By Tom Umstattd, CPA December 6, 2004
If you were thinking about donating your old car to charity, you better do so quick, and in 2004, because on January 1, 2005, Congress (in the American Jobs Creation Act of 2004) and the IRS will begin discriminating against those who would donate vehicles, boats and planes to charities. Historically, when someone donates property to their favorite charity they may deduct its fair market value. The common definition of fair market value is what a willing buyer will pay a willing seller. When we donate a car (or boat) to a charity, they typically will sell it to a whole seller at an auction or for a bargain sale, who in turn sells it to a used car lot, who in turn sells it to the end user. Although the whole seller is a willing buyer, the charity is not a willing seller. The willing seller and buyer tests, establishing the fair market value, are not satisfied until the used car company sells it to the end user. For example, a car worth $5,000 donated to a charity might be sold by the charity to the whole seller for $3,000, who might sell it for $4,000 to the used car company, who then sells it for $5,000 to the end user, which establishes the fair market value of the car. Since the contributor could not likely ever know the details of the final sale, estimations of this value have historically been estimated by either consulting a used car value guide, such as Kelly Blue Book, or for assets over $5000, hiring an appraiser. Beginning January 1, 2005, no longer. In the example above, under the old rules the charitable contribution deduction is $5,000, next year the contribution would be only $3,000.
In order to close a perceived abuse of taxpayers by Congress, claiming higher values than reasonable, we can only deduct the amount charity is able to sell the car for, assuming that they actually sell it. All other property given to charity such as clothes, toys and furniture can still be valued at fair market value. Therein is the discrimination. The IRS in IR-2004-142 has spelled out many of the details of the new law. I have included it below.
Tom Umstattd, CPA
IRS Officials Urge Care for Those Making a Car Donation; New Law Changes Rules at End of the Year
IR-2004-142, Nov. 30, 2004
WASHINGTON — The Internal Revenue Service issued a consumer alert today to help taxpayers avoid potential pitfalls when they donate their automobiles to charities.
In addition, as taxpayers plan their charitable giving, donors should understand the way that the American Jobs Creation Act of 2004 will alter the rules for the contribution of used motor vehicles, boats and planes after Dec. 31, 2004.
Next year, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.
Under the new rules, the charitable organization must provide an acknowledgement to the donor within 30 days of the sale stating the amount of gross proceeds. Alternatively, if the charity significantly uses or materially improves the vehicles, the charity must certify this intended use and duration and provide an acknowledgement to the donor within 30 days of the contribution. If the charity significantly uses or materially improves the vehicle, generally, the donor may deduct the vehicle’s market value.
For the remainder of 2004, however, the new rules do not apply. Under the rules in effect for 2004, taxpayers will be able to deduct the fair market value of the contributed property.
“Just because the rules will be tightened for vehicles donated next year doesn’t mean anyone should give a car to charity and claim an inflated value this year,” said IRS Commissioner Mark W. Everson.
IRS officials recommend that people who want to donate their vehicle by Dec. 31, 2004, take the following steps:
* Check That the Organization is Qualified — Taxpayers should make certain that they contribute their car to an eligible organization; otherwise, their donation will not be tax deductible. Taxpayers can use the IRS Web site to check that an organization is qualified by searching Publication 78. Publication 78 is an annual, cumulative list of most organizations that are qualified to receive deductible contributions. Publication 78 is also available in many public libraries. In addition, taxpayers can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Be sure to have the organization’s correct name and its headquarters location, if possible. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified. They frequently are not listed in Publication 78. Donations to these institutions are tax deductible.
* Itemize in Order to Benefit — Many taxpayers can’t take a deduction for car donations because they don’t itemize deductions on their personal tax return. For taxpayers, the decision to itemize is determined by whether their total itemized deductions are greater than the standard deduction (for 2004, the standard deduction will be $4,850 for single; $9,700 for married filing jointly). Slightly more than one-third of the 130 million individual taxpayers itemized in 2001, the last year for which complete data is available.
* Calculate the Fair Market Value — The donor must take many factors into consideration to establish the value of the car. Many used-car buying guides contain step-by-step instructions so that readers can make adjustments to the value of a car for accessories, mileage and other indicators of its general condition. Both Publication 526, Charitable Deductions, and Publication 561, “Determining the Value of Donated Property,” provide detailed instructions.
