start-up law talk 1 corporate law carter mackley mackley & mackley, pllc (206) 249-9678...
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Start-Up Law Talkwww.startuplawtalk.com
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Corporate Law
Carter Mackley Mackley & Mackley, PLLC (206) [email protected]/
Tax Law
Deniz KiralTurquoise Financial Advisory(425) 945-6300deniz@turquoisefinancial.comwww.turquoisefinancialadvisory.com
Immigration Law
Tahmina Watson Watson Immigration LawSeattle, WA, 98154(206) 292-5237 [email protected]
Intellectual Property Law
Ashley K. LongEmber Intellectual Property Law Group, PLLC(617) [email protected]
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Current State Overview
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 Location Tax Liability
Jail/Fine
President
Connection Newspapers
Virginia NA 6 Months 647,000
Owner Employment Agency
Oklahoma 370 K 24 Months / $1 mil.
Owner Temp Agency Minneapolis
400 K 12 Months /
Owner Construction Miami NA 60 Months / 1.2 Mil.
Owner Health Systems
Ohio 1 Mil. 25 Months
Owner WRG Electric Seattle 377 K 6 Months / $377 k
Owner Health Care Rhode Island
1.3 Mil. 30 Months /1.21 M
Owner Contractor Florida 504 K 18 Months / 504 K
Owner Health Care North Carolia
1.3 Mil. 24 Months / $1.3 Mil.
Owner Construction New York 460 K 12 Months / 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
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Classification
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
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530 Safe Harbor
SECTION 530 SAFEHARBOR 14
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 15
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.
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Settlement
Classification Settlement Program (CSP)18
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 Chart19
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) Example20
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
Disclaimer23
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 Talkwww.startuplawtalk.com
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Corporate Law
Carter Mackley Mackley & Mackley, PLLC (206) [email protected]/
Tax Law
Deniz KiralTurquoise Tax Advisory(425) 945-6300deniz@turquoisefinancial.comwww.turquoisefinancialadvisory.com
Immigration Law
Tahmina Watson Watson Immigration LawSeattle, WA, 98154(206) 292-5237 [email protected]
Intellectual Property Law
Ashley K. LongEmber Intellectual Property Law Group, PLLC(617) [email protected]