Are You An Independent Contractor Or An Employee?

I am asked this very often, if it is better to be an independent contractor or an employee. My answer like all accountants is always, "It Depends!". On the other hand, for a small business owner (SBO), the question mostly is, how to determine the business relationship that exists between the person providing the services & the SBO; and if that relationship is that of an independent contractor or an employee. 

So how is that determination made? 

Common Law Rules fall into 3 categories: Behavioral; Financial; & the Type of Relationship. Does the company have the right to control what the worker does & how he does it?; Are the business aspects of the worker's job controlled by the payer?; Are there written contracts or employee type benefits? 

• The general rule of thumb is that one is an independent contractor if the payer (of the fees) has the right to control or direct only the result of the work and not what will be done and how it will be done. 
• Hence you are not an independent contractor if you perform services that can be controlled by an employer (what will be done & how it will be done). You may have freedom of action but the employer has the legal right to the details of how the services will be performed. 

An independent contractor is considered self-employed and employee is not. 

One must look at all of the above points to determine whether a worker is an

independent contractor or not. There is no set formula to determine a worker one way or the other. The matter has to be decided after careful evaluation of the entire relationship, considering the extent of the right to control and direct. And these factors have to documented. 

If the business or the worker cannot make that determination on their own, Form SS-8 can be filed with the Internal Revenue Service, they will review the facts and make a determination for you. It may take at least 6 months for the IRS to make that determination. 

Once this relationship is established and the determination made, the appropriate forms and associated taxes have to be filed: 

• For Independent Contractors: Forms W-9 and Form 1099-MISC. The W-9 is given to the worker to complete. This is needed to obtain the correct name & the Taxpayer Identification Number which can be a SSN or EIN. The 1099-MISC has to be issued if a business paid any contractor more than $600 in a year. You may qualify for an exception to filing Form 1099-MISC. From that point, an independent contractor is responsible for filing his own taxes.

• For Employees: Withholding the correct federal & state taxes, FICA and medicare & any other benefits provided and depositing them on time is a big responsibility for employers. This has to be done in collaboration with professionals in that area. 

In spite of taking all the  above steps, if one thinks they have been /or have misclassified a worker, there is recourse for that. This can be done by filing Form 8919 and attaching it to the tax return, Form 1040. 

The IRS has also announced the Voluntary Classification Settlement Program via their Announcement 2012-45 . For more information on this program, you could visit the IRS Website here. 

P.S: Also, I am happy to announce that I was recently included on the Top Accountants on Twitter along with several leaders in the accounting community. You can view the list here or by clicking on the nice badge to the right. Thanks! 

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Please read my disclaimer here. Please consult a tax professional for your unique situation. 
For any questions regarding this or other tax matters, please contact me via Email: manasa@mntaxsolutionsllc.com.

ACA For Small Business Owners: What To Do Before October 1st, 2013?

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 The New Health Insurance Marketplace opens October 1st, 2013. This "Marketplace" is a website or a one-stop shopping place per the Dept of Labor, where you can go to find health coverage if you don't have coverage presently or you want to look for better options. 

An online application kick starts the process and you can see all the available plans in your area from which you can pick & choose. Open enrollment for coverage through this marketplace begins October 1st, 2013 for the year 2014. 

As business owners, we need to understand how this will affect us. There are so many misconceptions out there, laws have been revised so many times, keeping track of it all has been like hugging jello! This is the latest revised version. 

The Department of Labor (DOL) issued a Technical Release # 2013-02 in May, 2013 providing guidance on the notices to be issued to employees of available coverage options. According to the guidance, employers to whom the FSLA* applies,  

• are required to provide a notice to each new employee at the time of hiring beginning October 1, 2013. 
• With respect to employees who are current employees before October 1, 2013,

  

  Pic Courtesy: dol.gov

  employers are required to provide the notice not later than October 1, 2013. 
• The notice is required to be provided automatically, free of charge.
• The notice must be provided in writing in a manner calculated to be understood by the average employee. 
• It may be provided by first-class mail. 
• Alternatively, it may be provided electronically if the requirements of the DOL’s electronic disclosure safe harbor at 29 CFR 2520.104b-1(c) are met.
• For 2014, the DOL will consider a notice to be provided at the time of hiring if the notice is provided within 14 days of an employee's start date. 

The notice should inform employees: 

• About the Health Insurance Marketplace;
• Coverage (if any) offered by the employer and that the employees may purchase lower cost insurance in the marketplace
• If the employees buy insurance through this marketplace, they may lose the employer contribution (if any) to their health benefits

The U. S. Department of Labor has model notices to be sent out by employers who:

• Offer a health plan to some or all employees
• Do not offer a health plan

The latest release by the DOL clarifies that an employer cannot be fined for failing to provide employees with notices about the Affordable Care Act's new Health Insurance Marketplace.


*The FSLA, short for Fair Labor Standards Act, Section 18B is applicable to an employer if they pass the test of not less than $500,000 in annual dollar volume of business. If you are in doubt, you can use this tool to check if you have to comply.

Bibliography:

1. U.S. Department of Labor Technical Release 2013-02
2. sba.gov: Health Care Pulse
3. healthcare.gov: Marketplace
4. Compliance Assistance Tool

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Please read my disclaimer here. Please consult a tax professional for your unique situation. 
For any questions regarding this or other tax matters, please contact me via Email: manasa@mntaxsolutionsllc.com. 



  

Foreign Earned Income Exclusion Made Simple

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Today's workplace is global and the average worker has to be mobile to be successful. This means he should even be ready to pack his rucksack & move to any part of the world his work takes him. Many upwardly mobile US Citizens now do not hesitate to do just that. 

Wait a minute! The IRS wants to help? Yes! Yes! It does! There is a foreign earned income exclusion that a US Citizen or Permanent Resident can avail of if (of course) certain conditions apply. Let's back up however, what is Earned Income & what is Foreign Earned Income? 

Earned Income is pay for personal services performed. These can be in the form of salaries, wages, commissions, tips, bonuses or professional fees. Business profits, royalties and rents may also fall under this category. 

Foreign Earned Income is the above income earned for services performed in a foreign country during a period one's tax home is in such foreign country and during which one must meet either the bonafide residence test or the physical presence test. 

One must meet the Bona fide Residence Test OR the Physical Presence Test and fulfill the following requirements:  

Pic Courtesy: money.cnn.com

• A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
• A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

If one fulfills the above requirements, the maximum foreign earned income exclusion for 2013 is $97,600 ($95,100 for 2012; $92,900 for 2011). 

How This Works 

• An Individual’s Tax = (Total Income - Any Foreign Earned Income) X Determined Tax Rate

  

  Pic Courtesy: Google Images

• The Tax Rate is determined by including the amount(s) excluded, and the tax that would be imposed as if his or her taxable income were equal to the excluded amount(s). 
• For this purpose, the excluded amount(s) will be reduced by the aggregate amount of any deductions or other exclusions otherwise disallowed.
• In many cases this will have the effect of increasing an individual’s U.S. federal income tax to an amount greater than it would have been under prior law. 
• Form 2555 or Form 2555-EZ are the forms used to claim this exclusion. The form is then attached to Form 1040. 

Bibliography: 

• Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad
• Internal Revenue Code (IRC) section 911
• www.irs.gov-Foreign Earned Income Exclusion

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Please read my disclaimer here. For any questions regarding this or other tax matters, please contact me via Email: manasa@mntaxsolutionsllc.com.