Archive for Employee Business Expense
The Internal Revenue Service announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes. The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in
This Rev. Proc. provides an optional safe harbor method that may be used to determine the amount of deductible expenses attributable to certain business use of a residence during the taxable year. This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses for purposes of satisfying the requirements of § 280A of the Internal Revenue Code.
The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6 million hours annually. It also provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a IRS Form 8829 calculating allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.
Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.
Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
This new option is available starting with the 2013 return most taxpayers file early in 2014.
In my dealings with the US Treasury Department regarding worker classification disputes I have learned that although in reality there may be shades of gray distinguishing between what constitutes an employee and what constitutes an independent contractor the US Treasury has some very specific positions. Here are four that will hopefully help you make the correct determination and avoid future problems:
1. A relationship between an employer and an employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to what is to be done, but also how it is to be done. It is not necessary that the employer actually direct or control the individual, it is sufficient that the employer merely has the right to do so. The designation of a worker as an agent, sub-contractor or independent contractor is irrelevant if the relationship of employer and employee exists. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed.
2. A worker who is required to comply with another person’s instructions about when, where and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions. Some employees may work without receiving instructions because they are highly proficient and conscientious workers or because the duties are so simple or familiar to them. Furthermore, instructions, that show how to reach the desired results, may have been oral and given only once at the beginning of the relationship.
3. Lack of significant investment by a person in facilities or equipment used in performing services for another indicates dependence on the employer and, accordingly, the existence of an employer-employee relationship. The term “significant investment” does not include tools, instruments, and clothing commonly provided by employees in their trade; nor does it include education, experience or training.
4. A person who can realize a profit or suffer a loss as a result of his or her services is generally an independent contractor, while the person who cannot is an employee. “Profit or loss” implies the use of capital by a person in an independent business of his or her own. The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and, thus, does not constitute a sufficient economic risk to support treatment as an independent contractor. If a worker loses payment from the firm’s customer for poor work, the firm shares the risk of such loss. Control of the firm over the worker would be necessary in order to reduce the risk of financial loss to the firm. The opportunity for higher earnings or of gain or loss from a commission arrangement is not considered profit or loss.
Tool and Equipment Plans generally require employees to provide their own tools. Some plans purport to receive tax-favored treatment as “accountable plans” under the definition of adjusted gross income in Internal Revenue Code § 62(c). If you are expected to use your own tools and equipment on the job and get reimbursed be very careful in understanding the definition of an “accountable plan” because the Internal Revenue Service has established a compliance team to address significant concerns with certain Employee Tool and Equipment Plans that purport to receive tax-favored treatment as accountable plans. It’s all spelled out in the Alert. Here’s the facts as I understand.
1. According to ILM 201120021 a reimbursement or other expense allowance arrangement that pays an amount regardless of whether an expense is paid or incurred or reasonably expected to be paid or incurred by the employee in performing services for the employer violates the business connection requirement of an accountable plan under Treas. Reg. § 1.62-2(d)(3)(i). Accordingly, payments made under the arrangement are treated as made under a nonaccountable plan. Amounts treated as paid under a nonaccountable plan must be included in the employee’s gross income for the taxable year, are subject to withholding and payment of employment taxes, and must be reported as wages or other compensation on the employee’s Form W-2.
2. The IRS’ Chief Counsel issued the following Advice – ILM 200745018 concluding that an employer’s tool reimbursement plan does not satisfy the requirements of an accountable plan.
3. IRS Revenue Ruling 2005-52 holds that tool allowances paid to employees are not paid under an accountable plan because the substantiation and return of excess requirements are not met.
4. A Coordinated Issue Paper Revised on July 2,2008 concludes that Employee Tool and Equipment Plans under which amounts are paid to employees for the use of their tools and equipment, do not meet the accountable plan requirements.
