Compensation and Employment Tax Issues

Compensation and Employment Tax Issues

Presented by

Rick Lahr, CPA

I. Independent Contractor or Employee

A. IRS 20-factor control test based upon common law

principles

B. Independent Contractor or Employee (Publication

1779)

1. Behavioral Control

a. Right to direct or control how the worker does the work

b. Instructions

c. Training


B. Independent Contractor or Employee (Publication

1779)

2. Financial Control

a. Right to control the business part of the work

b. Significant investment

c. Expenses

d. Opportunity for profit or loss

3. Relationship of the Parties

a. How the business and the worker perceive their relationship

b. Benefits

c. Written contracts


C. Tax Court Factors1

1. The degree of control exercised by the payer

2. Which party invests in the work facilities used by the worker

3. The worker’s opportunity for profit or loss

4. Whether the payer can discharge the worker

5. Whether the work is part of the payer’s regular business

6. The permanency of the relationship

7. The method of payment

8. Whether the work required special skills

9. The relationship the parties believed they were creating

1 Lisa Beth Levine v. Commissioner, TC Memo 2005-86


D. Can an individual be an employee in one capacity and

an independent contractor in another capacity?

1. Full-time university professor who also provided seminars in

classrooms provided by the university1

2. On-air radio personality who also rendered services in

promoting the products and services of his sponsors2

3. Consultant working on two projects for the same company3

1 James S. Reece, TC Memo 1992-3352 Juan A. Ramirez, et ux v. Commissioner, TC Summary Opinion 2013-383Information Letter 2012-0069


E. Example: Employee & Contractor

Nonemployee compensation

Wages, tips, other compensation


Wages, tips, other comp.

Other Income

E) Example: Employee

& Partner

Wages, tips, other comp.

Guaranteed payments




F. Forms

1. W-4

a. Employee’s withholding allowance certificate

b. Purpose so that your employer can withhold the correct federal

income tax from your pay

c. Two-earners/multiple jobs worksheet


F. Forms

2. W-9

a. Request for taxpayer identification number and certification

b. Purpose so that the requester can file an information return to

report income paid to you

c. $50 penalty for failure to furnish your correct taxpayer identification

number to a requester

d. $500 penalty for false information with respect to backup

withholding

e. Criminal penalty for falsifying information


F. Forms

3. SS-8

a. Determination of worker status for purposes of federal

employment taxes and income tax withholding

b. Behavioral control

c. Financial control

d. Relationship of the worker and firm

e. It can take at least six months to get a determination


F. Forms

4. 8919

a. Uncollected social security and medicare tax on wages

b. You performed services for a firm

c. You believe your pay from the firm was not for services

as an independent contractor

d. The firm did not withhold your share of social security

and medicare taxes from your pay

e. Reason code A, C, G or H applies to you

II. S Corporation Compensation and

Medical Insurance

A. Reasonable Compensation

1. IRS authority to reclassify payments to a

shareholder-employee as a wage expense subject to

employment taxes

2. If most of the gross receipts and profits are

associated with the shareholder’s personal services,

then most of the profit distribution should be

allocated as compensation


Medical Insurance

A. Reasonable Compensation

3. Factors1

a. Training and experience

b. Duties and responsibilities

c. Time and effort devoted to the business

d. Dividend history

e. Payments to non-shareholder employees

f. Timing and manner of paying bonuses to key people

g. What comparable businesses pay for similar services

h. Compensation agreements

i. The use of a formula to determine compensation

1David E. Watson, PC vs. U.S., 668 F. 3d 1008 (8th Cir. 2012)


Medical Insurance

B. Example

Wages, salaries, tips, etc.


Medical Insurance

C. Treating Medical Insurance Premiums as Wages

1. If paid on behalf of 2-percent shareholder-employee,

deductible and reportable as wages

2. Not subject to social security or Medicare or

unemployment taxes

3. 2-percent shareholder-employee may deduct in

arriving at adjusted gross income unless eligible to

participate in any subsidized health care plan


Medical Insurance

D. Example


Medicare wages and tips

III. Guaranteed Payments

A. Treatment

1. Payments to a partner that are determined

without regard to the partnership’s income

2. Not subject to income tax withholding

3. Deduction to the partnership; ordinary income

to the partner subject to self-employment tax

4. Partners are not employees and should not be

issued a Form W-2


B. Self-employed Health Insurance Premiums

1. If paid on behalf of a partner, for services as

a partner, then deductible as a business

expense and the partner must include them in

gross income

2. If paid for a partner as a reduction in

distributions to the partner, the partnership

cannot deduct the premiums


C. Example

Guaranteed payments

Amounts paid for medical insurance

IV. Employment Tax Examination

A. Section 530 Relief (Publication 1976)

1. Reasonable basis

a. Reliance on court case or IRS ruling

b. Prior audit

c. How a significant segment of your industry treats

similar workers

d. Professional advice

2. Substantive consistency

a. Predecessor business

b. Not available if you treated similar workers as

employees


A. Section 530 Relief (Publication 1976)

3. Reporting consistency

a. Filed Form 1099-MISC if a worker paid $600 or

more

b. Not available for any year and for any workers for

whom you did not file the required information

returns and federal tax returns


B. Classification Settlement Program

(CSP)/Application for Voluntary Classification

Settlement Program (VCSP) (Form 8952)

1. Reclassify workers as employees for future tax periods

with limited federal employment tax liability for past

non-employee treatment

2. 100% CSP offer if the taxpayer meets the section 530

reporting consistency requirement but not the

substantive consistency requirement or the reasonable

basis test, then a full employment tax adjustment of the

most recent tax year


B. Classification Settlement Program

(CSP)/Application for Voluntary Classification

Settlement Program (VCSP) (Form 8952)

3. 25% CSP offer if the taxpayer meets the section 530

reporting consistency requirement and the substantive

consistency requirement or the reasonable basis test, then a

one-quarter tax adjustment for the most recent tax year

4. Taxpayer may qualify for more than one CSP offer if

several classes of workers are at issue

If you have any questions please feel free to contact

Rick at:

214-635-2520

[email protected]

mailto:[email protected]

Economy & Finance

Compensation and Employment Tax Issues