Employee vs. Independent Contractor

Posted by admin on May 10th, 2012

One of the most frequent coverage questions arising under the employment tax laws is whether an individual worker should be treated as an “employee” or an “independent contractor” for payroll tax purposes. Generally, when making compensation payments to employees, an employer is obliged to withhold income and social security taxes and to pay social security and unemployment taxes on the wage payments. Independent contractors, on the other hand, are considered self-employed persons and are responsible for making their own tax payments. An employer has no tax withholding or tax payment obligations with respect to compensation paid to an independent contractor.

Remember that even if an individual qualifies as an “employee,” two other criteria must be met before an employer incurs payroll tax obligations. These two additional requirements are: (1) the employee must be working in “covered employment”, and (2) the compensation received by the employee must qualify as taxable wages.
The primary method used to determine whether an employee-employer relationship exists is the “common law” test. The central focus of the common law test is determining who has the right to control two basic elements: (1) what must be done — i.e., the results of the work, and (2) how it must be done — i.e., the method by which the work or services are performed. Under this test, a worker is considered an employee subject to payroll tax withholding if the employer has the right to control both the result to be accomplished and the method or means by which the result is achieved. If the employer has the right to control or direct only the result of the work — and not the method or means used to accomplish the result — the individual generally qualifies as an independent contractor.

The common law test can be difficult to apply to specific cases or situations. Proper application of the test requires an employer to consider a number of factors or characteristics of the work in question to determine whether an employer-employee relationship exists. For example, two characteristics typically indicating that an individual has “employee” status are: (1) the employer has the right to discharge the worker, and (2) the employer supplies the worker with tools and a place to work. On the other hand, individuals such as lawyers, physicians, and contractors who offer their services to the general public in the pursuit of an independent trade, business, or profession normally are not considered employees. Keep in mind, however, that no one factor or set of factors is automatically controlling. All the facts and circumstances of a particular situation must be taken into account in determining whether an individual worker should be treated as an employee or as an independent contractor.

Fair-Tax Bill Would End Payroll Taxes, Gains Attention in Congress

Posted by admin on May 8th, 2012

A fair-tax concept that would eliminate payroll taxes, including Social Security and Medicare taxes, and replace them with a national consumption tax is gaining attention in Congress. With Democratic and Republican lawmakers voicing support for an overhaul of the tax code, proponents see an opportunity to advance a House bill (H.R. 25) that would establish a national sales tax rate of 23 percent in 2013. It also would have adjustments every year to replace individual and business income taxes, Social Security taxes, Medicare taxes, self-employment taxes, and gift and estate taxes.

How Payroll Withholdings Are Calculated

Posted by admin on May 4th, 2012

Before withholding can be computed, the payroll period must be identified. The payroll period is defined as the time period of service for which wage payments ordinarily are made. For most full-time employees, the time period of service, or payroll period, is the same as the frequency of wage payments.

IRS issues withholding tables annually to facilitate the computation of withholding for federal income taxes. Separate tables are available covering the most commonly-occurring regular payroll periods: daily, weekly, biweekly, semimonthly, monthly, quarterly, semiannually, or annually. Any other payroll period or any payment made without regard to a payroll period is treated as a miscellaneous payroll period, and withholding must be computed using the daily/miscellaneous withholding tables.

If a regular payroll period is established, withholding amounts are determined based on that period, even if there is an occasional variation in the payroll period or if the employee receives payment at an irregular time or works less than the full payroll period.
It is the period of service, not the interval of payments, that determines the payroll period. Therefore, withholding for a part-time employee who regularly works fewer than five days each calendar week is computed on a miscellaneous (daily) basis, even if the employee is paid weekly or at some other interval.

However, an exception to this rule is available in certain situations. If part-time employees have no other employer from whom they receive wages subject to withholding and so certify in writing, under penalties of perjury, withholding may be computed on the basis of a weekly payroll period.

Part-time employees must notify their employer within 10 days if they subsequently begin working concurrently for another employer. In that event, withholding on a weekly basis is no longer permitted. The original employer must begin withholding on the basis of a miscellaneous payroll period within 30 days of receiving notification from the employee.
IRS provides several methods for computing withholding of federal income taxes. Employers may choose whichever method they prefer and may use different methods for different employees or different payroll periods. Other withholding methods that produce basically the same results as the percentage method (described below) also are permitted. The two most common methods of withholding are the percentage method and the wage-bracket method. Separate sets of withholding tables, based on different payroll periods and marital status, are provided for each of these methods. Related alternative methods and tables suitable for automated payroll systems include the alternative formula percentage method, the wage-bracket percentage method, and combined income tax and social security tax withholding tables. An employer also can use special withholding methods, which may be advantageous when wage payments are irregular or an employee has had a significant period of unemployment during the year.
This method can be used for employees earning any amount of wages and claiming any number of allowances. Determining the value of each withholding allowance claimed, based on the payroll period, is the first step. The values for the different types of payroll periods are set forth in the table below.

To calculate the value of all allowances claimed by an individual employee, multiply the value indicated on the following table by the number of allowances specified by the worker on Form W-4. Subtract this value from gross wages. Withholding is figured on the remainder.

2012 Withholding Allowance Values
Payroll Period One Allowance
Weekly $  73.08
Biweekly 146.15
Semimonthly 158.33
Monthly 316.67
Quarterly 950.00
Semiannually 1,900.00
Annually $3,800.00
Daily or miscellaneous 14.62

IRS tables for the percentage method of withholding are organized by payroll period and marital status. The percentage method withholding tables are reproduced following this chapter, beginning at 111:2051. Locate the appropriate table for the employee’s situation and calculate the amount to be withheld according to the indicated formula.

Tip Income

Posted by admin on May 3rd, 2012

Employers must pay the employer portion of FICA taxes on cash tips reported by their employees until wages and tips combined reach the wage base limit. A business tax credit is provided for food and beverage establishments. The credit will equal the employer’s FICA tax obligation (7.65 percent) attributable to reported tips in excess of those treated as wages for purposes of satisfying the minimum wage provisions of FLSA.

Employees are required to report their tip income monthly, but only if their tips equal or exceed $20 for the month. Included are tips paid directly by customers and tips paid by the employer in behalf of charge customers.

Employers also must withhold the employees’ portion of FICA taxes for reported tips. These taxes may be collected from wage payments or funds employees make available for payment of their FICA taxes. If wages are not sufficient to cover the FICA tax liability and employees do not provide enough funds by the 10th of the month following the month they report tip income, the employer is relieved of the responsibility of collecting the remaining employee FICA taxes due that month. Uncollected employee FICA taxes must be reported on Form W-2, and the employee will be responsible for direct payment to the IRS of FICA taxes owed.

Large food and beverage establishments, where tipping is customary, may be required to allocate tips among employees under certain circumstances. Employee FICA taxes should not be withheld from allocated tips.

Income and FICA Tax Reporting

Posted by admin on May 1st, 2012

Most employers must file quarterly reports indicating the amounts of income and FICA taxes withheld from employees’ wages. These reports generally are due on the last day of the month following the close of each calendar quarter—April 30, July 31, Oct. 31, and Jan. 31.

Most employers use IRS Form 941, Employer’s Quarterly Federal Tax Return, for filing quarterly reports, although certain employers use alternative forms:

• Employers that report wages paid to workers in the U.S. Virgin Islands, Guam, Northern Mariana Islands, or American Samoa must use Form 941-SS, Employer’s Quarterly Federal Tax Return for the Virgin Islands, Guam, and American Samoa.

• Employers reporting wages paid to workers in Puerto Rico must use Form 941-PR, Employer’s Quarterly Federal Tax Return for Puerto Rico.

• Employers of agricultural workers must use Form 943, Employer’s Annual Federal Tax Return for Agricultural Workers.

• Employers whose annual employment tax liability is estimated at $1,000 or less can use Form 944, Employer’s Annual Federal Tax Return.

• Employers whose only workers are domestic employees paid for services performed in and about the employer’s home must file Schedule H, Household Employment Taxes with Form 1040, 1040NR, 1040-SS, or 1041.

• Employers that withhold federal income tax from nonpayroll income paid to their employees must file Form 945, Annual Return of Withheld Federal Income Tax. Nonpayroll income includes pensions, annuities, and IRA distributions; gambling winnings; and amounts subject to backup withholding, Nonpayroll income does not include wages paid to employees.

Using Form 941

The purpose of IRS Form 941 is to reconcile employers’ tax liabilities with the amounts they deposit. The form requires most employers to report:

• total wages paid to employees,

• total income tax withheld from wages and other payments,

• taxable Social Security wages paid,

• taxable Medicare wages paid, and

• total Social Security and Medicare taxes withheld from wages.

Using this information, employers calculate the total taxes owed and deduct taxes deposited to determine the balance due. In most cases, this balance should equal zero, since the pay-as-you-go monthly and semiweekly deposit schedules are designed to require that employees meet their withholding deposit obligations well before the end of the quarter.

Employers’ reports also must document when their withholding liabilities were generated during a quarter. Monthly depositors report this information by month on Form 941, while semiweekly depositors report liabilities by pay period using the separate Schedule B of Form 941. This information shows IRS that the employer remitted withheld taxes according to the appropriate deposit schedule and does not owe any penalties or interest.

Submitting Returns

Employers must file Form 941 beginning with the first calendar quarter in which they must withhold federal income tax or pay wages subject to FICA taxes. An employer must continue to file these returns for each quarter it continues in business, even for quarters in which it pays no wages or withholds no taxes. Once an employer ceases its business operations or permanently stops paying wages, it must file a final return.

Employers should mail or hand-deliver completed Form 941 to the IRS service center for the region where their principal place of business is located. The general instructions to Form 941 list the regions and applicable addresses to which quarterly returns should be sent. If an employer does not have a legal residence or principal place of business in any IRS district, the return should be sent to: Internal Revenue Service Center, Philadelphia, Pa. 19255.

Electronic filing.Information on electronic filing is available on the IRS Web site at http://www.irs.gov/efile. Employers that have a computer, modem, and Web-based Internet access can file Form 941 electronically through an IRS-approved third-party provider, using the agency’s Form 941 e-file program.

Acquisitions.When a business is acquired by a new owner, both the former owner and the new owner must file a separate Form 941 reporting the wages each paid to employees for the quarter in which the transfer of ownership occurred. Each owner should include with its Form 941 an explanation of the transfer of ownership.

Mergers. If two businesses merge, the acquiring company that continues in business should file the return for the period when the merger occurred. The acquired firm should file a final Form 941. Employers are to report discrepancies related to reports due to a merger or acquisition using Form 941, Schedule D.

Final returns. If an employer goes out of business or permanently ceases to pay wages subject to federal income or FICA tax withholding, it should clearly mark the last Form 941 it files as a final return. The employer must indicate on the final return the date on which it last paid wages. In addition, the final return must be accompanied by a statement indicating:

• the address at which the employer’s records will be kept;

• the name of the person responsible for keeping such records; and

• if the business has been sold or otherwise transferred to another person, the name and address of this person and the date on which such sale or transfer took place.

Missed the Income Tax Deadline – IRS Offers Help for Taxpayers

Posted by admin on April 19th, 2012

The IRS has some advice for taxpayers who missed the tax filing deadline.

Don’t panic but file as soon as possible. If you owe money the quicker you file your return, the less penalties and interest you will have to pay. Even if you have to mail us your return, the sooner we receive it, the better.

E-file is still your best option. IRS e-file programs are available for most taxpayers through the extension deadline – October 15, 2012.

Free File is still available. Check out IRS Free File at irs.gov/freefile.  Taxpayers whose income is $57,000 or less will qualify to file their return for free through IRS Free File. For people who make more than $57,000 and who are comfortable preparing their own tax return, the IRS offers Free File Fillable Forms. There is no software assistance with Free File Fillable Forms, but it does the basic math calculations for you.

Pay as much as you are able. Taxpayers who owe tax should pay as much as they can when they file their tax return, even if it isn’t the total amount due, and then apply for an installment agreement to pay the remaining balance.

Installment Agreements are available. Request a payment agreement with the IRS.  File Form 9465, Installment Agreement Request or apply online using the IRS Online Payment Agreement Application available at irs.gov.

Penalties and interest may be due. Taxpayers who missed the filing deadline may be charged a penalty for filing after the due date. Filing as soon as possible will keep this penalty to a minimum.  And, taxpayers who did not pay their entire tax bill by the due date may be charged a late payment penalty. The best way to keep this penalty to a minimum is to pay as much as possible, as soon as possible.

Although it cannot waive interest charges, the IRS will consider reductions in these penalties if you can establish a reasonable cause for the late filing and payment. Information about penalties and interest can be found at Avoiding Penalties and the Tax Gap.

Refunds may be waiting. Taxpayers should file as soon as possible to get their refunds. Even if your income is below the normal filing requirement, you may be entitled to a refund of taxes that were withheld from your wages, quarterly estimated payments or other special credits. You will not be charged any penalties or interest for filing after the due date, but if your return is not filed within three years you could forfeit your right to the refund.

More information can be found at irs.gov.

Last-Minute Filers: Avoid Common Errors

Posted by admin on April 16th, 2012

The Internal Revenue Service today reminded taxpayers to review their tax returns for common errors that could delay the processing of their returns. Here are some ways to avoid common mistakes.

File electronically. Filing electronically, whether through e-file or IRS Free File, vastly reduces tax return errors, as the tax software does the calculations, flags common errors and prompts taxpayers for missing information. And best of all, there is a free option for everyone.

Mail a paper return to the right address. Paper filers should check the appropriate address where to file in IRS.gov or their form instructions to avoid processing delays.

Take a close look at the tax tables. When figuring tax using the tax tables, taxpayers should be sure to use the correct column for the filing status claimed.

Fill in all requested information clearly. When entering information on the tax return, including Social Security numbers, take the time to be sure it is correct and easy to read. Also, check only one filing status and the appropriate exemption boxes.

Review all figures. While software catches and prevents many errors on e-file returns, math errors remain common on paper returns.

Get the right routing and account numbers. Requesting direct deposit of a federal refund into one, two or even three accounts is convenient and allows the taxpayer access to his or her money faster. Make sure the financial institution routing and account numbers entered on the return are accurate. Incorrect numbers can cause a refund to be delayed or deposited into the wrong account.

Sign and date the return. If filing a joint return, both spouses must sign and date the return. E-filers can sign using a self-selected personal identification number (PIN).

Attach all required forms. Paper filers need to attach W-2s and other forms that reflect tax withholding, to the front of their returns. If requesting a payment agreement with the IRS, also attach Form 9465 or Form 9465-FS to the front of the return. Attach all other necessary schedules and forms in sequence number order shown in the upper right-hand corner.

Keep a copy of the return. Once ready to be filed, taxpayers should make a copy of their signed return and all schedules for their records.

Request a Filing Extension. For taxpayers who cannot meet the April 17 deadline, requesting a filing extension is easy and will prevent late filing penalties. Either use Free File or Form 4868. But keep in mind that while an extension grants additional time to file, tax payments are still due April 17.

Owe tax? If so, a number of e-payment options are available. Or send a check or money order payable to the “United States Treasury.”

Managing Your Tax Records After You Have Filed

Posted by admin on April 13th, 2012

Keeping good records after you file your taxes is a good idea, as they will help you with documentation and substantiation if the IRS selects your return for an audit. Here are five tips from the IRS about keeping good records.

1. Normally, tax records should be kept for three years.

2. Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

3. n most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.

4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.

5. or more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Need More Time to File? Use Free File or Form 4868 to Get a Six-Month Extension

Posted by admin on April 12th, 2012

The Internal Revenue Service today reminded anyone unable to meet next week’s tax deadline that they can easily get an automatic six-month tax-filing extension. And, the easiest and quickest way to get an extension is online through the Free File link on IRS.gov.

In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic extension on Form 4868. Filing this form gives taxpayers until Oct. 15 to file a return. This is an extension of time to file; not an extension of time to pay.

To get the extra time, taxpayers must estimate their tax liability on this form and should also pay any amount due. Taxpayers can e-pay what they owe using the Electronic Federal Tax Payment System (EFTPS), by electronic funds withdrawal or with a credit or debit card. Those who choose to pay by check or money order should make the payment out to the “United States Treasury.”

By properly filing Form 4868, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance, that applies to returns filed after the deadline. In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 17. The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Besides Free File, taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov. Of the 10.5 million extension forms received by the IRS last year, about 4 million were filed electronically.

Some taxpayers get more time to file without having to ask for it:

  • Members of the military on duty outside the U.S., as well as U.S. citizens and resident aliens living and working abroad have until June 15 to file and pay, though interest still applies to payments made after April 17.
  • Members of the military and others serving in Iraq, Afghanistan or other combat zone localities can typically wait until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.
  • People in parts of Indiana, Kentucky, Tennessee and West Virginia, affected by tornadoes, severe storms, floods and other recent natural disasters, have until May 31 to file and pay.

Details on all filing and payment options are on IRS.gov.

Ten Last-Minute Tips for Individuals Still Working on Their Tax Returns

Posted by admin on April 11th, 2012

The tax filing deadline is just around the corner. The IRS has 10 tips to help taxpayers still working on their tax returns:

1. File electronically Most taxpayers file electronically. If you haven’t tried it, now is the time! The IRS has processed more than 1 billion individual tax returns safely and securely since the nationwide debut of electronic filing in 1990. In fact, 112 million people — 77 percent of all individual taxpayers — used IRS e-file last year.

2. Check the identification numbers Carefully check identification numbers — usually Social Security numbers — for each person listed. This includes you, your spouse, dependents and persons listed in relation to claims for the Child and Dependent Care Credit or Earned Income Tax Credit. Missing, incorrect or illegible Social Security numbers can delay or reduce a tax refund.

3. Double-check your figures If you are filing a paper return, double-check that you have correctly figured the refund or balance due.

4. Check the tax tables If you e-file, the software will do this for you. If you are using Free File Fillable Forms or a paper return, double-check that you used the right figure from the tax table for your filing status.

5. Sign your form You must sign and date your return. Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it and enter their Preparer Tax Identification Number.

6. Send your return to the right address If you are mailing a return, find the correct mailing address at www.irs.gov. Click the Individuals tab and the “Where to File” link under IRS Resources on the left side.

7. Pay electronically Electronic payment options are convenient, safe and secure methods for paying taxes. You can authorize an electronic funds withdrawal, or use a credit or a debit card. For more information on electronic payment options, visit www.irs.gov.

8. Follow instructions when mailing a payment People sending a payment should make the check payable to the “United States Treasury” and should enclose it with, but not attach it to, the tax return or the Form 1040-V, Payment Voucher, if used. The check should include the Social Security number of the person listed first on the return, daytime phone number, the tax year and the type of form filed.

9. File or request an extension to file on time By the April 17 due date, you should either file a return or request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.

10. Visit IRS.gov Forms, publications and helpful information on a variety of tax subjects are available at www.irs.gov.

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