PhillyTalk: Ask the Writers and Experts

This may seem a bit more complicated than first thought. We aty the IRS do not offer financial advice nor do we offer services as to how folks shouls structure their tax liabilites. That being said please take a look at the below infomration which I feel well help give you some guidance. You may then wish to consult a tax professional so that you can set something up that will best suite your needs.

Independent Contractors vs. Employees  (http://www.irs.gov/businesses/small/article/0,,id=99921,00.html)

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be -

An independent contractor

A common-law employee

A statutory employee

A statutory nonemployee

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

Who is an Independent Contractor?

A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour.  Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400.  She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements.  Vera is an independent contractor.

How should I report payments made to independent contractors?

You may be required to file information returns to report certain types of payments made to independent contractors during the year.  For example, you must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons not treated as employees (e.g. independent contractors) for services performed for your trade or business.  For details about filing Form 1099 and for information about required electronic or magnetic media filing,  refer to information returns.

Who is a Common-Law Employee (Employee)?

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

To determine whether an individual is an employee or independent contractor under the common law, the relationship of the worker and the business must be examined. All evidence of control and independence must be considered. In an employee-independent contractor determination, all information that provides evidence of the degree of control and degree of independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. Refer to Publication 15-A, Employer's Supplemental Tax Guide for additional information.

Who is an Employee?

A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.

Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.

Statutory Employees

If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute ( statutory employees ) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social security and Medicare taxes , below.

A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.

A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.

A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer s business operation. The work performed for you must be the salesperson s principal business activity. Refer to the Salesperson section located in Publication 15-A, Employer s Supplemental Tax Guide for additional information.

Statutory Nonemployees

There are two categories of statutory nonemployees: direct sellers and licensed real estate agents. They are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:

Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked and

Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

Refer to information on Direct Sellers located in Publication 15-A, Employer s Supplemental Tax Guide for additional information.

Misclassification of Employees

Consequences of treating an employee as an independent contractor.  If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.  See Internal Revenue Code section 3509 for additional information.

References/Related Topics

Tax Topic 762 Basic Information

To determine whether a worker is an independent contractor or an employee, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories Behavioral Control, Financial Control, and the Type of Relationship itself.

Publication 1976, Section 530 Employment Tax Relief Requirements (PDF)

Section 530 provides businesses with relief from Federal employment tax obligations if certain requirements are met.

IRS Internal Training:  Employee/Independent Contractor  (PDF)

This manual provides you with the tools to make correct determinations of worker classifications. It discusses facts that may indicate the existence of an independent contractor or an employer-employee relationship.  This training manual is a guide and is not legally binding.   If you would like the IRS to make the determination of worker status, please file IRS Form SS-8.

Form SS-8 (PDF)

Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

Publication 15-A

The Employer's Supplemental Tax Guide has detailed guidance including information for specific industries.

Publication 15-B

The Employer’s Tax Guide to Fringe Benefits supplements Circular E (Pub. 15), Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits.

Businesses with Employees

Hiring Employees

Online Classroom, Lesson 6 - What you need to know about federal taxes when hiring employees/contractors

Distinguishing Between Self-Employed Individuals and Independent Contractors

A company can issue a W-2 or 1099 for any minimal amount. However there are thresholds that when met these forms MUST be filed. For the 1099, which is an Information Return, any person, including a corporation, partnership, individual, estate, and trust, who make reportable transactions during the calendar year must file information returns to report those transactions to the IRS. Persons required to file Information Returns to the IRS must also furnish statements to the recipients of the income. Filers who have 250 or more must file these returns electronically or magnetically . For the thresholds for the various 1099 please go to IRS.gov (http://www.irs.gov/efile/article/0,,id=98114,00.html).

For the W-2 for most people, only the amount in box 1 (wages, tips, other compensation) needs to be reported as income on your tax return. If you are an employee who receives tips, you may have to include the amount from box 8 (allocated tips) as income on your return.

Any employer-provided dependent care benefits listed in box 10 that are not excludable from income must be reported as wages on Form 1040 or Form 1040A. Any credit taken for child and dependent care expenses must be reported on your return. Refer to Form 2441, or Form 1040A, Schedule 2 Child and Dependent Care Expenses, to determine the amount, if any, of the exclusion or credit.

Employer-provided adoption benefits that must be used to complete Form 8839, Qualified Adoption Expenses, appear in box 12 with a code T. Employer contributions to a medical savings account (MSA), which you report on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, also appear in box 12 with a code R. Employer-provided benefits may be taxable as compensation under certain conditions. Refer to the relevant form instructions.

If you received advanced earned income credit payments from your employer (box 9), you must include the amount on your individual income tax return Form 1040 or Form 1040A.

The other boxes either display information that the employer wanted to provide to you, or contain information that must be reported to the Social Security Administration or to the IRS.

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This response does not represent a legal opinion from the IRS. To address your specific circumstances consult with a tax professional.

If you are giving up ownership of property, such as when you sell your home, you may apply for a Certificate of Discharge. Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge. If you're selling your primary residence, you may apply for a taxpayer relocation expense allowance. Certain conditions and limitations apply. Refer to Publication 783 (PDF), Instructions on How to Apply for a Certificate of Discharge of Property from the Federal Tax Lien. IRS.gov http://www.irs.gov/businesses/small/article/0,,id=108339,00.html#apply Publication 783: http://www.irs.gov/pub/irs-pdf/p783.pdf 

When faced with a complex lien issue, consider contacting the Collection Technical Services (TS) Advisory function. TS Advisory is a collection compliance function that interacts with taxpayers on complex lien issues such as: Certificate of Discharge, Subordination, Subrogation, Non-Attachment, Withdrawal and other complex lien issues. Publication 4235, Technical Services Advisory Group Addresses should be used to locate the appropriate office to contact for assistance.

