Independent Contractor or Employee?
Jun 16, 2016
This seems like such a simple question. However, many companies and employees never take the time to consider their position. This is one of the most important decisions in the tax world. In fact, it goes well beyond taxes as it involves workers’ compensation, unemployment insurance, state and federal wage and labor laws, pension laws, nondiscrimination laws and more.
From an employer’s perspective, it’s often preferable to hire freelancers and contractors instead of employees. An employer is not required to pay for all the benefits offered to regular employees, such as health insurance, bonuses, 401(k) plan contributions, and so on. As a result, employers experience considerable incentives when utilizing independent contractors. More often than not, such employment follows the regulations set forth by the law. Nevertheless, some employers have been accused of misclassifying workers who should be considered employees as contractors instead.
The IRS has issued guidelines on the matter, stating “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.” Meanwhile, “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.” The distinction is important because there are penalties for misclassification.
For businesses of all sizes, the fines are everywhere and they’re not cheap. Take a look:
- The Department of Labor ordered three construction companies to pay $491,100 in back wages and damages to 99 employees who were misclassified as independent contractors, in addition to another $108,900 in civil fines.
- A prominent shipping company settled a series of class action lawsuits alleging worker misclassification for a total of $27 million. Previously, the IRS had already ordered the company to pay $319 million in back taxes and penalties.
- The San Diego Union Tribune, owned by The Copley Press Inc., was ordered by a state court judge in California to pay $6.1 million in legal fees to the attorneys for a class of over 1,200 paper carriers to whom the court had earlier awarded $3.2 million in damages and another $1.75 million in interest. The final cost of the verdict against the newspaper for misclassification of the paper carriers as independent contractors totaled $11 million.
The IRS has given guidelines to its agents to determine worker status. In the past, a list of 20 factors compiled by the IRS had been used in court decisions to determine worker status. The list, sometimes called the “20-Factor Test” is still used as an analytical tool, although some of the factors are no longer as relevant as they once were.
Basically, the IRS’ 20-Point Checklist focuses on three main factors:
- How much control the employer has over the worker’s behavior and work results. (Who controls training, where and what time the person works, what equipment they use?)
- How much control the employer has over finances? (Does the employer have primary control over the person’s profit or loss?)
- What is the relationship between the parties? (Does the worker receive benefits? Is it a long-term relationship?) Estimates are that 20% of businesses misclassify workers, so make sure your business understands the difference.
By: Mark Dietrich, Accountant
Categories: Other Resources, Tax Planning
Changes Coming To The CPA Exam
Jun 09, 2016
For every CPA, the CPA Exam is a rite of passage, one of the first milestones on the path to a career in accounting. Long hours of study and prep work and the stress of the test itself are rewarded with the joy and/or relief of passing scores on all parts of the exam.
If you or anyone you know is planning to enter the field of public accounting, be aware changes are coming to the Uniform CPA Examination in April 2017, the first major update to the exam since 2011. Periodically, the AICPA conducts a practice analysis, seeking input from state boards of accountancy, state CPA societies, public accounting firms, and other stakeholders to assess whether the test is able to measure the skills and knowledge needed by newly licensed CPAs. This analysis determined that due to the automation and outsourcing of routine accounting tasks, greater critical-thinking skills were needed of new hires.
The four basic content areas of the exam – Auditing and Attestation, Business Environment and Concepts, Financial Accounting and Reporting, and Regulation – are not changing. How those areas are tested, however, will be. There will be fewer multiple-choice questions, and a greater emphasis on task-based simulations that better assess higher-order critical-thinking skills. Because of this, total test time will be increased from 14 to 16 hours.
To aid new candidates with preparation for the exam, an array of preparation and support materials reflecting the new exam format are being rolled out. The current Content Specification Outline and Skill Specification Outline are being replaced by new “blueprints” that will contain about 600 tasks across the four exam areas that will align with the skills expected of new accountants. AICPA.org will offer a sample of the new exam at aicpa.org/nextcpaexam, as well as a LinkedIn group for exam candidates.
Based on historical trends in advance of previous changes to the exam, the AICPA expects a surge of exam candidates in 2016. Forty total testing days will be added – ten each quarter beginning in April 2016.
Jake Freppel, Senior Accountant
Categories: Other Resources
Is Your Business Plagued By Payment Issues?
May 31, 2016
Most small business owners love what they do. However, finances can become limited when customers don’t pay their bills on time. One or two delayed payments or a non paying customers can be enough to negatively affect your business operations. Understanding what may be occurring and being proactive may help you maintain steady ground with your accounts receivable.