* Deduct Only the Car’s Fair Market Value — Some car donation program operators have mistakenly claimed that donors can deduct the highest value listed in a used-car buyer’s guide for their make and model of car, regardless of the donated car’s condition. The IRS, however, will only allow a deduction for the fair market value of the car. Fair market value takes into account many factors, including the vehicle’s condition. The fair market value of the taxpayer’s car may be substantially different than the highest value listed in a used-car buyer’s guide for that make and model of car.
* Document the Charitable Contribution Deduction — For vehicle donations, taxpayers must document the car donation and its fair market value. Recordkeeping requirements are comprehensive and vary depending on the amount of the contribution and the total amount of the charitable deduction. IRS Publication 526 details requirements for the types of receipts taxpayers must obtain and the forms they must file.
* Contact State Charity and IRS Officials When in Doubt — Donors with questions about whether a contribution is deductible should call the IRS at 1-800-829-1040 or for TTY/TDD help, call 1-800-829-4059. They can also find IRS forms and publications at IRS.gov. Donors concerned that contributions are being solicited for fraudulent purposes should contact the appropriate state charity official, who is often located in the state attorney general’s office. A list of state charity official offices can be found online.
* IRS Publication 78
* State Charity Officials
* State Attorneys General
* Publication 526, Charitable Deductions (PDF 177K)
* Publication 561, Determining the Value of Donated Property ( PDF 101K)
|Revised December 6, 2005 by Tom Umstattd, CPA. Non-cash charitable gifts to charities can add up quick with very little hassle, and great benefit to others. We are always looking for ways to increase our cash flow. My favorite is receiving non-taxable income by cutting my income tax bill, without actually having to “pay” for any extra cash expenses. It seems our homes are filled to the brim with things that we have paid $1,000s for or that we were given & have not used for years. Now, I am not talking about family heirlooms or something that will have a specific future use to us. But the Clutter, Clutter, Clutter! How can we rid ourselves of this great American plague?
One man’s junk is another man’s treasure. There are many folks less blessed than we and would greatly appreciate the stuff in our garages & attics. Or perhaps we have moved, lost or gained weight or lost a beloved family member and still have some of their personal effects that no one else in our family wants. There are countless charities that receive gifts of personal property: boats, cars, clothing, appliances, shoes, toys, household furnishings, you name it, even real estate. Ginger and I have given to the Salvation Army, various churches, private schools, public schools, municipalities, neighborhood organizations, worthy Christian ministries, the Boy Scouts of America, Salvation Army, and others. I personally prefer the Salvation Army due to their Christian ideals, rather than Goodwill. Consult their Valuation Guide for Items Donated to the Salvation Army schedule which lists the average prices charged in their thrift stores. A problem is, when we collect our “junk” we tend to just leave it off at the Salvation Army and do not get with a receipt, not itemize what we gave, and forget all about it at tax time.
It is amazing to me, after 24 years of experience, how many under report their charitable contributions. I usually hear, “I don’t want to get the IRS mad at me,” like the IRS has emotions?! There are 2 emotions inappropriate for making investment decisions: fear and greed; same with determining fair market values. So, what are things worth? As usual, when taking an income tax position, there are some objective criteria to follow, and lots of subjective. Objective criteria are: using published (e.g. Wall Street Journal) trading ranges for common stocks donated, hiring a qualified appraiser for items valued over $5000, or donating the ownership of, for example, real estate, moments before the sale to an unrelated party, then using that sales price as the fair market value. As president, Bill Clinton, setting an example for the rest of us by making public his tax return showing his deduction of $2 per pair of used underwear. However, it is usually not reasonable to hire the expensive, and often over-worked qualified appraisers. When this is the case, we must rely on the ambiguous, subjective and exciting measurement criteria offered to us by common law: the gray area, my favorite color!
Tom’s Top Ten Tips for this type of giving:
And remember, Jesus said, “It is more blessed to give than to receive.”
For more information: See IRS Instructions to Form 8283
Medical Bills Deductions
(under an employee benefit program), by Michael Hengst
We would like to bring to your attention a tax saving plan that is relatively unknown. This plan is for the sole proprietor of a small business or C Corporation. A partnership or S Corporation cannot successfully use this plan for its owners. The plan allows for 100% tax deductibility of health insurance premiums and uninsured medical expenses paid by the business. The deduction can be taken as an employee benefit program deduction, on Form 1040, Schedule C, Line 14 or on Form 1120, Line 25. Internal Revenue Code 105 & 106, along with Revenue Ruling 71-588 make this plan legal. This is not a Medical Savings Account (MSA), which tends to be quite cumbersome, hard to manage, and easily penalized by the IRS. The taxpayer has or sets up a small business and employs his wife or her husband. (For a C Corporation there is no spousal employment requirement.)
