Contractor or Employee? How the Income Tax Obligations Differ

It’s a very important distinction, and one that can get you in hot water if you misclassify workers.

Full-time employees of companies often look at independent contractors with envy. They can generally work whatever hours they want. They can sit at a computer, make phone calls, and create products in their jammies if they’d like. They don’t have to make up an excuse to take a mental health day, and they can run errands at times when the stores aren’t as busy.

TaxPlan0315image1_zpsd68f951aIt is true that self-employed individuals have many freedoms not afforded to those who must show up at an office or warehouse or retail outlet at scheduled hours several times a week. But where income taxes are concerned, that envy goes the other direction. Besides not getting benefits like paid time off, health insurance, and retirement plans, independent contractors bear a much heavier load, as they must kick in the money that employers cover for their full-timers.

The differences in these two types of job status may seem obvious. But even major corporations who have teams of lawyers and compensation specialists and human resources professionals have been scrutinized – and in some cases, penalized – for misclassifying workers. Here’s what you need to know as an employer.TaxPlan0315image2_zpsef06b389

Contractors Contract

There’s a good reason why independent contractors are called contractors: they “contract” with companies to provide services. They work for an hourly or by-the-project rate that’s arrived at ahead of time by mutual agreement. There are numerous types of professions that count independent contractors among their ranks, including artists and writers, doctors and dentists, lawyers, accountants, and, well, contractors and subcontractors.

Contractors, according to the IRS, are part of a larger group called the “self-employed.” This larger classification can also include members of a partnership and individuals who are in business for themselves (including part-time businesses).

When you employ independent contractors, you owe them payment for services rendered. Nothing more. You do not contribute a penny to their income tax obligations. They are required to file an income tax return annually and submit estimated taxes quarterly. They must also pay the IRS self-employment tax (SE tax), which consists of the Social Security and Medicare taxes that are paid by the employer when one is an official employee.

Common-Law Employees

The Internal Revenue Service’s term for an individual who is an official employee of a company is common-law employee. The IRS has established a set of criteria to help employers determine the “degree of control and independence” that exists in the working relationship.

The factors to be considered are:

  • Behavioral. Can you, as an employer, control what the individual does and how he or she does it?
  • Financial. How is the worker paid? Are necessary expenses reimbursed? Do you supply the tools and supplies needed to carry out the prescribed tasks?
  • Type of Relationship. Is the individual entitled to benefits like health insurance, vacation pay, and/or a pension plan? Will your relationship be ongoing? Is the work that the individual will do a “key aspect of the business”?

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Figure 1: Need assistance determining whether an individual is an employee or an independent contractor? Let us help you communicate with the IRS.

That seems fairly cut and dried, but believe it or not, it’s sometimes difficult to make a clear distinction. Some factors may point to an employer-employee relationship, while others may signal that the individual is an independent contractor.

The IRS has a very complicated form that you can fill out to determine the status of an individual. If you feel that you need direction in this process, let us help you. Doing this incorrectly can lead to problems that you shouldn’t have to face.

New to QuickBooks Online? Take a Tour Around the Home Page

Switching from QuickBooks desktop or starting fresh with QuickBooks Online? Here’s a quick overview of its home page.

Whether or not you’ve ever used accounting software, we think you’ll like using QuickBooks Online. It was designed for small businesses who have little or no accounting experience, and its user interface and navigation should be familiar to anyone who’s been around websites.

We do have to say, though, that if you’ve never used any accounting applications, some upfront training with us might be in order. Once you get used to how your Excel-and-paper accounting system translates to the web, you should do fine. But you’ll save a lot of time and avoid frustration if you learn the basics before you start entering your own company data. It’s easier to explain how things work before you attempt them than to try to untangle a tangled-up company file.

That said, let’s look at what you’ll see on the home page when you first sign into QuickBooks Online.

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Figure 1: QuickBooks Online presents a good overview of your company’s finances on its home page.

QuickBooks Online’s home page was designed to give you a quick look at what’s happening with your company’s money. By checking it first thing every morning, you’ll know whether something needs attention immediately. If it does, you can use the links provided here to take care of business.

Using graphs and numbers, the home page gives you the bottom line on your income, expenses, and profit and loss. You can click on practically anything here to see the detail behind the totals – and to do something about it if necessary.