5. An IRS Private Letter Ruling (200930029) states that an employer’s expense reimbursement plan satisfies the business connection, substantiation, and return of excess requirements of an accountable plan. Payments made under the Plan were allowed exclusion from the Technician’s income and not considered wages subject to the withholding and payment of employment taxes because the Plan only reimbursed covered costs that the Technician substantiated.
If you are an employer that requires your employees to provide their own tools you may want to review and understand this private letter ruling and only provide reimbursement for tool expense upon written substantiation (aka receipt). It is best practice to understand the nuances of accountable and nonaccountable tool and equipment plans. A blanket payment made to an employee on a regular and consistent basis is usually considered income subject to employment tax regardless of what it is called.
I received an interesting call today from a small business employer who was reported to the IRS by a disgruntled past worker who claimed that he was paid as an independent contractor (and received IRS Form 1099) when in actuality he believed himself to be an employee (that should have received IRS Form W-2) for tax reporting purposes.
This prompted me to post about the new Voluntary Worker Classification Settlement Program. Having created well over 300 living wage jobs with benefits for people over the years I’ve grown to believe that most people roaming the planet today have no idea about the risks associated with that effort. The biggest risk in my opinion is associated with properly classifying workers as either employees subject to employment tax obligations or independent contractors whereby the worker is responsible for paying their own self employment tax. In the past the IRS has closed down the most well meaning business operations because improper worker classification created very large employment tax liabilities and heavily burdensome Trust Fund Recovery Penalties. The biggest risk I think is when a worker classified as an independent contractor gets injured on the job and doesn’t have his/her own insurance coverage or when a worker classified as an independent contractor becomes disgruntled and decides as a parting blow to report his/her ‘boss’ to the IRS or the US Treasury.
To alleviate that pain and mitigate some risk associated with one of thousands of decisions that job creators routinely make IRS Announcement 2011-64 gives businesses an opportunity to reclassify independent contractors as employees going forward.
IRS Form 8952 is used by businesses to apply for this reclassification opportunity. A business that applies for and is accepted into this program:
1) Receives audit protection backwards in connection with these reclassified workers,
2) Pays only 10% of the normal employer tax liability that may be due for the most recent tax year, and
3) Is not liable for interest and penalties on the amount.
In exchange the business gives IRS a six-year statute of limitation on the following three years’ employment taxes.
To be eligible:
1) The business cannot currently be under audit by IRS, the Department of Labor, or a state or local agency. If the business has previously been audited, the business has to be currently complying with the directions of that audit.
2) The business must have consistently treated the workers as independent contractors.
3) The business must have filed all Forms 1099 for the prior years.
If you are an employer you can appreciate the fact that everyone working for you it seems wants to be an independent contractor until they get injured on the job or get pissed off at you and seek relief outside of your organization. Employees and the subsequent employment tax liability they bring can be a real kick in the pants. If you have taken the risk of actually having employees then you may be keenly aware that it has become practically impossible to compete for prospective business if the competition is using improperly classified workers as independent contractors and subsequently avoiding payroll tax liabilities. It seems these days that operating margins across all industry groups are razor thin and getting undercut on bids by a competitor who is not paying employment tax creates an uneven playing field. Many, many times the difference between staying viable as a small business owner and closing up shop distills down to the employment tax liability and whether or not that liability can be paid in a timely fashion.
On the other hand if you are running fast and loose with your worker classifications and improperly classify workers as independent contractors when indeed they should be classified as employees the tax ramifications can be devastating for the responsible party. If you mis-classify workers and get audited by the IRS you can be found liable for trust fund employment taxes and the trust fund recovery penalty. These assessments are not discharged in bankruptcy and can subsequently destroy lives. I’ve seen it happen on many different occasions. The fallout is tragic particularly when good people are involved.
Now, finally, to provide relief the Internal Revenue Service is offering a new program that will allow many employers the opportunity to resolve past worker classification issues. You apply for the program by filing IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before treating the workers as employees.