You may wish to also contact the Taxpayers Advocate Office by using this link to locate the office nearest you... http://www.irs.gov/advocate/content/0,,id=150972,00.htmlt.

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This response does not represent a legal opinion from the IRS. To address your specific circumstances consult with a tax professional.

Are your workers independent contractors or employees? The answer can have a profound impact on how much tax you pay as a small business owner. Knowing whether your workers are or are not employees will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them. Employers who misclassify workers as independent contractors can end up with substantial tax bills as well as penalties for failing to pay employment taxes and failing to file required forms information.

Workers can avoid higher tax bills and lost benefits if they know their proper status. Your workers can ask the IRS to make a determination by filing an SS-8 form, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner. If you have the right to control or direct not only what is to be done but also how it is to be done then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Three broad characteristics are used by the IRS to determine the relationship between businesses and workers - Behavioral Control, Financial Control, and the Type of Relationship. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

Knowing the proper worker classification can be critical to your business. Don’t guess. Act now to make certain you know for sure.

You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, and Publication 1779, Independent Contractor or Employee. Both of these publications are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

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This response does not represent a legal opinion from the IRS. To address your specific circumstances consult with a tax professional.

Based on my understanding of the question, there are 2 issues facing this individual:

1) How to report amounts repaid in 2007 that were included as income on prior year(s) tax returns.

2) How to treat a lump sum payment of social security benefits (i.e., an amount received in 2007 that includes benefits retroactive to prior years).

Resolution to both issues will not involved filing amended tax returns:

1) Amounts repaid in the current year that were reported as income in prior years may either be deducted as an itemized deduction on Schedule A or (if the repayment is more than $3000) used to calculate a tax credit. The calculation of the tax credit is a bit involved; however, there is an example in Publication 525 on p. 33:

http://www.irs.gov/publications/p525/ar02.html#d0e9207

2) Social Security Benefits (including SSA disability) that include benefits attributable to an earlier year may be reported under a "Lump Sum election" as described on page 10 of Publication 915:

http://www.irs.gov/publications/p915/ar02.html#d0e2528

Since there may be additional mitigating circumstances you may strongly wish to seek out a tax professional that deals with these issues.

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This response does not represent a legal opinion from the IRS. To address your specific circumstances consult with a tax professional. ******** For more information visit us at IRS.gov.

If you receive a lump–sum distribution from a qualified retirement plan or a qualified retirement annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant.

A lump–sum distribution is the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. All the participants accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.

If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan before 1974 as long-term capital gain taxed at a 20% rate. You can also elect to figure the tax on the rest of the distribution using the 10–year tax option. For information on the 10–year tax option, refer to Topic 555 9http://www.irs.gov/taxtopics/tc555.html).

You should receive a Form 1099-R from the payer of the lump-sum distribution showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive Form 1099–R by early February, you should contact the payer of your lump–sum distribution.

You may defer tax on all or part of a lump–sum distribution by requesting that your employer directly roll over the taxable portion into an Individual Retirement Arrangement (IRA) or to an eligible retirement plan. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution. A rollover, however, eliminates the possibility of any future special tax treatment of the distribution. Refer to Topic 413 (http://www.irs.gov/taxtopics/tc413.html) for more information on rollovers. Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump-sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days.

For more information on the rules for lump–sum distributions, including information on distributions that do not qualify for the 20% capital gain election or the 10–year tax option, refer to Publication 575 (http://www.irs.gov/publications/p575/index.html), Pension and Annuity Income, and to Form 4972(http://www.irs.gov/pub/irs-pdf/f4972.pdf), Instructions, Tax on Lump–Sum Distributions.

Please review he infornation on our Web site IRS.gov and use "reimbursed milage" in the search box. Among the search results will be Tax Topic 510

Topic 510 - Business Use of Car
If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your deductible car expense using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.

Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight–line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.

The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. For further information on record keeping, refer to Topic 305.

If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, i.e., a plan that meets the 3 accountable plan rules, the reimbursement should not be included in your wages on your Form W-2, and you should not deduct the expenses.

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The Internal Revenue Service has warned taxpayers of a new phishing scam, in which an e-mail purporting to come from the IRS advises taxpayers they can receive $80 by filling out an online customer satisfaction survey. The IRS urges taxpayers to ignore this solicitation and not provide any requested information. The IRS DOES NOT initiate contact with taxpayers through e-mail.

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This response does not represent a legal opinion from the IRS. To address your specific circumstances consult with a tax professional.

There is no way for me to make any kind of determination based on the information provided, I am not a CPA or tax advisor so you may wish to speak with one to see if there is a way to deduct theses monies. My first inclination though is that this would be dealing with gift taxes and their implications. Below is some information on this subject.

Gift Taxes

IRS Tax Tip 2007-39

If you gave any one person gifts in 2006 that valued at more than $12,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts.

The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone's benefit

Gifts to your Spouse

Gifts to a Political Organization for its use

Gifts to Charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift.

For more information, get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709, United States Gift Tax Return, and Instructions for Form 709. They are available at the IRS Web site at IRS.gov in the Forms and Publications section or by calling 800-TAX-FORM (800-829-3676).

Also see:

Publication 950, Introduction to Estate and Gift Taxes (PDF 44K)

http://www.irs.gov/pub/irs-pdf/p950.pdf

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Back-to-School Tax Breaks Help Teachers Pay Classroom Costs; Aid Parents and Students With College Tuition. With the new school year now under way, the Internal Revenue Service reminds teachers, parents and students that saving receipts and keeping good records can help them take advantage of various education-related deductions and credits on their 2007 federal income tax return. 

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This response does not represent a legal opinion from the IRS. To address your specific circumstances consult with a tax professional.