The employee/spouse performs duties needed to help operate the business and receives a reasonable salary for services performed. The salary paid to the employee/spouse is included on the couple’s federal individual income tax return. The spouse and dependents (including the employer/spouse) can also receive non-taxable medical reimbursements for qualified medical expenses. The reimbursement received is not included in gross income for the recipient (Code Section 105) and is fully deductible by the business. Although legally these plans do not have to be in writing, it is our opinion that they should be. We have a simple one page form at our office for you. This will help insure the law is properly followed. The plan cannot discriminate in favor of a certain employee(s) over others.
The benefits paid by the business along with the reimbursements make this a 100% tax deduction. Benefits can include: all uninsured medical expenses (deductibles, co-pays, uncovered expenses), Health Insurance, Disability Income, Long Term Care, Cancer Insurance, Term Life Insurance (up to $50,000 per year), Medicare Supplement, Indemnity Hospital, Indemnity Medical, and Vision/Hearing Insurance. The uninsured medical expenses that are not covered by insurance should be for the diagnosis, cure, mitigation, treatment, or prevention of disease.
A physician should prescribe the medications. Also deductible if not covered by the benefits is lodging while away from home while a spouse is in a licensed hospital or in a medical care facility. The lodging is limited to $50 for each night for each individual. A medical expense such as cosmetic surgery is not included unless the surgery is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. If you feel that you or your business may qualify for this plan, please contact us.
NEW FOR 2003!! According to the IRS’s new Revenue Ruling 2003-102 (9/5/03):
Over-the-Counter Drugs Can Be Covered by Health Care Flexible Spending Accounts. The Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts. Treasury and IRS issued guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income. Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee. See: http://www.irs.gov/pub/irs-drop/rr-03-102.pdfNote, that vitamins for “general good health” are not considered as non-taxable or excludable health benefits for these types of plans.
By Michael Hengst,
Written by Tom Umstattd, CPA, April 1, 2002.
Some of my colleagues offer electronic filing (E-File); I do not, yet. This procedure is currently most appropriate with low-budget, seasonal, non-CPA tax return preparers who prepare 1000s of very fast and easy returns with refunds; we prepare almost no easy returns. We first looked into E-Filing about 8 years ago and every year since. When a return is E-Filed, the “pertinent information,” according to the IRS, from a tax return is downloaded via the internet directly into the IRS’s computer system. E-Filers cannot send explanations or attachments. When a return is filed via the mail, IRS employees keypunch certain entries from the return.
If a return, as the IRS calls it: gets “kicked out of the pipeline” or, gets selected with “audit potential” by other means, then an IRS employee looks at the paper filed return with all of the attachments and explanations and professionally decides whether to proceed further. But for E-Filed returns, were no paper is filed, then the IRS is left with little alternative but to contact the taxpayer and begin the arduous experience of examining the taxpayer’s receipts and records which corroborate his or her income, deductions, etc. And, if the IRS goes through this much trouble, as many of you already know, they tend to examine everything. Ray Sommerfield, one of my UT tax professors warned us, “When it comes to audits, the IRS has determined that there’s a lot of gold in ‘them thar hills.’” For example, we have many philanthropic clients who give more than 10% of their income to charities. This 10% benchmark is one of the IRS’s benchmarks for high audit probability. If we can attach statements from 1 or more of the charities proving most of the charitable contributions deduction, we have likely assuaged an audit. This cannot be done with E-Filed returns.
Study: IRS Data Open to Hackers, Thursday March 15, 2002, 1:24 PM ET
WASHINGTON (AP) –Government investigators were able to hack into the Internal Revenue Service computer system last year and access Social Security numbers and other sensitive information from electronically filed tax returns, a congressional report said Thursday.
“We demonstrated that unauthorized individuals, both internal and external to IRS, could have gained access to IRS’ electronic filing systems and viewed and modified taxpayer data contained in those systems during the 2000 tax filing season,” the General Accounting Office report stated.
The investigators said they were able to gain access to taxpayer information because the IRS had not securely configured its operating systems, implemented adequate password management practices or used encryption technology.
