Module 13 Employee vs Independent Contractor
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Transcript of Module 13 Employee vs Independent Contractor
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Module 13Employee vs
Independent Contractor
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Employee (E’e) vs Independent Contractor (IC)
Key Learning Objectives
Income and payroll taxes withholding Coverage under certain federal laws Fringe benefits
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Employees Only--Income & Payroll Tax Withholding
Income tax withholding Social Security and Medicare taxes Federal unemployment
taxes
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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
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Employees Only Entitled to Fringe Benefits
Fringe benefits Group medical insurance coverageGroup medical insurance coverage Group life insurance coverageGroup life insurance coverage Participation in an employer's cafeteria plan Participation in an employer's cafeteria plan Payment for sick and vacation daysPayment for sick and vacation days
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Employees and Wages
Key Learning Objectives Determining who are employees Determining which wages are subject to
Withholding of income taxesWithholding of income taxes Social Security and Medicare taxesSocial Security and Medicare taxes
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TaxPoint: Workers Reclassified on Audit
Between 1988 and 1995Between 1988 and 1995 IRS completed 12,896 payroll auditsIRS completed 12,896 payroll audits $830 million in recommended tax assessments$830 million in recommended tax assessments 527,000 workers reclassified to E’e status527,000 workers reclassified to E’e status
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Worker Employee If
Person paying for services Has right to control Has right to control Has right to direct details and means by Has right to direct details and means by
which the result is accomplishedwhich the result is accomplished Does not have to actually direct or Does not have to actually direct or
control ; control ; just have the right to do so just have the right to do so
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Worker Employee If
Person being paid is subject to the will and control of the payer as to What work has to be doneWhat work has to be done How the work must be doneHow the work must be done
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Withholding & Employment Taxes
Applied to includable wagesApplied to includable wages Current compensationCurrent compensation Non-excluded fringe benefitsNon-excluded fringe benefits Compensation related interest free loansCompensation related interest free loans
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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
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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
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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
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Compensation Related Compensation Related Interest Free LoansInterest Free Loans
Interest income/expense must be imputed Imputed amount is subject to withholding
Income taxes Employment taxes
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Tax Obligations of an Employer
Key Learning Objectives
Income tax withholding Social Security and Medicare taxes Federal Unemployment Taxes (FUTA)
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Income Tax Withholding
E’r required toE’r required to withhold federal/state withhold federal/state
individual income tax individual income tax from wagesfrom wages
deposits money on deposits money on required due datesrequired due dates
may be required to file may be required to file electronicallyelectronically
file quarterly Form 941file quarterly Form 941 file annual W2file annual W2
E’e files Form W4 to E’e files Form W4 to establish withholding establish withholding amountamount
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Social Security and Medicare(Employment taxesEmployment taxes))
E’r and E’e pay equal sharesE’r and E’e pay equal shares E’e share is withheld from payE’e share is withheld from pay `E’r deposits both halves on required due dates`E’r deposits both halves on required due dates
may be required to file electronicallymay be required to file electronically
2000 rates2000 rates for eachfor each 6.20% on first $76,200 of included 6.20% on first $76,200 of included
wageswages 1.45% on each included dollar 1.45% on each included dollar
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Federal Unemployment Taxes
Provides payments to workers who have lost their jobs
Employee does not include An insurance salesperson ORAn insurance salesperson OR An individual who works at homeAn individual who works at home
Special rules for some classes of employeesSpecial rules for some classes of employees
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Federal Unemployment Taxes
E’r E’r onlyonly required to pay to state and federal required to pay to state and federal Base = $7,000 of wages per employeeBase = $7,000 of wages per employee Rate = 6.2% of base Rate = 6.2% of base
Reduced by credit for up to 5.4% of state Reduced by credit for up to 5.4% of state unemployment tax paid unemployment tax paid
E’r deposits money on required due datesE’r deposits money on required due dates E’r may be required to file electronicallyE’r may be required to file electronically
E’r files annual Form 940 or 940EZE’r files annual Form 940 or 940EZ
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Compliance Query: Calculation of Payroll Taxes
Chris receives the following from employerChris receives the following from employer Cash salary Cash salary $100,000$100,000 Heath insurance premiumsHeath insurance premiums $5,000 $5,000 E’r contributions to qualifiedE’r contributions to qualified
retirement planretirement plan $10,000 $10,000 What is FICA/Medicare liability for What is FICA/Medicare liability for
Chris?Chris? Chris’s employer?Chris’s employer?
