Tag Archive for Employment Tax
June 4, 2012 John R. Dundon II Appeals & Audit Resolution, Audit Reconsideration, Business Expense, Employee Business Expense, Employment Tax, FICA, Payroll Tax Problems, Self Employ, Small Business, Sub-chapter S, Tax Guidance & Preparation, United States Treasury 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.
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 5.7.5.3.1. 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.
The VOW to Hire Heroes Act of 2011, provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations. IRS Notice 2012-13, posted today on IRS.gov, and the instructions for IRS Form 8850 provide details in support of the following…
According to the IRS the credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors including:
* the length of the veteran’s unemployment before hire,
* the hours a veteran works and
* the amount of first-year wages paid.
Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.
Normally, an eligible employer must file IRS Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But according to the new IRS guidance, employers have a little more time with definitive expiration.
In an effort to streamline the certification requirements, the IRS will allow the use of electronic signatures and fax when gathering the IRS Form 8850 for transmission with state work force agencies willing to work in this fashion.
Businesses claim the credit on their income tax return. The credit is first figured on IRS Form 5884 and then becomes a part of the general business credit claimed on IRS Form 3800.
This credit is also available to certain tax-exempt organizations by filing IRS Form 5884-C. The guidance released today also provides instructions and a new set of forms for tax-exempt organizations to claim the credit.
Employment taxes withheld by your employer are considered ‘trust fund’ taxes. I’m not entirely sure of its origin but I think the term trust fund tax is used because the US Treasury considers employment taxes withheld from your paycheck the US federal government’s money and the US Treasury is ‘trusting’ your employer to not only withhold the appropriate amount of employment taxes from your paycheck but to also promptly turn over this withheld money to the US Treasury. For example if you are paid on Friday and your employer withholds employment taxes from your pay check the employer MUST turn those withheld proceeds over to the US Treasury by the following Wednesday. If this does not happen the employer is considered guilty of theft of federal property and if the delinquency persists your employer’s ‘responsible party’ can indeed serve prison time. It is a serious offense.
Additionally your employer matches the amount of money withheld from your paycheck for employment taxes and this amount is considered the employer’s share of the total employment tax liability. The employer’s matching portion is a tax on the employer and not withheld or collected from someone else for payment to the government according to Internal Revenue Code 6671 and 6672 and as such can indeed be discharged in bankruptcy or by demonstrating insolvency.
If you are an employer and you become delinquent with your employment tax liability short of declaring bankruptcy or demonstrating insolvency another way to resolve the delinquency is to enter into an installment agreement with the IRS. Payments made to the IRS as part of an Installment Agreement however are not considered ‘voluntary’ and as such you cannot usually designate how the payments are applied as sited in the Internal Revenue Manual. Installment agreement payments are applied in the best interest of the US Treasury which generally means that your payments are applied to the oldest liability first and to interest and penalties first, before being applied to your actual tax liability.
Protective refund claims are filed to preserve a taxpayer’s right to claim a refund when the taxpayer’s right to the refund is contingent on future events like future litigation, and may not be determinable until after the statute of limitations expires. Without a protective refund claim, taxpayers will only have a three-year statute of limitations in which to seek a refund.
For example as I’ll describe below a taxpayer who paid FICA tax in 2009 on severance pay will only be eligible to receive a refund of these payments until April 15, 2013, unless the taxpayer files a protective refund claim.
A protective claim can be either a formal claim or an amended return (1040X, 1120X, etc.) for credit or refund. A protective claim does not have to state a particular dollar amount or demand an immediate refund. However, to be valid, a protective claim must:
• Be in writing and be signed;
• Include the taxpayer’s name, address, social security number or
individual taxpayer identification number, and other contact
information;
• Identify and describe the contingencies affecting the claim;
• Clearly alert the IRS to the essential nature of the claim; and
• Identify the specific year(s) for which a refund is sought.
Generally, the IRS will delay action on the protective claim until
the contingency is resolved. Once the contingency is resolved, the IRS may obtain additional information necessary to process the claim and then either allow or disallow the claim.
Taxpayers can mail a protective claim for refund to the address listed in the instructions for Form 1040X, under Where To File.
Here is an example of when a protective refund claim is in order. In February 2010, a federal district court in U.S. v. Quality
Stores, Inc., (DC MI 2/23/2010) 105 AFTR 2d 2010-1110, ruled
that severance payments made to terminated employees by a company going out of business were not “wages” subject to FICA. The Court said that “…where severance payments are intended to serve the same purpose as social security benefits, i.e., support for workers in lieu of a lost ability to earn wages, the collection of social benefit taxes on the wage-replacement benefits makes
little sense.” The Court believed that the severance payments were in effect supplemental unemployment compensation benefits, not taxable remuneration for the employees’ services or wages and reasoned that the severance payments were not subject to taxation for FICA purposes.