Employers accepted into the program will pay an amount approximately equal to just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. On the down side if it can be called that participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
Under this new Voluntary Classification Settlement Program (VCSP), eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to most for profit businesses, tax-exempt organizations and government entities that have up until now improperly classified their workers as independent contractors, and now want to correctly treat these workers as employees. To be eligible employers must:
Consistently have treated the workers in the past as non-employees,
Have filed all required Forms 1099 for the workers for the previous three years
Not currently be under audit by the IRS
Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers
For more information be sure to check out IRS Announcement 2011-64.
The Internal Revenue Service launched a new program that will enable many employers to voluntarily reclassifying their workers in an effort to resolve past worker classification issues. It is called the Voluntary Classification Settlement Program (VCSP).
This new program will allow employers the opportunity to make a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit and was designed to increase tax compliance and reduce burden for employers by in theory providing greater certainty. Eligible employers can obtain relief from federal payroll taxes they may have owed for the past if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as non-employees or independent contractors, and now want to correctly treat these workers as employees.
Employers can apply for the program by filing Form 8952, at least 60 days before they want to begin treating the workers as employees. To be eligible applicants must:
1. Consistently have treated the workers in the past as non-employees,
2. Have filed all required Forms 1099 for the workers for the previous three years
3. Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers
Employers accepted into the program will:
1. pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year.
2. be relieved of interest or penalties,
3. will not be audited on payroll taxes related to these workers for prior years.
Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes. For more information check out the Employment Tax pages of IRS.gov, and in Announcement 2011-64
Okay I got a new case for appeal consideration and am blasting out my thoughts as to why this one is not receiving further consideration. In short it is not winnable. You need to be very diligent in your research and documentation to successfully deduct business miles as unreimbursed employee business expense on IRS Form 1040 Schedule A.
The deduction is allowed and indeed one of the most common expenses incurred by taxpayers who use their personal vehicle for their employer’s business. In order to be deductible though taxpayers must be able to substantiate the mileage and explain the circumstances for which an ordinary and necessary deduction would be allowed.
In this particular case the mileage claimed by the taxpayer was properly recorded in a log with sufﬁcient information to determine the mileage claimed and the trip purpose. However the IRS still denied the mileage deduction because the taxpayer did not establish that the business expenses paid or incurred were ordinary and necessary for the taxpayer’s employment.
Even though the taxpayer’s employer did not reimburse the tax payer for the miles incurred while on the job and reported on the schedule A, the IRS still concluded that there was insufﬁcient evidence that the expenses were ordinary and reasonable because the employer maintained a ﬂeet of vehicles that employees were expected to use when traveling. Furthermore the employer had a policy in place to reimburse employees for business use of their personal vehicles if the use is approved in advance.
So I think the lesson learned here is that if your employer has a fleet of vehicles for employee’s travel, use the employer’s vehicle. Or if the employer reimburses employees for miles driven on the job then accept the reimbursement.
If you itemize deductions and are an employee, you may be able to deduct certain work-related expenses. Generally, report expenses on IRS Form 2106 to figure the deduction for employee business expenses and attach it to Form 1040. Deductible expenses are then carried over onto Form 1040, Schedule A, as a miscellaneous itemized deduction subject to 2% of your adjusted gross income rules. Only employee business expenses that are in excess of 2% of your adjusted gross income can be deducted. For more information see Publication 529, Miscellaneous Deductions (PDF). Expenses that qualify for an itemized deduction include:
Business travel away from home
Business use of car
Business meals and entertainment
Use of your home
You must keep records to prove the business expenses you deduct. For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals PDF
If your employer reimburses you under an accountable plan, you do not include the payments in your gross income, and you may not deduct any of the reimbursed amounts. An accountable plan must meet three requirements:
You must have paid or incurred expenses that are deductible while performing services as an employee.
You must adequately account to your employer for these expenses within a reasonable time period, and
You must return any excess reimbursement or allowance within a reasonable time period.
If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses.