Archive for Employment Tax
According to IRS administrative guidelines to its examiners concerning Rev. Rul. 2012-18, published in the 2012-26 Internal Revenue Bulletin, when performing a tip examination (aka audit), IRS examiners must ensure that service fees or charges are properly characterized as wages and not tips. If the payment is not a tip then it is a service charge and reported as wages.
Whether payments should be reported as tips or service charges basically distills down to whether the following factors were present:
(1) The payment was made free from compulsion;
(2) The customer had the unrestricted right to determine amount;
(3) The payment was not be the subject of negotiation or dictated by employer policy; and
(4) The customer determined who receives the payment.
Automatic gratuities (for parties of a certain size for example) should according to this directive to examiners be reported as service charges and not tips in my humble opinion. Comments on the interim guidance may be submitted either electronically at TIP.Program@irs.gov or in writing to:
Internal Revenue Service
National Tip Reporting Compliance
3251 North Evergreen Dr. NE
Grand Rapids, MI 49525
Also I learned that the IRS intends to solicit public comments on proposed changes to it’s existing voluntary tip compliance agreements. Specifically, the Tip Reporting Alternative Commitment (TRAC) program and other variations of TRAC agreements.
The principal author of this revenue ruling is Linda L. Conway-Hataloski of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this revenue ruling, contact Linda L. Conway-Hataloski at 202-622-0047.
According to Internal Revenue Code Section 21, the maximum tax credit as of this posting date remains at $1,050 (35% of $3,000) for one qualifying individual and $2,100 (35% of $6,000) for two or more. This credit is for expenses paid for the care of your qualifying children under age thirteen, or for a disabled spouse or dependent, to enable you or your spouse (if Married Filing Jointly) to work or look for work.
A qualifying person is a dependent child, age twelve or younger and/or your spouse or other certain individuals who are physically or mentally incapable of self-care.
In order to qualify you (or your spouse if MFJ) must have earned income from wages, salaries, tips, other taxable employee compensation, or net earnings from self-employment.
1. Payments for care can not be made to a spouse or dependent.
2. You are precluded from the credit if your filing status is Married/separate.
3. The qualifying person must have lived in the home with you for more than 6 months.
4. You may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
5. Qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that are excluded from income.
If an individual is paid to come to your home and care for your dependent or spouse, you pretty much by default become a household employer liable for employment tax reporting and payment obligations. Check out IRS Publication 926.
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.
Payments for the services of a child under the age of twenty-one who works for his or her parent whether or not in a trade or business, are not subject to federal unemployment taxes (FUTA). These exceptions are not the case with a corporation (C or S), even if the corporation is completely controlled by the child’s parents. Significant tax shelter is provided through the employment of children in a sole proprietorship or partnership by shifting income to persons in lower tax brackets. A child is allowed to earn the amount of the standard deduction tax-free every year ($5,700 in 2010). Above that level, the child can receive income and pay tax at the lower ten percent and fifteen percent rates.
Of course, the employment arrangement must be bona fide, and the compensation must be appropriate for the age and skill set
of the child. But as the child matures, it is reasonable that compensation would increase. For a parent who would like to put money away for a child’s education, the family business still provides a great opportunity.
I’ve found myself needing to specifically clarify what the definition of statutory employee means for IRS employment tax purposes. Statutory employees include:
1. full-time life insurance agents,
2. certain agent or commission drivers,
3. traveling salespersons, and
4. certain homeworkers.
Statutory employees do not owe self employment tax on these earnings, as Social Security and Medicare taxes have already been withheld. If as a statutory employee you have both self-employment income and statutory employee income, then two Schedule Cs should be completed. Do not combine these amounts on one Schedule C. Gross income includes income from whatever source derived including income received on a Form W-2 where Box 13 is checked as “Statutory employee.”
If you are a statutory employee income from Box 1 of the W-2 is entered on Line 1 of Schedule C.
Here are 5 things I learned through experience regarding TFRP:
1. An IRS Revenue Officer makes a determination to “assess” or “not assess” the Trust Fund Recovery Penalty (TFRP). Bankruptcy does not stop the Assessment Statute even though it can stop the Collection effort. One of the major reasons why an IRS Revenue Officer won’t assess the TFRP is doubt as to collectability. If you are filing bankruptcy you are showing everybody including the IRS that collectablity is a problem and maybe the TFRP should be not be assessed. However Revenue Officers and their managers can and sometimes will pursue the penalty even with doubt as to collectability.
2. Appeal the determination under CAP, CDP. When an IRS Revenue Officer sends you the initial letter (L1153) it contains appeal rights. Ultimately if you go to IRS Appeals you take the case out of the hands of the IRS Revenue Officer and his or her Manager who are trained to advocate aggressively on behalf of the government’s position and into the hands of an IRS Settlement Office who approaches making a determination from a neutral perspective taking into consideration the hazards of litigation. Generally speaking I have found that most IRS Settlement Officers are impartial and very good at what they do. To date, I rarely have had a problem with a Settlement Officer’s knowledge and fairness. Be sure to know what is expected of you in terms of timely responding as your rights expire if you do not respond within the required parameters. Appealing under Collection Appeal (CAP) won’t stop enforced collection action and you loose the right to petition Tax Court if an adverse determination is made by the Settlement Officer. The CAP basically gives you the opportunity to tell your side of the story.
3. Ask for your trust fund recovery penalty file under the Freedom of Information Act (FOIA). With this you will be able to verify the evidence the IRS has accumulated in order to assess you as a willful and responsible party for failure to pay Trust Fund Taxes. Be sure to ask for the main file not just your tax file. The main file will have the bank information and alledged evidence against you.
4. To prove doubt as to liability file IRS Form 656-L Offer In Compromise – Doubt as to Liability. Show that you did not have control or shared control particularly of the checkbook or payroll. The risk is that unless you have a solid case you will receive a judgment that will be good for 20 years instead of an assessment good for 10 years. Additionally if claiming this doubt exists you do not have to submit financial statements or pay the application fee.
5. To prove doubt as to collectibility according to Internal Revenue Manual Section 22.214.171.124.1. Basically if you are disabled or about to retire on Social Security and have little in terms of liquid assets you have a case. If you have the opportunity to get back on your feet or have reasonably substantial assets, you usually don’t.