Use 2000 amountsUse 2000 amounts
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Solution--Compliance Query: Total Cost = $12,348.80 ,348.80
Exclude from wage baseExclude from wage base Heath care premiums paid by E’rHeath care premiums paid by E’r E’r contributions to qualified retirement plansE’r contributions to qualified retirement plans
Wages subject to payroll taxes = $100,000Wages subject to payroll taxes = $100,000 Maximum FICA base for 2000 is $76,200Maximum FICA base for 2000 is $76,200 FICA FICA = $ 76,200 * .062 = $4,724.40 = $ 76,200 * .062 = $4,724.40 Medicare = $100,000 * .0145 = Medicare = $100,000 * .0145 = $1,450.00$1,450.00 Chris & E’r pay same amountChris & E’r pay same amount $6,174.40$6,174.40
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Tax Consequences for Independent Contractor
Key Learning Objectives
Payroll taxes (self-employment taxes) Schedule C Estimated tax payments
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Self-Employment Taxes(Payroll Taxes)
Wage base is all earnings net of allowable Wage base is all earnings net of allowable deductionsdeductions
Wage base is reduced to 92.35%Wage base is reduced to 92.35% 12.4 % 12.4 % OASDI OASDI (FICA equivalent)(FICA equivalent)
$76,200 maximum base in 2000$76,200 maximum base in 2000 2.9% Medicare 2.9% Medicare
No maximum ceilingNo maximum ceiling
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Compliance Query: Payroll Taxes for Independent Contractor
Chris, an independent contractor, receives Chris, an independent contractor, receives $123,000 for services rendered $123,000 for services rendered
Chris pays the following from the $123,000Chris pays the following from the $123,000 Allowable business expenses $8,000Allowable business expenses $8,000 Heath insurance premiums Heath insurance premiums $5,000 $5,000 Contributions to qualifiedContributions to qualified
retirement retirement planplan $10,000 $10,000
What is Chris’ SE tax liability for 2000?What is Chris’ SE tax liability for 2000?
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Solution--Compliance Query: Total cost = $12,528.6912,528.69
Only allowable business expenses excludedOnly allowable business expenses excluded Wages subject to payroll taxes = $106,203Wages subject to payroll taxes = $106,203
(123,000-8,000) x .9235(123,000-8,000) x .9235 OASDI (FICA) OASDI (FICA) = $ 76,200 x .124 = $9,448.80 = $ 76,200 x .124 = $9,448.80 MedicareMedicare = $106,203 x .029 = $3,079.89 = $106,203 x .029 = $3,079.89 Additional deductions FOR AGIAdditional deductions FOR AGI
60% (2000) of medical premiums 60% (2000) of medical premiums (No E’r coverage)(No E’r coverage)
Qualified pension plan contributionsQualified pension plan contributions 1/2 SE TAX1/2 SE TAX
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Tax Planning Query: Become An Independent Contractor?
Andy would like to quit her job and be her own Andy would like to quit her job and be her own womanwoman
Andy currently works 2,000 hours a year forAndy currently works 2,000 hours a year for Cash salary Cash salary $100,000$100,000 Heath insurance premiumsHeath insurance premiums $5,000 $5,000 E’r contributions to qualifiedE’r contributions to qualified
retirement planretirement plan $10,000 $10,000
Andy feels that she could charge $65 per hour and Andy feels that she could charge $65 per hour and would be able to bill 2,000 hourswould be able to bill 2,000 hours
If she quits, will she be in a better or worse financial If she quits, will she be in a better or worse financial position?position?
