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Module 13 Employee vs Independent Contractor. Employee (E’e) vs Independent Contractor (IC) Key Learning Objectives n n Income and payroll taxes withholding.

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Presentation on theme: "Module 13 Employee vs Independent Contractor. Employee (E’e) vs Independent Contractor (IC) Key Learning Objectives n n Income and payroll taxes withholding."— Presentation transcript:

1 Module 13 Employee vs Independent Contractor

2 Employee (E’e) vs Independent Contractor (IC) Key Learning Objectives n n Income and payroll taxes withholding n n Coverage under certain federal laws n n Fringe benefits

3 Employees Only--Income & Payroll Tax Withholding n n Income tax withholding n n Social Security and Medicare taxes n n Federal unemployment taxes

4 Employees Only Protected By Some Laws n n Minimum working condition standards n n Minimum wages and overtime pay n n The right to collective bargaining n n Pension benefits n n Civil Rights Act of 1964 n n Age Discrimination in Employment Act

5 Employees Only Entitled to Fringe Benefits n n Fringe benefits u Group medical insurance coverage u Group life insurance coverage u Participation in an employer's cafeteria plan u Payment for sick and vacation days

6 Employees and Wages Key Learning Objectives n n Determining who are employees n n Determining which wages are subject to u Withholding of income taxes u Social Security and Medicare taxes

7 TaxPoint: Workers Reclassified on Audit n Between 1988 and 1995 u IRS completed 12,896 payroll audits u $830 million in recommended tax assessments u 527,000 workers reclassified to E’e status

8 Worker Employee If n n Person paying for services u Has right to control u Has right to direct details and means by which the result is accomplished u Does not have to actually direct or control ; just have the right to do so

9 Worker Employee If n n Person being paid is subject to the will and control of the payer as to u What work has to be done u How the work must be done

10 Withholding & Employment Taxes n Applied to includable wages u Current compensation u Non-excluded fringe benefits u Compensation related interest free loans

11 Current Compensation Cash and FMV of property Tips, bonuses, and most awards Sick /Severance pay Personal use of property e.g. autos Personal expenses paid for self or family Moving expenses paid by E'r if not "Qualified" Unemployment benefits Non-excluded fringe benefits

12 Excluded Fringe Benefits (Some require non-discrimination) 1st $50,000 of group term life insurance Accident/health insurance premiums Reimbursement/medical care Reimbursement/qualified moving expenses Reimbursement/accountable plan for business expenses Qualified employee discounts

13 Excluded Fringe Benefits (Some require non-discrimination) No additional cost services Working condition fringes DeMinimus fringes Qualified transportation f ringe Meals/lodging for Employer’s convenience On-premises athletic facilities Reduced tuition for education Otherwise excluded selected through cafeteria plan

14 Compensation Related Interest Free Loans n n Interest income/expense must be imputed n n Imputed amount is subject to withholding u u Income taxes u u Employment taxes

15 Tax Obligations of an Employer Key Learning Objectives n n Income tax withholding n n Social Security and Medicare taxes n n Federal Unemployment Taxes (FUTA)

16 Income Tax Withholding n E’r required to u withhold federal/state individual income tax from wages u deposits money on required due dates u may be required to file electronically u file quarterly Form 941 u file annual W2 n E’e files Form W4 to establish withholding amount

17 Employment taxes ) Social Security and Medicare ( Employment taxes ) n E’r and E’e pay equal shares u E’e share is withheld from pay u `E’r deposits both halves on required due dates F may be required to file electronically n 2000 rates for each u 6.20% on first $76,200 of included wages u 1.45% on each included dollar

18 Federal Unemployment Taxes n n Provides payments to workers who have lost their jobs n n Employee does not include u An insurance salesperson OR u An individual who works at home n Special rules for some classes of employees

19 Federal Unemployment Taxes n E’r only required to pay to state and federal n Base = $7,000 of wages per employee n Rate = 6.2% of base u Reduced by credit for up to 5.4% of state unemployment tax paid n E’r deposits money on required due dates u E’r may be required to file electronically n E’r files annual Form 940 or 940EZ

20 Compliance Query: Calculation of Payroll Taxes n Chris receives the following from employer u Cash salary $100,000 u Heath insurance premiums $5,000 u E’r contributions to qualified retirement plan $10,000 n What is FICA/Medicare liability for u Chris? u Chris’s employer? n Use 2000 amounts

21 ,348.80 Solution--Compliance Query: Total Cost = $12,348.80 n Exclude from wage base u Heath care premiums paid by E’r u E’r contributions to qualified retirement plans n Wages subject to payroll taxes = $100,000 n Maximum FICA base for 2000 is $76,200 n FICA = $ 76,200 *.062 = $4,724.40 n Medicare = $100,000 *.0145 = $1,450.00 n Chris & E’r pay same amount $6,174.40

22 Tax Consequences for Independent Contractor Key Learning Objectives n n Payroll taxes (self-employment taxes) n n Schedule C n n Estimated tax payments

23 Self-Employment Taxes (Payroll Taxes) n Wage base is all earnings net of allowable deductions n Wage base is reduced to 92.35% n 12.4 % OASDI (FICA equivalent) u $76,200 maximum base in 2000 n 2.9% Medicare u No maximum ceiling

24 Compliance Query: Payroll Taxes for Independent Contractor n Chris, an independent contractor, receives $123,000 for services rendered n Chris pays the following from the $123,000 u Allowable business expenses $8,000 u Heath insurance premiums $5,000 u Contributions to qualified retirement plan $10,000 n What is Chris’ SE tax liability for 2000?