The left vertical pane contains your main navigational toolbar. Click on any link here, and you’ll either go straight to that section – like Customers and Reports – or you’ll get to choose from a number of sub-pages (Taxes | Sales Tax or Payroll Tax, for example). Clicking on Home always takes you back to the home page.

In the upper right corner, you’ll find the Help icon, which gives you access to QuickBooks Online’s searchable help files. If you’re a new user and we haven’t done any training with you, you’re likely to find that these brief explanations don’t answer all of your questions or don’t answer them thoroughly enough. Let us help when that occurs.

Your company’s name appears to the left of Help. When you click on it, you’ll see this:

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Figure 2: Clicking on your business name in the upper right corner of QuickBooks Online opens a window containing numerous utilities and lists.

It’s a good idea to explore these options early in your QuickBooks Online life:

In Company Settings, you can make your preferences known about many aspects of the site. For example, you can establish the payment terms that will appear automatically on sales forms, and turn fields like Shipping and Discount on or off. You can set up an account with QuickBooks Payments so your company can accept credit cards, and you can choose whether or not to use Classes to categorize transactions (we can work with you on these in training).

Another important item here is Manage Users, which lets you set limits on what other staff can and can’t do in QuickBooks Online.

Directly below the two links in the upper right corner of the home page is a list of your bank accounts and their balances. Since QuickBooks Online can be connected to your online financial accounts, you may see two numbers here: your bank balance according to the bank and to QuickBooks Online.

The most recent Activities will be displayed below your account balances. You’ll see a list of all actions that have been taken by anyone with access to the site, like invoices created and/or sent, and bills paid.

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Figure 3: The Activities section of QuickBooks Online’s right vertical pane displays all actions take recently by you and your staff.

Finally, QuickBooks Online includes a handy navigational tool at the top of the screen that contains three icons. The magnifying glass gives you access to the site’s search tool. Clicking on the + sign opens shortcuts to transaction screens and other commonly-used features. And the third icon displays the most recent transactions processed.

That’s it. Your accounting workflow will make use of the countless other pages within the site, but QuickBooks Online’s home page does a good job of showing you the lay of the land.

IRS impersonation scams prey on taxpayers

The FTC’s Bureau of Consumer Protection is advising consumers about a tax scam that has resulted in an “explosion of complaints about callers who claim to be IRS agents – but are not.” These IRS impersonation scams count on people’s lack of knowledge about how the IRS contacts taxpayers. The IRS never calls a taxpayer about unpaid taxes or penalties; the initial contact is made by a mailed letter. If you get a call purporting to be from the IRS telling you to send money for unpaid taxes, hang up and report the scam to the FTC and the Treasury Inspector General for Tax Administration at www.tigta.gov.

 

QuickBooks Online Goes on the Road

If you do business outside of your office walls, you need remote access to QuickBooks Online. You can have it.

One of QuickBooks Online’s most compelling benefits is its portability. While its desktop counterparts remain chained to your desktop PC or notebook (with limited remote capabilities), many of the features found in browser-based QuickBooks Online can be easily accessed via iOS and Android smartphone and tablet apps.

These apps don’t look and work exactly like QuickBooks Online, and they don’t do absolutely everything you can do in the browser-based versions, but the most common accounting tasks you’d want to do away from the office are supported.

These mobile apps give you and your staff the freedom to manage numerous accounting tasks away from the office, whether you’re at home, a customer’s location, a conference or convention, or any event where you can sell products or services. You can, for example:

  • Enter expense data

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Figure 1: You can either snap a photo of a paper receipt or enter expense information manually on your smartphone or tablet.

  • Build new records for customers and vendors
  • Create invoices and estimates
  • Receive payments, and
  • Issue sales receipts

You can do all of that on a smartphone. The iPad version offers more, including reports and account registers.

Easy Operations

QuickBooks Online mobile apps take advantage of the capabilities of whatever device you’re using, so it’ll be easy to jump in and start using them by clicking on links or buttons, entering data or choosing from lists, and returning to previous screens when necessary. Their user interfaces and navigational tools are very similar.

Once you’ve downloaded and installed the free app, you’ll simply sign in using your QuickBooks Online user name and password. Your accounting files are then automatically synchronized with the mobile app, after which you can open the navigational menu, which appears in the left vertical pane.