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Tax Planning Query: Become an Independent Contractor? (con’t)
Assumptions:Assumptions: Andy is single & does not itemizeAndy is single & does not itemize 2000 tax year2000 tax year
single standard deduction = $4,400single standard deduction = $4,400 1 exemption = $28700 1 exemption = $28700
Medical premiums remain the sameMedical premiums remain the same No additional costs of doing business asNo additional costs of doing business as
independent contractorindependent contractor
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Become An Independent Contractor? (con’t)
Step One Step One Calculate the income tax due if an employeeCalculate the income tax due if an employee
Gross income Gross income $100,000$100,000
Deductions for AGI Deductions for AGI 0 0
AGIAGI $100,000 $100,000
Deductions from AGIDeductions from AGI 7 ,200 7 ,200 (2,800 +4,400)(2,800 +4,400)
Taxable Income Taxable Income $ 92,800$ 92,800
Income TaxIncome Tax $23,449 $23,449
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Become An Independent Contractor? (con’t)
Step TwoStep Two Calculate the payroll taxes paid if an employeeCalculate the payroll taxes paid if an employee
FICA TaxesFICA Taxes $76,200 x .062 $76,200 x .062 $4,724 $4,724
Medicare $100,000 x .0145 Medicare $100,000 x .0145 1,450 1,450
Step Three:Step Three: Calculate net cash from being an employeeCalculate net cash from being an employee $70,377 = 100,000 - 23,449 - 4,724 -1,450$70,377 = 100,000 - 23,449 - 4,724 -1,450
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Become An Independent Contractor ?? (con’t)
Step Four:Step Four: Calculate gross income from being SECalculate gross income from being SE $65 per hour x 2,000 hours = $130,000 $65 per hour x 2,000 hours = $130,000
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Become An Independent Contractor? (con’t)
Step Five:Step Five: Calculate the payroll taxes paid if an employeeCalculate the payroll taxes paid if an employee SE wage base is reduced to 92.35%SE wage base is reduced to 92.35% FICA equivalent increased to 12.4% on $76,200 FICA equivalent increased to 12.4% on $76,200 Medicare increased to 2.9% Medicare increased to 2.9%
FICA Taxes $76,200 x .124 FICA Taxes $76,200 x .124 = $9,449 = $9,449 Medicare $130,000 x .9235 x .029 = Medicare $130,000 x .9235 x .029 = 3,4823,482
$12,931$12,931
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Become An Independent Contractor ?? (con’t)
Step Six: Step Six: Calculate the income taxes due if self employedCalculate the income taxes due if self employed 60% of medical deductible for AGI in 200060% of medical deductible for AGI in 2000 50% of total SE taxes deductible for AGI50% of total SE taxes deductible for AGI Retirement contribution deductible for AGIRetirement contribution deductible for AGI
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Become An Independent Contractor? (con’t)
Gross income Gross income $130,000$130,000
Deductions for AGIDeductions for AGI
RetirementRetirement 10,000 10,000
60% Medical60% Medical 3,000 3,000
50% SE Tax 50% SE Tax $12,931$12,931 6,4666,466
AGIAGI $110,534$110,534
Deductions from AGIDeductions from AGI 7 ,200 7 ,200 (2,800 +4,400)(2,800 +4,400)
Taxable Income Taxable Income $ 103,334$ 103,334
Income TaxIncome Tax $26,715 $26,715
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Become An Independent Contractor? (con’t)
Step Seven:Step Seven: Calculate net cash from being self-employedCalculate net cash from being self-employed $75,354 = 130,000 - $75,354 = 130,000 - $26,715- $12,931 - 15,000 $12,931 - 15,000
(medical and retirement) (medical and retirement) Step Eight:Step Eight:
Compare with net cash from being employee Compare with net cash from being employee $75,354 - $70,377 = $4,977$75,354 - $70,377 = $4,977
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Become An Independent Contractor? (con’t)
Andy will make about $2.48 more an hour Andy will make about $2.48 more an hour as a self-employed person. as a self-employed person.
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§530 Relief
Key Learning Objectives Requirements for obtaining §530 relief Benefits of obtaining §530 relief
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§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.
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§530 Relief--Extends to E’r Only
Relief applies to E’r liability to withhold Income tax Income tax Social Security tax Social Security tax
Relief applies to E’r liability to pay Social Security tax Social Security tax Unemployment taxUnemployment tax
Interest or penalties automatically forgiven E’e remains liable for taxes
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TaxPoint: Classification Settlement Program (CSP) & New Training Programs for IRS CSP designed to allow taxpayers to resolve CSP designed to allow taxpayers to resolve
worker classification issues worker classification issues Taxpayer can pay part of back taxes and agree Taxpayer can pay part of back taxes and agree
to proper treatment in futureto proper treatment in future Retraining stresses that qualifying taxpayers Retraining stresses that qualifying taxpayers
should be informed that §530 relief may should be informed that §530 relief may apply apply