25 12,528.69 Solution--Compliance Query: Total cost = $12,528.69 n Only allowable business expenses excluded n Wages subject to payroll taxes = $106,203 u (123,000-8,000) x.9235 n OASDI (FICA) = $ 76,200 x.124 = $9,448.80 n Medicare = $106,203 x.029 = $3,079.89 n Additional deductions FOR AGI u 60% (2000) of medical premiums F (No E’r coverage) u Qualified pension plan contributions u 1/2 SE TAX

26 Tax Planning Query: Become An Independent Contractor? n Andy would like to quit her job and be her own woman n Andy currently works 2,000 hours a year for u Cash salary $100,000 u Heath insurance premiums $5,000 u E’r contributions to qualified retirement plan $10,000 n Andy feels that she could charge $65 per hour and would be able to bill 2,000 hours n If she quits, will she be in a better or worse financial position?

27 Tax Planning Query: Become an Independent Contractor? (con’t) n Assumptions: u Andy is single & does not itemize u 2000 tax year F single standard deduction = $4,400 F 1 exemption = $28700 u Medical premiums remain the same u No additional costs of doing business as independent contractor

28 Become An Independent Contractor? (con’t) n Step One u Calculate the income tax due if an employee Gross income $100,000 Deductions for AGI 0 AGI $100,000 Deductions from AGI 7,200 (2,800 +4,400) Taxable Income $ 92,800 Income Tax $23,449

29 Become An Independent Contractor? (con’t) n Step Two u Calculate the payroll taxes paid if an employee FICA Taxes $76,200 x.062 $4,724 Medicare $100,000 x.0145 1,450 n Step Three: u Calculate net cash from being an employee u $70,377 = 100,000 - 23,449 - 4,724 -1,450

30 Become An Independent Contractor ?? (con’t) n Step Four: u Calculate gross income from being SE u $65 per hour x 2,000 hours = $130,000

31 Become An Independent Contractor? (con’t) n Step Five: u Calculate the payroll taxes paid if an employee u SE wage base is reduced to 92.35% u FICA equivalent increased to 12.4% on $76,200 u Medicare increased to 2.9% n FICA Taxes $76,200 x.124 = $9,449 n Medicare $130,000 x.9235 x.029 = 3,482 $12,931

32 Become An Independent Contractor ?? (con’t) n Step Six: u Calculate the income taxes due if self employed u 60% of medical deductible for AGI in 2000 u 50% of total SE taxes deductible for AGI u Retirement contribution deductible for AGI

33 Become An Independent Contractor? (con’t) Gross income $130,000 Deductions for AGI Retirement 10,000 60% Medical 3,000 50% SE Tax $12,931 6,466 AGI $110,534 Deductions from AGI 7,200 (2,800 +4,400) Taxable Income $ 103,334 Income Tax $26,715

34 Become An Independent Contractor? (con’t) n Step Seven: u Calculate net cash from being self-employed u $75,354 = 130,000 - $12,931 - 15,000 (medical and retirement) u $75,354 = 130,000 - $26,715- $12,931 - 15,000 (medical and retirement) n Step Eight: u Compare with net cash from being employee $75,354 - $70,377 = $4,977

35 Become An Independent Contractor? (con’t) n Andy will make about $2.48 more an hour as a self-employed person.

36 §530 Relief Key Learning Objectives n n Requirements for obtaining §530 relief n n Benefits of obtaining §530 relief

37 §530 Relief Available If Taxpayer n n Has never treated individual as an employee n n Files all required Federal tax returns on a basis consistent with individual as a nonemployee, AND n n Has a reasonable basis for not treating the individual as an employee n n §530 relief NOT available for skilled workers hired through technical service firms.

38 §530 Relief--Extends to E’r Only n n Relief applies to E’r liability to withhold u Income tax u Social Security tax n n Relief applies to E’r liability to pay u Social Security tax u Unemployment tax n n Interest or penalties automatically forgiven n n E’e remains liable for taxes

39 TaxPoint: Classification Settlement Program (CSP) & New Training Programs for IRS n CSP designed to allow taxpayers to resolve worker classification issues u Taxpayer can pay part of back taxes and agree to proper treatment in future n Retraining stresses that qualifying taxpayers should be informed that §530 relief may apply

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