The IRS said it had no evidence that real intrusions actually occurred, but the GAO concluded the agency did not have “adequate procedures to detect such intrusions.”
The IRS also said in its response that it had taken steps to better protect taxpayer privacy this year.
Sen. Fred Thompson, R-Ten., Chairman of the Governmental Affairs Committee, asked for the investigation.
Written July 2001 by Tom Umstattd, CPA. Why your business should get and use a website to promote its products and services.
Having a website is a new way of reaching your targeted clients and customers. With today’s computer savvy economical climate, it is becoming more and more imperative that we have at least a minimal website for our businesses. So, what are some of the other reasons to use a website?
It is critical that whatever you are trying to accomplish, your website must be integrated into your sales and marketing strategy. Have your employees: sales people, receptionists, etc. frequently refer to your website to receive and deliver information about your business. They should be very familiar with what information is on the website, so there is more time for salesmanship, and less time spent reporting technical data to potential customers. While communicating with my clients and perspective customers, I find myself referring more and more to my websites, as well as other websites, while we talk on the phone. Listening to my voice while simultaneously looking at my website’s pictures, forms, contracts and the like is tremendously effective, facilitates the communication of difficult subjects, and saves lots of time.
Your marketing strategy must take into account the new and often-ignored characteristics of the World Wide Web, the technology behind it, and the attitudes of the public as they update to connect into this culture-changing phenomenon. Also more and more people are expecting savvy businesses to be on line. Advertisements everywhere include a website address. Perspective customers ask: “What’s your website?” Web presence alone could be the difference of making a sale or not. I think that sooner or later most businesses will have websites.
I frequently refer to my own websites, so that clients, perspective business associates, buyers, sellers, mortgage lenders, governmental bureaucrats, brokers, and yes, even friends, can quickly familiarize themselves with the technical qualifications, capabilities, services, products and experiences of my businesses. That way we can spend more time on the phone, at lunch, etc. negotiating the deal, connecting, winning favor, and best of all having a little fun together. I used to be obliged to render a pontification my credentials and accomplishments, running the risk of being interpreted as merely having an ego trip. Now I just refer to my website; and when they get enough, they do not have to be rude, but just click <back.
Payroll Taxes are a complicated subject, but I will do my best to present this information in a concise way.
As a Texas employer, you have a number of responsibilities to fulfill to your employees, the IRS, the Social Security Administration, the Texas Workforce Commission, and even the Immigration and Naturalization Service.You have requirements to meet with all four of these agencies, regardless of how few hours your employee works, or whether your employees are members of your family.This article is intended to outline your basic responsibilities in clear simple steps.
You must use your Federal Employer Identification Number (FEIN) on all items you send to these government agencies.If you do not have a FEIN, you can apply for one on Form SS-4, and have your number assigned over the telephone by calling 512-460-7843.If you take over some one else’s business, do not use their FEIN, be sure to get your own.
If you need any of the forms described in this article, you may call the IRS forms and publications at 1-800-829-3676, or print them out from the IRS website, www.irs.ustreas.gov, or call our office for assistance.
You have some basic record-keeping requirements.Each employee must have three things:a social security number, a current Withholding Allowance Certificate called Form W-4 from the IRS, and Employment Eligibility Verification called Form I-9 from the Immigration and Naturalization Service.Keep these on file.
Whenever you pay your employees, the employer is responsible for withholding a certain amount for federal income tax, social security tax and Medicare tax.The information your employee gives you on the W-4 affects how much you must withhold from their pay for federal income tax.Circular E from the IRS includes tax tables that calculate federal withholding.The tax tables are updated frequently.Using QuickBooks for your paychecks simplifies these calculations tremendously.By subscribing to QuickBooks Basic Payroll Service, your payroll tax tables are continually updated and the proper withholding is automatically calculated on your paychecks.
Social security tax is a straight 6.2% of gross wages.Medicare tax is 1.45% of gross wages.As an employer, you also pay four employer payroll taxes – the matching social security tax of 6.2%, the matching Medicare tax of 1.45%, the federal unemployment tax of 0.3% and the state unemployment tax set for your business by the Texas Workforce Commission, usually 0.3%.QuickBooks, when properly set up, will automatically calculate all these taxes too.
