Tag Archives: tax law

The Independent Contractor

All too often businesses wrongfully classify employees as Independent Contractors in an effort to save taxes.  The misclassification can be costly, as the IRS will seek 3 years of back taxes at 41.5% of the individual’s pay.  Thus, it is necessary to understand how the IRS distinguishes the two, with their simple (yeah, right) 11-part test (which used to be 20-part!).

Behavioral control

Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

    1. Instructions the business gives the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:
      1. When and where to do the work
      2. What tools or equipment to use
      3. What workers to hire or to assist with the work
      4. Where to purchase supplies and services
      5. What work must be performed by a specified individual
      6. What order or sequence to follow

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

2.  Training the business gives the worker. An employee may be trained to perform services in a particular        manner. Independent contractors ordinarily use their own methods.

Financial control

Facts that show whether the business has a right to control the business aspects of the worker’s job include:

  1. The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.
  2. The extent of the worker’s investment. An employee usually has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
  3. The extent to which the worker makes services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
  4. How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
  5. The extent to which the worker can realize a profit or loss. Since an employer usually provides employees a workplace, tools, materials, equipment, and supplies needed for the work, and generally pays the costs of doing business, employees do not have an opportunity to make a profit or loss. An independent contractor can make a profit or loss.

Type of relationship

Facts that show the parties’ type of relationship include:

  1. Written contracts describing the relationship the parties intended to create. This is probably the least important of the criteria, since what really matters is the nature of the underlying work relationship, not what the parties choose to call it. However, in close cases, the written contract can make a difference.
  2. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The power to grant benefits carries with it the power to take them away, which is a power generally exercised by employers over employees. A true independent contractor will finance his or her own benefits out of the overall profits of the enterprise.
  3. The permanency of the relationship. If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
  4. The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company’s regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

If you ever question whether an individual is an employee or independent contractor, seek professional advice.  Generally, you can also take the safe route and W-2 that individual.  This is an area of the law that the IRS has been cracking down on lately due to executive directives and fair labor proponents.  The penalties for running awry of this law are great, so it is certainly advisable to follow the law (when is it not?)!

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The IRS is coming!

It’s tax season, you’ve filed your taxes and owe the federal government a decent chunk of change without the means to pay in full the amount due.  What do you do?

There are a few different options to pay your tax bill:

1.  Offer in Compromise

In pursuing an Offer in Compromise, you offer an amount considerably less than the total amount due and request that the IRS accept that amount as full satisfaction of the tax debt owed.  You’ll want to show that you cannot pay the full amount due and their collection efforts will be relatively fruitless in order to have the greatest success in this measure.  This is often a common step taken to reduce the amount of debt owed.

2.  Installment Plan

The IRS often attempts to get their taxpayer into a payment plan that results in you paying the entire amount over a period of time.  This should probably be your last choice, as you won’t catch a break.

What if you don’t think you owe the full amount?

Contest the amount.  There are various ways to do this depending on the type of tax owed.  It is important to have a professional experienced in this field review your case in order to determine whether the IRS is wrong in their position.  Often times, a professional will be able to abate any penalties, reduce interest and potentially eliminate the principal.  You will surely want someone advocating for your side if contacted by the IRS so that you may even the playing field.

 

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Willful and Responsible – The IRS Test

When seeking to collect certain withholding taxes, the Internal Revenue Service will attach any individual who may be responsible, in any manner, for the collection and turning over of said tax.  This can be quite the wide net cast by an entity whose resources are effectively limitless and who does not have much incentive to back off of their collection attempts.  Because of this, it is important to know the test which the IRS will use to determine whether an individual is liable for the certain tax that is owed.

To start, the Internal Revenue Code, at section 6672, imposes the following duty:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Two conditions must be met before an individual can be held liable under this provision: (1) she must be responsible for the collection and payment of withholding taxes, and (2) she must willfully fail to collect and pay them over.  See Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976); Pacific National Ins. V. United States, 422 F.2d 29 (9th Cir. 1976).  The test of responsibility under section 6672 is a functional one, which focuses upon the degree of control and influence which the individual exercised over the financial affairs of the corporation and, more specifically, over the disbursement of funds.  See Taubman v. United States, 499 F.Supp. 1133 (E.D. Mich. 1978).  Liability attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government.  Scott v. United States, 354 F.2d 292, 296; see also Gefen v. United States, 400 F.2d 476, 482 (5th Cir. 1968), cert. den’d, 393 U.S. 1119, 89 S.Ct. 990, 22 L.Ed.2d 123.

The Court in Benoit v. Commissioner of Revenue specifically sets out indicia of responsibility as follows:

1)    ID of officers, directors & stockholders;

2)    Ability to sign checks on behalf of the corporation;

3)    ID of individual who hires and fires employees;

4)    ID of individual who was in control of financial affairs; and,

5)    Those with an entrepreneurial stake in the corporation.

Benoit v. Commissioner of Revenue, 453 N.W.2d 336, 344 (Minn. 1990).   Federal law treats the person with effective power to pay the tax as the “responsible person.”  Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983).  Courts read the term “responsible person” expansively.  O’Callaghan v. United States, 943 F.Supp. 320, 324 (S.D.N.Y. 1996).  An “employee with the power and authority…to direct the payment of taxes is a responsible person within the meaning of section 6672.”  Feist v. United States, 221 Ct.Cl. 531, 607 F.2d 954, 960 (1979).

In the responsible person analysis, the answer often pivots on whether the person had power to make tax payments in light of the enterprise’s financial organization and decision-making structure.  O’Connor v. United States, 956 F.2d 48, 51 (4th Cir.1992).  This is fact-intensive; in some instances, employees who perform clerical functions of collecting and paying taxes are not responsible persons.  Feist, 607 F.2d at 957, 960.

While that sums up the responsible person analysis, what of the willful person?  A number of courts have addressed the “willful” component of section 6627.  These courts have defined the term “willful” in this context to mean voluntary, conscious and intentional (as opposed to accidental) decisions not to remit funds properly withheld to the Government. Spivak v. United States, 370 F.2d 612, 615 (2d Cir. 1967), 499 F.2d 90, 94 (4th Cir. 1962); Hewitt v. United States, 377 F.2d 921, 924, 22 A.L.R.3d 1 (5th Cir. 1967); Flan v. United States, 326 F.2d 356, 358 (7th Cir. 1964); Bloom v. United States, 272 F.2d 215, 223 (9th Cir. 1959).  The Court in Kizzier v. United States stated that

“A responsible person acts willfully within the meaning of [section] 6672 if he acts in such a manner that he knows or intends that, as a consequence of his conduct, withheld employment taxes belonging to the government will not be paid over but will be used for other purposes.”

Kizzier v. United States, 598 F.2d 1128, 1132 (CA 8 1979).

Therefore, to be held liable for certain withholding taxes not withheld, the individual must both be responsible (i.e. be required to withhold and pay over certain taxes) as well as willful (i.e. intentionally carry out conduct that brings about a certain known consequence).  Failing to meet one of these criteria will alleviate an individual from the penalties imposed by the IRS concerning withholding.

Internal Revenue Service Circular 230 Disclosure: In compliance with IRS requirements, you are on notice that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

 

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