The in­de­pen­dent con­trac­tor fil­ing blues

Due dates for re­port­ing have been moved up, and worker clas­si­fi­ca­tion re­mains a ma­jor prob­lem

Accounting Today - - Taxpractic­e - By Roger Rus­sell See CON­TRAC­TORS on 17

The ac­cel­er­a­tion of the due date for fil­ing in­de­pen­dent con­trac­tor forms with the In­ter­nal Rev­enue Ser­vice has put pres­sure on small busi­nesses and their tax pre­par­ers.

In­de­pen­dent con­trac­tor forms, along with W-2s, are now due to the IRS by Jan. 31, 2019. The date was moved up by the PATH Act, which also moved the fil­ing dead­line for W-2s to the ear­lier date. The ear­lier date helps the IRS more ef­fi­ciently ver­ify in­come that in­di­vid­u­als re­port on their tax re­turns and helps pre­vent fraud.

“States tend to fol­low the fed­eral govern­ment,” said Todd Walet­zki, pres­i­dent of the pay­roll di­vi­sion of Ben­e­fit­mall, a large pay­roll com­pany and the largest gen­eral agency help­ing bro­kers pro­vide in­sur­ance ben­e­fits for small busi­nesses.

“We are see­ing fil­ing dead­lines be­ing com­pressed, and it com­pels us to keep our clients in­formed of ac­cel­er­at­ing dead­lines and help them close out year-end taxes in a timely man­ner,” he said. “We file em­ploy­ment tax re­turns, such as Form 921, and pro­vide pack­ages to our clients and their CPAS to help them file their busi­ness re­turns.”

“There used to be sep­a­rate due dates, one for the payee form on Jan­uary 31, and one for the IRS ver­sion due on Fe­bru­ary 28,” said Vin­cent O’brien, of Vin­cent J. O’brien CPA PC.

The ear­lier due date only ap­plies if Box 7 on Form 1099-MISC is checked, ac­cord­ing to O’brien.

“If you have a 1099-MISC with other in­for­ma­tion, then it won’t be due on the ear­lier date,” he said. “That time frame com­presses tax sea­son a lot. But if you’re re­port­ing any­thing other than Box 7, non-em­ployee com­pen­sa­tion, then the end-of-fe­bru­ary due date still ap­plies.”

“And it goes be­yond that. If you pay some­one other than a cor­po­ra­tion, you are re­quired to send them a Form 1099 for pay­ment for their ser­vices if it amounts to more than $600,” he con­tin­ued. “That would in­clude some­one like a plumber or elec­tri­cian that comes to the of­fice. If they’re or­ga­nized as a cor­po­ra­tion such as ‘Acme Plumb­ing Inc.,’ it wouldn’t be nec­es­sary to com­plete Form 1099-MISC for them, but if they’re or­ga­nized as a sole pro­pri­etor you have to send the form. There are se­vere penal­ties if you don’t.”

The same holds true for clients of an ac­count­ing firm, O’brien noted. “If the ac­count­ing firm is or­ga­nized as a part­ner­ship or an LLC but is not in­cor­po­rated, the ac­count­ing firm’s clients are sup­posed to send the firm a 1099 if their pay­ments to the firm amounted to more than $600 in the ag­gre­gate dur­ing the year.”

The thorni­est of is­sues

The clas­si­fi­ca­tion of a worker as an in­de­pen­dent con­trac­tor rather than a worker can be ex­ceed­ingly com­plex, and de­pends on the facts and cir­cum­stances of each case. The de­ter­mi­na­tion is based on whether the per­son for whom the ser­vices are per­formed has the right to con­trol how the worker per­forms the ser­vices.

“An em­ployee is tech­ni­cally con­trolled by the em­ployer, man­ag­ing what they do, how they do it, and when they do it,” said Ben­e­fit­mall’s Walet­zki. “How­ever, an in­de­pen­dent con­trac­tor may be told what project is needed and when it’s due, but they are in con­trol of the way they go about it.”

Both of these sta­tuses have pros and cons, ac­cord­ing to Walet­zki. “Some ad­van­tages of hir­ing em­ploy­ees in­clude the fact that the hourly wage is usu­ally less, the em­ployee is rou­tinely avail­able to work 30-plus hours a week, and can re­quire less train­ing. Dis­ad­van­tages of hir­ing em­ploy­ees in­clude the cost of pro­vid­ing ben­e­fits, con­sis­tently sched­uled pay­ment, and in­creased pay­roll pa­per­work.”

“With an in­de­pen­dent con­trac­tor, over­all cost can be less and em­ploy­ers are pro­vided more flex­i­bil­ity when it comes to re­place­ment and as­sign­ment,” Walet­zki said. “Ad­di­tion­ally, the in­de­pen­dent con­trac­tor han­dles licensing and per­mits. How­ever, some of the dis­ad­van­tages in­clude less con­trol over the in­di­vid­ual. Since the in­de­pen­dent con­trac­tor’s time is their own, they can say no to a project, and have no sense of loy­alty.”

Em­ploy­ers who mis­la­bel their work­ers as em­ploy­ees escape the obli­ga­tion of pay­ing min­i­mum wages, over­time, pay­roll taxes, worker’s com­pen­sa­tion, un­em­ploy­ment, So­cial Se­cu­rity, health ben­e­fits, paid leave, and re­tire­ment ben­e­fits. Work­ers them­selves ben­e­fit by be­ing clas­si­fied as in­de­pen­dent con­trac­tors by be­ing able to deduct cer­tain busi­ness ex­penses that are not avail­able to em­ploy­ees, the abil­ity to set up their own re­tire­ment plans, and the fact that they are not sub­ject to with­hold­ing.

But there are se­ri­ous con­se­quences to mis­clas­si­fi­ca­tion of a worker as an in­de­pen­dent con­trac­tor. If the worker is de­ter­mined by the IRS to be an em­ployee, the busi­ness is li­able for the taxes it ne­glected to with­hold, in ad­di­tion to the em­ployee’s share, plus in­ter­est and penal­ties.

The fil­ing of Form 1099-MISC helps em­ploy­ers pro­tect the sta­tus of a worker as an in­de­pen­dent con­trac­tor, ac­cord­ing to Walet­zki.

“Em­ploy­ers pro­vide one copy to the con­trac­tor and an­other to the IRS. The in­de­pen­dent con­trac­tors use the forms to keep track of their own in­come for tax pur­poses,” he said. “Since they self-pay FICA taxes, em­ploy­ers do not deduct any pay­roll taxes from con­trac­tor pay.”

The IRS has kept a close eye on this is­sue in the past sev­eral years, Walet­zki noted.

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