Purchase Order Predicaments
Not all customers use purchase orders, but those which do rely on them to coordinate ordering and accounts payable functions. If there’s a mix-up involving a purchase order and your invoice doesn’t match up with the customer’s purchase order, your invoice could end up on the “problem” pile instead of the “pay” pile. Be proactive by verifying that the purchase order numbers on your invoices are correct before they are sent.
Strapped for Cash
Lack of money is a common excuse for not paying. One reason your customer may not be able to pay you is because your customer’s customers haven’t paid their bills. Regardless of the reason, be the squeaky wheel and keep communicating with your past due customers.
You can help reduce your exposure to customer cash shortfalls by tightening your credit requirements.
Disputes, Dilemmas, and Other Disappointments
Misships, damaged goods, late deliveries. Plenty of things can go wrong during the fulfillment process. Rather than make a phone call, customers may just “file” your invoice at the bottom of the pile.
Follow-up e-mails or phone calls to find out if your customers are satisfied will help smooth any ruffled feathers and could improve how quickly you get paid.
Vanishing Invoices
“We never received your invoice” is a weak excuse, but you still have to find a way around it. Once again, early follow-up is key. Paperless billing and the potential to monitor whether e-mailed invoices have been opened can also help eradicate this excuse.
Categories: Other Resources
Laying the Groundwork for a Business Sale
May 26, 2016
Are you considering selling your small business? To ensure a successful and profitable outcome, now may be the right time to prepare for such transaction in advance.
After you’ve built your business from the ground up, being objective about its value can be difficult. Knowing what similar businesses have sold for recently can provide significant guidance. If you require a clear idea, you may consider having a certified accountant complete a business valuation.
Next, it is important to give some thought to an appropriate type of buyer – your ideal candidate. Is it a key person who currently works for your company? A competitor? Someone who just wants to buy a good business and run it but isn’t a current employee or competitor? An investor who wants to make a profit but isn’t interested in the day-to-day operations of the company? The sales price you desire will be dependent on the type of buyer being targeted.
At this point, you will also want to think about your future participation in the business after it is sold. Consider the role you’d be willing and able to play, if any, during the transition to new ownership.
Make It Attractive Before putting your company on the market, you’ll want to focus on its profitability. Taking steps to enhance the bottom line — even if it means paying more income taxes — may allow you to command a higher price for the business.
On the asset side, now is the time to identify any equipment, furniture, fixtures, or machinery that is no longer useful and consider selling or otherwise disposing of these items. That way, you’ll be able to present a leaner business to potential buyers.
It’s What You Keep Selling your company for a fair price is important, but so is securing all available tax advantages. Will you be structuring the sale as an asset sale or will you be selling your company stock? Each has different tax implications. With smart planning, you’ll be in a better position not only to command top dollar for your company, but also to minimize taxes on the sale.
Categories: Other Resources
IRS Changes Call First Policy for Audits
May 19, 2016
Most taxpayers are familiar with the IRS’ promise of not calling first. The IRS offers this assurance in an effort to combat scammers making unsolicited calls claiming to be IRS officials. However, this pledge has not been entirely accurate and lends to an explanation.
T
he IRS made such declaration with regard to phone calls made for the collection of taxes or requests for personal information. However, until recently the Internal Revenue Manual suggested the preferable way to schedule in-person field examinations was to make initial contact through phone calls. The IRS felt it was clear their previous assurance of not calling first related only to collection calls while calls to schedule audits were a completely different function. Unfortunately, the distinction is not as obvious to a taxpayer receiving a cold call from someone claiming to be from the IRS. Distinguishing between the two scenarios may be difficult. In an effort to avoid confusion, the IRS is changing their policy and will now send a notification of audit through the U.S. mail and will follow-up with a subsequent call to schedule an appointment.
This change in policy is the result of various complaints from attendees of a public forum held by the Taxpayer Advocate Service on May 5, 2016. The complaints argued taxpayers has received phone calls from the IRS to schedule audits, which contradicted the IRS’ assurance of never calling first. In response to these complaints, the IRS issued a statement that “in an abundance of caution and in light of pervasive phone scams seeking to extort money from taxpayers, the IRS has decided to adjust this policy for in-person field exams.”
This change in policy means the IRS will no longer make initial contact through phone calls, but will instead only contact taxpayers via for follow-up communication. An IRS Consumer Alertreminds taxpayers that the IRS will never do any of the following over the phone:
- Demand immediate payment
- Request you to verify your identity or ask for personal and financial information
- Ask for credit or debit card numbers
- Require the use of a specific payment method for your taxes, such as prepaid debit card
- Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying
If you receive a phone call from someone claiming to be from the IRS that involves any of the above red flags, do not provide any information and hang up immediately. You can then call any of the professionals at William Vaughan Company and we will assist you in determining if you have any obligation to the IRS.
By: Mark Sawyer, CPA
Categories: Other Resources, Tax Compliance