1 Corporate Law Carter Mackley Mackley amp Mackley PLLC 206 2499678 cartermackleymackleylawcom wwwmackleylawcom Tax Law Deniz Kiral Turquoise Financial Advisory 425 9456300 ID: 712645
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Start-Up Law Talkwww.startuplawtalk.com
1
Corporate Law
Carter Mackley
Mackley & Mackley, PLLC
(206) 249-9678
carter.mackley@mackleylaw.com
www.mackleylaw.com/
Tax Law
Deniz Kiral
Turquoise Financial Advisory
(425) 945-6300
deniz@turquoisefinancial.com
www.turquoisefinancialadvisory.com
Immigration Law
Tahmina Watson
Watson Immigration Law
Seattle, WA, 98154
(206) 292-5237
tahmina@watsonimmigrationlaw.com
www.watsonimmigrationlaw.com
Intellectual Property Law
Ashley K. Long
Ember Intellectual Property Law Group, PLLC
(617) 513-8222
ashley@emberip.com
www.emberip.comSlide2
INDEPENDENT CONTRATOR OR EMPLOYEE?
StartupLawTalk
Deniz Kiral
Turquoise Financial Advisory
deniz@turquoisefinancial.com
425-945-6300Slide3
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Current State OverviewSlide4
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 2010-20126000 employers are being audit in extensive review of employment tax returnsAudit 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,
2012Slide5
EXAMPLES OF CRIMINAL PENALTIES FOR EMPLOYMENT TAX INVESTIGATIONS 2011
5
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 KSlide6
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 benefitsSlide7
7
ClassificationSlide8
DISTINGUISING EMPLOYEES FROM INDEPENDENT CONTRACTOR
8
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.Slide9
the IRS grouped the 20 factors into three broad categories:
9
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 Slide10
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 Slide11
20 FACTOR TEST (
REVENUE RULING 87-41) :
11
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 Slide12
7 FACTOR TEST USED BY TAX COURT:
12Degree 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 Slide13
13
530 Safe HarborSlide14
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 Slide15
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, orReliance 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. Slide16
UNDER SECTION 1760, 530 RELIEF DOES NOT APPLY TO
:
16
Technical
workers who are subject to a three-party arrangement (i.e., the company, an engineering firm and the worker)
EngineerDesignerDrafterComputer programmerSystems analystOther similarly skilled worker engaged in a similar line of work.Slide17
17
SettlementSlide18
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.Slide19
CSP Analysis Chart
19
Are the Workers Employees?
Were Forms 1099 Timely Filed?
Is Taxpayer Entitled to 530
Relief
Type of CSP Offer
Yes
No
No
None
Yes
YesNo
1 Year Tax + CSP
Yes
Yes
Maybe
25%
Tax + CSPSlide20
Code Section 3509(a) Example
20
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%Slide21
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 Slide22
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 contractorsSlide23
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. Slide24
Start-Up Law Talkwww.startuplawtalk.com
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Corporate Law
Carter Mackley
Mackley & Mackley, PLLC
(206) 249-9678
carter.mackley@mackleylaw.com
www.mackleylaw.com/
Tax Law
Deniz Kiral
Turquoise Tax Advisory
(425) 945-6300
deniz@turquoisefinancial.com
www.turquoisefinancialadvisory.com
Immigration Law
Tahmina Watson
Watson Immigration Law
Seattle, WA, 98154
(206) 292-5237
tahmina@watsonimmigrationlaw.com
www.watsonimmigrationlaw.com
Intellectual Property Law
Ashley K. Long
Ember Intellectual Property Law Group, PLLC
(617) 513-8222
ashley@emberip.com
www.emberip.com