The IRS has indicated it will appeal the decision, and will continue to deny claims for a refund of FICA tax paid on severance payments. The IRS continues to rely on CSX Corp. v. U.S., (Ct of Fed Cl 4/1/02) 89 AFTR 2d 2002-1935, that severance payments are “wages” for FICA tax purposes, there is no statutory
exception to exclude them from taxation, and they are not “supplemental unemployment benefits” because they are not conditioned on eligibility for, or receipt of, state unemployment benefits.
Taxpayers should file protective claims to preserve their right to
receive a refund if Quality Stores is upheld on appeal on the off chance that we experience clarity as to whether severance packages are subject to FICA tax.
As I have blogged before a Personal Service Corporation can indeed elect Sub Chapter ‘S’ corporate status and be treated as a disregarded entity for income tax purposes. This requires the filing of IRS form 1120-S, not IRS form 1120. However if you are successfully (ie profitably) operating a personal service corporation structured as a Sub Chapter ‘S’ entity you should take some salary and pay employment taxes on that salary particularly if the entity is demonstrating regularity and consistency in generating profits. Employment taxes are reported quarterly on IRS form 941 AND annually on IRS form 940. Determining your appropriate salary is critical. If the salary is too low or non existent, the IRS fines you with payroll tax penalties. If the salary is too high, you cheat yourself of tax savings.
Generally speaking the best way I believe to determine salary is to rely on external sources of information such as the Management of an Accounting Practice (MAP) survey conducted by the American Institute of Certified Public Accountants. This survey shows comparative employment costs for a wide assortment of jobs and serves as a great stepping off point for making a salary determination. From there you can adjust the salary number based on you own individual circumstances.
Industry compensation surveys etc aside, I’ve been successful to date demonstrating in audit AND appeal that the shareholder/employee of a Sub Chapter ‘S’ Personal Service Corporation should only be held accountable for employment tax on wages to the extent that those wages not exceed 1/2 of the entity’s profit for the tax year in question. I’m usually having to defend the taxpayer’s previously declared 0% of profitability as employment tax liability and the IRS is usually assessing 100% of profitability as employment tax liability by the time the file gets to my desk.
So my generic advice is that if you are making money on a regular and consistent basis, declare yourself an employee and pay yourself a wage, file the IRS form 941 and use this expense as a deduction against revenue. Otherwise you really are running the risk of an employment tax audit. If the IRS tries to declare that 100% of your Personal Service Corporation’s (PSC) profit is subject to employment tax simply because the entity is structured as a Sub Chapter ‘S’ corporation then you should probably retain the services of a professional to represent you in resolving the matter. Representing yourself in these circumstances can be daunting and crushing.
According to the IRS millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid.
Unbelievably this reduced Social Security withholding will have no effect on the employee’s future Social Security benefits. The new law also maintains the income-tax rates that have been in effect in recent years.
Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than Jan. 31, 2011.
Notice 1036, contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes.
For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2011.
I recommend reviewing all workers w4 and 1099s annually. Check out:
Revenue Procedure In Rev. Proc. 2009-51, IRS sets forth procedures for employers to opt in to filing Form 944 (Employer’s Annual Federal Tax Return) and for employers previously notified to file Form 944 to opt out and file Forms 941 (Employer’s Quarterly Federal Tax Return) instead.
Beginning with wages paid in 2009, final regulations require “disregarded entities” to pay their own employment taxes and file their own tax reports. A new employer identification number (EIN) will be needed if the disregarded entity does not have one.
Under the disregarded entity rules, certain single-owner eligible entities and QSubs are disregarded as entities separate from their owners for tax purposes. As a result, the disregarded entity is ignored and its property and activities are treated as those of the owner of the entity.
Under the now obsolete Notice 99-6, employment tax obligations for employees of a disregarded entity may be satisfied in one of two ways: (1) payment by the owner of the entity under the owner’s name and tax ID number, or (2) separate calculation and payment by the disregarded entity under its own name and tax ID number.
The IRS issued final regulations providing that for wages paid on or after January 1, 2009, a disregarded entity is treated as a separate entity for purposes of employment taxes and related reporting requirements and is treated as a corporation for purposes of employment taxes and related reporting requirements.
IRS Form 8919, Uncollected Social Security and Medicare Tax on Wages, may be used if you were an employee and your employer did not withhold your share these taxes and you meet certain criteria. These taxes will then be credited to you social security records.
Generally, a worker who received a Form 1099 for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit using Schedule SE. However, if the worker was actually an employee, rather than an independent contractor, the worker is not required to pay the full self-employment tax, and expenses can only be deducted as an itemized deduction.
To be eligible to use Form 8919 you must meet one of several criteria indicating that you were an employee while performing these services. The criteria include:
You filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating that you are an employee of the firm.
You have been designated as a “section 530 employee” by your employer or by the IRS prior to January 1, 1997.
You have received other correspondence from the IRS that states you are an employee. Or you were previously treated as an employee by the firm and you are performing services in a similar capacity and under similar direction and control.
Your co-workers are performing similar services under similar direction and control and are treated as employees.
Your co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.
You have filed Form SS-8 with the IRS and have not yet received a reply.
