Archive for Payroll Tax Problems
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.
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.
It has been truly amazing to see so many failed payroll service providers all around the United States screw over small business owners by collecting tax revenue from business owners to be passed on to federal and state governments and then fail to turn the money over to the governments before closing up shop and leaving the small business owner liable for payroll taxes to the government already paid once to the payroll service provider.
Usually several weeks or even months pass by without the small business owner recognizing the magnitude of such an event. This is a federal offense bringing with it HUGE PENALTIES and even incarceration. These nefarious payroll organizations bring a bad name to legitimate payroll service providers meaning that background checks should be carefully conducted on any entity engaged.
Many small business owners usually don’t realize that as an Officer of their entity (usually the sole Officer) they (up until recently) were the only people personally “responsible” for the fraudulent failure to submit payroll taxes of their contractually engaged payroll services providers.
The memorandum expands the scope of “responsible persons” under Code §6672 to include third-party payers, such as payroll service providers (PSPs) and professional employer organizations (PEOs) and complies with the recommendations made by the IRS National Taxpayer Advocate. This memorandum is an attempt to protect businesses from PSPs and PEOs that have to pay the IRS withheld payroll taxes.