The apps are arranged slightly differently, but they’re roughly comparable, the iPad version offering the most options, of course. They all have a link to an Activity screen, which is an audit trail of sorts. It displays transactions entered in QuickBooks Online on all devices.

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Figure 2: You can view transactions already entered in QuickBooks Online and create your own on your mobile device.

Simple Forms

Say you’re working from home and you need to create a customer invoice. You’d click on that menu item, then on the “+” sign and fill out the form similarly to how you would back in the office. You’ll have access to your existing customer list and your database of products and services, or you can add your own. So you’d:

  • Select your customer from the list that opens
  • Change the dates, terms, sales tax status, discount and deposit if necessary
  • Choose products and/or services from the list and modify the quantity if necessary
  • Add a note or customer message if desired, and
  • Save the invoice.

All data that you enter, modify or delete is periodically synchronized; you can also refresh it manually.

QuickBooks Online’s sales forms – invoices, estimates and sales receipts — all work similarly. You can record payments in the mobile apps, as well as expenses you incur outside of the office.

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Figure 3: If you sell products or services outside of the office, you can create sales receipts and offer to email copies to customers.

Of course, if you’ll be selling away from the office using one of QuickBooks Online’s mobile apps, you’ll want to be able to accept credit and debit cards. We can help you get set up with a merchant account that will allow you to do that. Remote payments are sent to QuickBooks Online, so your bookkeeping tasks will be greatly simplified.

If you use any kind of mobile device, there’s really no reason not to use a QuickBooks Online mobile app – unless you absolutely never work away from the office, never meet with customers at their sites, and never sell anything remotely. If you do any of those things ever, you’ll find that their convenience and flexibility can help you save time, manage your workflow better, and increase sales.

For more information or assistance, contact Brenda J. McGivern, P.C. at 866-895-1614 or visit http://www.bmcgiverncpa.com

Consider a buy-sell agreement for your business

Marriages end, and so do business ventures. If your business is owned by two or more persons, a buy-sell agreement is one of the most important legal documents your business can have. This document provides for the “buyout” of an owner’s interest when that owner leaves. Here are the areas that a buy-sell agreement should typically address.

  • Describe the events that will trigger the agreement, such as a divorce, disability, death, or notice that an owner simply wants to leave.
  • Set a value for each owner’s interest, or provide a formula to value each interest at a later date. Your agreement might require an independent business appraisal.
  • Without a method to set the value, there could be some serious problems. Let’s say you and your partner reach a point where you can no longer work together. You believe the company is worth $2 million. Your partner refuses to sell, but he makes you a $100,000, take-it or leave-it offer for your 50% interest. You could face a drawn-out legal battle to settle things.
  • Outline a funding plan. Different purchase and financing plans can be used to cover different situations. For example, cross-purchase agreements allow the remaining owners to buy an exiting owner’s share. A redemption agreement allows the company to buy back an exiting owner’s share. Financing options might include owner financing (an installment contract) or life insurance, in the case of an owner’s death.
  • Prevent unwanted transfers. Generally owners don’t want a business associate they didn’t choose. Yet this could happen if one owner divorces, dies, or sells his shares to an outsider.

A buy-sell agreement is designed to provide fair compensation to an exiting owner, while making it possible for the remaining partners to continue in business. We can work with you and your attorney to develop a buy-sell agreement or to review your existing agreement. Call us.

Your social security benefits may be taxable

Did you sign up for social security benefits last year? If so, you may have questions about how those payments are taxed on your federal income tax return.

The good news is the formula is the same as prior years. That’s also the bad news, because the thresholds for determining taxability are not indexed for inflation, and did not change either. Those thresholds, or “base amounts,” remain at $32,000 when you’re married and file a joint return, and $25,000 when you’re single.

How much of your social security benefit is taxable? To determine the answer, calculate your “provisional income.” That’s your adjusted gross income plus tax-exempt interest, certain other exclusions, and one-half of the social security benefits you received.

When you’re married filing jointly, your benefits are 50% taxable if your provisional income is between $32,000 and $44,000. If your provisional income is more than $44,000, up to 85% of your benefits may be taxable. For singles, the 50% taxability range is $25,000 to $34,000.

In some cases, diversifying the types of other retirement income you receive can reduce the tax burden on your social security benefits. Contact us if you want more information or planning assistance.