Posts Tagged ‘employee’

In Part I of the Schedule C “Hot Buttons” we touched on Gross Receipts and Cost of Goods Sold (COGS), as well as an explanation of why the IRS salivates over Schedule C audit opportunities.  Remember, once the IRS begins an examination of your tax return, expect them to dig deep.  All those personal expenses you’ve been running through as a Schedule C deduction will likely be found and subsequently removed, causing a chain reaction of increasing taxes and penalties you owe.

Part II of the “Hot Buttons” has 2 points of emphasis:  Automobile Expenses and Contract Labor.

1)      Automobile Expenses – You can deduct the actual expenses of running your automobile or take the standard deduction rate for business miles driven (whichever is higher).  Most important is to keep a log of the business miles driven, as well as an odometer reading on January 1^st and December 31^st of each year.  This will help determine the business use of the vehicle.  (WARNING to California Residents:  the Franchise Tax Board typically finds a noncompliance rate of 80% each year, so they scrutinize automobile expenses extensively).  Keep good records or risk losing the deduction all together.  No proof, no deduction.

a)      Actual expenses can include depreciation, registration fees, gas, insurance, repairs/maintenance, lease payments, personal property taxes, and parking fees.  If business use of the vehicle is less than 100 percent, expenses must be allocated between business and personal use.

b)      The standard mileage for 2010 is 50 cents per mile.  This can only be applied to business miles.

2)      Contract Labor – This area can cause headaches for those attempting to avoid payroll taxes, worker’s compensation insurance, etc.  If it is determined by an IRS auditor that the hired help is actually considered an employee, be expected to pay unpaid payroll taxes and penalties.

a)      If you are unclear on whether the worker(s) you hire are considered employees or non-employees, fill out Form SS-8 and send in for a final determination.  When in doubt, consider the worker as an employee until it is determined otherwise.  Contact your accountant if you have any questions about filing payroll taxes and any other employee or payroll related forms.  Also take a look at our previous blog on making the determination.

Most of you will not read this on December 31st and say ,”I better get a log book placed in the glove compartment of my business vehicle in the morning!”  But what about for 2010?  The answer is that it’s best to start now and estimate what the first part of the year was like, and do it sooner rather than later so that the likelihood to reasonably estimate what occurred will be as accurate as possible (especially for those of you who like to extend to October 15^th to file your personal tax return).

Up next for the Schedule C “Hot Buttons”, Part III – Depreciation, Other Expenses and the Home Office Deduction.

This is a question I’m often asked by clients.  Sometimes the answer is easy, other times, not so much.  I’d like to tell you that the rules are cut and dry; however, as with other issues in business, there are gray areas that make it difficult to determine.

The issues to consider include the following:

1. Behavioral Control:
   1. Do you determine when and where the worker works?
   2. Are you giving instruction on how to do the work?
   3. Do you evaluate how the work is performed (rather than just evaluating the end result)
2. Financial Control:
   1. Do you purchase all the equipment and supplies?
   2. Do you reimburse the worker for out of pocket expenses?
   3. Is the worker allowed to seek out other business opportunities in addition to working for you?
   4. Do you guarantee a regular wage?
3. Type of Relationship:
   1. Is there a written contract that specifies the employment type?
   2. Is the worker eligible for employee benefits?
   3. Will the relationship continue indefinitely?
   4. Are the services being provided a key aspect of the business?

If you have a situation that appears to be in the gray area, document your decision making – especially if you decide to treat the worker as an independent contractor.  The IRS website is actually very helpful in finding information for many business questions.  They have publications, questionnaires, checklists; you name it – all to help you make the right decisions.  You should also discuss your situation with a professional if you are unsure.

DON’T FOREGET – if you pay an independent contractor – you have to issue them a 1099 each year if you pay them over $600.  There are additional rules and exceptions here as well, but that is for another day.