
www.emberip.com