These taxes, with the exception of Medicare tax, are limited to a certain amount of wages.Social security tax only applies to the first $80,400 of earnings for the 2001 tax year.Federal unemployment tax only applies to the first $7,000 in wages.And Texas unemployment only applies to the first $9,000 in wages.These limits are called a “wage base”, and may change each year.Medicare has no wage base limit. If you already use QuickBooks or another computerized payroll program, it would be wise to review your payroll set up at the beginning of each year to determine if you are using the proper tax percentage and wage base for each payroll item.
So, to summarize the above, whenever you write a paycheck, you create seven payroll tax liabilities.Three employee taxes, and four employer taxes.These taxes are due quarterly for many of our clients.The IRS has made a welcome change in the tax due dates starting January 1, 2001.IF YOUR PAYROLL TAX LIABILITIES TOTAL LESS THAN $2,500 FOR THE QUARTER, YOU ARE NOT REQUIRED TO MAKE DEPOSITS WITH THE BANK.You can pay your tax with your quarterly return.QuickBooks will automatically calculate and print your quarterly payroll tax form.
If you have more than $2,500 in payroll tax liability, but less than $50,000, you are a “monthly depositor”.That simply means your federal payroll taxes for the month are due by the 15th of the following month.Deposit your taxes in any bank using a federal tax deposit coupon called a Form 8109.This coupon is a deposit slip for the federal government, and your account number is your FEIN.These blue deposit slips forms will be sent to you preprinted by the IRS, or may be ordered directly from them.
The quarterly form is Form 941.It is used to pay federal withholding, employee and employer social security tax, and employee and employer Medicare tax.Form 941 is due April 30, July 31, October 31 and January 31.So you have a month after each quarter has ended to determine and pay these five tax liabilities.Your state unemployment tax is due quarterly to the Texas Workforce Commission on the same dates.If you are a monthly depositor, then the Form 941 will account for your deposits, and there will usually be no additional taxes due.
The Texas Workforce Commission’s form is called the C-3 Employer’s Quarterly Report.The Texas Workforce Commission (TWC) form also requires a list of all employees by social security number and wages earned during that quarter.Your state unemployment tax rate is determined by the number of claims for unemployment benefits your past employees have made.The fewer the claims, the lower the rate.The lowest rate is 0.3%.This rate is made up of 0.2% unemployment tax and 0.1% Smart Jobs Assessment or job training tax.You must use the red forms the TWC sends to you.If you have any questions, you can call TWC at 491-4716.
Your federal unemployment tax (also known as FUTA) is only due once a year on January 31, if your federal unemployment tax liability is less than $100 for the year.If you have less than 5 full-time employees, you will probably fall under that limit. Wages paid to your spouse or parent are NOT subject to FUTA if it is paid by you as an individual.Wages paid to spouse or parents are subject to FUTA if they are paid by a corporation or trust.QuickBooks will automatically calculate and print your FUTA Form 940 as well.
At the end of the year, you must file your annual Wage and Tax Statements called Form W-2.These are special three-part forms, which are printed in red and can be ordered free from the IRS or purchased at an office supply store.QuickBooks will automatically calculate and print your W-2’s onto these forms.They are due to your employees by January 31.
Form W-3 is a “cover sheet” for your W-2’s that gives the total of all wages and taxes withheld for your company’s employees.These special red W-2’s and W-3 forms go to the Social Security Administration (SSA).It is another special red form that QuickBooks will print onto automatically.Do not fold, staple, or paper clip these tax forms.And they must be typed or printed from a computer, or they will not be accepted.There are no additional taxes to be paid with these forms.The SSA must receive them by February 28.
If you don’t have QuickBooks, you might want to consider having our office prepare your payroll tax forms.Please feel free to contact us at any time if you have any questions.We are at your service.
By Gail Henkel
GOLD AT THE END OF THE RAINBOW:
MEDICAL EXPENSES AND BELOW-MARKET-RATE LOANS IN
CONTINUING CARE RETIREMENT COMMUNITIES
By Robert Atkins Walker, Ph.D., CPA and Chad E. Turner, CPA
Published in 18 Virginia Tax Review 1 (Summer 1998: The University of Virginia School of Law) under the title “Gold at the End of the Rainbow: Medical Expenses and Below-Market-Rate Loans in Continuing Care Retirement Communities,”
Residents of continuing care retirement communities (CCRCs) or their children, if the residents are the children’s dependents,1 face significant tax consequences associated with the fees they pay to a CCRC. On the positive side, they usually can take a large tax deduction for the medical expense portion of their entrance fee2 and may also deduct the medical portion of their monthly fees. Negative consequences may occur, however, if the CCRC is obliged to refund some or all of the entrance fee when a resident vacates or dies. The refundable portion of the fee may be treated as a below-market-rate loan in which case residents may have to report imputed interest income, and the CCRC, imputed interest expense, on the refundable portion of the entrance fee.3 Residents also may have taxable income on the refund if they took a medical expense deduction on the entire original fee. This article addresses these consequences and analyzes the methods CCRCs use in estimating the portions of the entrance and monthly fees allocable to medical care.
