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Module 13 Employee vs Independent Contractor

Module 13 Employee vs Independent Contractor. Employee (E’e) vs Independent Contractor (IC). Key Learning Objectives Income and payroll taxes withholding Coverage under certain federal laws Fringe benefits. Employees Only--Income & Payroll Tax Withholding. Income tax withholding

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Module 13 Employee vs Independent Contractor

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  1. Module 13Employee vsIndependent Contractor

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

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

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

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

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

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

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

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

  10. Withholding & Employment Taxes • Applied to includable wages • Current compensation • Non-excluded fringe benefits • 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 fringe • 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 • Interest income/expense must be imputed • Imputed amount is subject to withholding • Income taxes • Employment taxes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  32. Become An Independent Contractor ?? (con’t) • Step Six: • Calculate the income taxes due if self employed • 60% of medical deductible for AGI in 2000 • 50% of total SE taxes deductible for AGI • 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 $12,9316,466 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) • Step Seven: • Calculate net cash from being self-employed • $75,354 = 130,000 - $26,715- $12,931 - 15,000 (medical and retirement) • Step Eight: • Compare with net cash from being employee $75,354 - $70,377 = $4,977

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

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

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

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

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

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