In many cases, the tax impact of moving into a CCRC may be very large, resulting in a medical expense deduction of $20,000 or more for the entrance fee and $3,000 or more annually for the monthly fees.4 Residents in assisted living units (ALUs) generally should be able to deduct 100% of their monthly fees. Nursing care residents also may deduct 100% of their monthly fees.
The IRS has provided little guidance regarding the mechanics of computing the deduction, the acceptability of the various rationales used by CCRCs in computing the medical expense percentage of their residents’ fees, or the tax effects on residents or their estates of an entrance fee refund. Furthermore, there is little consistency among CCRCs in advising their residents as to what is deductible or in their methods of computing the percentage of fees allocable to medical costs.
The need for consistent and proper treatment of the CCRC medical expense deduction is growing in importance. Since the 1970’s, the number of CCRCs has increased dramatically. In 1994 there were over 350,000 residents in nearly 1,200 CCRCs.5 This number is growing steadily and will accelerate after 2010 as the baby boomers reach retirement age.
To our knowledge, four articles to date have addressed the tax deductibility of CCRC fees. The first focused on nursing home residents,6 the second misinformed the readers,7 the third devoted only one paragraph to the issue,8 and the fourth discussed the effects of the Health Insurance Portability and Accountability Act of 19969 on deductibility of long-term care expenses and insurance.10 The second article stated, “[i]n counseling on the tax deductibility . . . of CCRC costs, you must first establish whether the principal reason for entry into the CCRC is the availability of medical and nursing care . . . .”11 This is wrong. As we discuss in section II.B.2., non-medical reasons for entering a CCRC will not prevent the deductibility of the medical expense portion of the fees.12
Our objectives are: (1) to clarify the tax deduction opportunities for CCRC residents, (2) to alert both the residents and CCRC administrators as to the potential tax effects of refundable entrance fees, and (3) to give CCRC administrators direction on allocating the medical expense fee portion properly so as to maximize their residents’ potential tax savings.
Regarding entrance fee refunds, we examine three issues: (1) whether the section 787213 below-market-rate loan rules will trigger imputed interest on the refundable portion of entrance fees, (2) whether an anticipated entrance fee refund must be subtracted from the entrance fee in calculating the medical expense deduction, and (3) whether the residents, their estates, or their heirs will have to recognize income in the year the refund is received to the extent of the previously deducted medical expenses attributed to the refund.
The following example of a CCRC resident related to one of the authors illustrates most of the issues involved as well as the magnitude of the tax savings available in properly taking advantage of the deduction.
SO YOUR EMPLOYER MADE YOU AN INDEPENDENT CONTRACTOR AND DIDN’T PAY ANY FICA TAX:
HOW TO HAVE YOUR CAKE AND EAT IT TOO
by Robert Atkins Walker and Clifton L. Kling
Continuing controversy surrounds the employee versus independent contractor classification issue.1 To date, research on worker status has concentrated on the factors used by the courts and the IRS to determine whether workers are employees or self-employed independent contractors.2 Some research has addressed worker misclassification issues from the employer’s standpoint,3 but no article to our knowledge has specifically dealt with the misclassification issue from the employee’s perspective.4 We investigate the effects and remedies for misclassified employees because they typically are not in an advantageous or knowledgeable position to redress the misclassification.
We focus on four employee-related employment tax and benefit issues: (1) how misclassified workers may avoid paying any self-employment tax (SECA), (2) how they possibly may avoid paying the employee’s half of FICA tax as well, (3) how they may secure reclassification as employees through the help of the IRS – in recent years, about 90% of the Private Letter Rulings addressing the issue have classified workers as employees rather than independent contractors,5 and (4) how they may have their earnings record updated to obtain maximum Social Security benefits after retirement despite paying neither self-employment nor FICA tax on the misclassified earnings. The proper action for misclassified workers is to report their independent contractor earnings as wages and pay no self-employment tax. The following is an example of one such worker that one of the authors met during the writing of this article.