Ohio Soil and Water Conservation Districts April 15, 2008 Trudee Billo Federal State and Local Government Specialist 419-522-2359 [email protected].

Ohio Soil and Water Conservation Districts

April 15, 2008

Trudee Billo

Federal State and Local Government Specialist

419-522-2359

[email protected]

Federal Agencies

State Agencies

Municipal Governments

County Governments

School Districts

F S L G

INDEPENDENT CONTRACTOR OR

EMPLOYEE?

INDEPENDENT CONTRACTOR DEFINED

Not subject to the control or direction of another as to the means and methods for accomplishing a result.

– Reg. 31.3121(d)-1(c)

EMPLOYEE DEFINED:

• IRC 3121(d) and Reg. 31.3121(d)-1– Officer of a corporation– Individual under usual common law rules– Individual who performs services for pay for

any person– Specifically identified by Statute

COMMON LAW STANDARD

– Employer-employee relationship exists– Employer has the right to direct and control

the worker– not only as to what work shall be done but

also– how work shall be done

Publication 963, chapter 3 7

FACTORS:

Review factors involved in worker classification to assure proper tax treatment:

• Behavioral Control

• Financial Control

• Relationship of the Parties

BEHAVIORAL CONTROL

• Instructions– when to do the work– where to do the work– what tools or equipment to use– what work must be performed– what routines or patterns must be used

• Evaluation Systemsmeasures compliance with performance standards

• TrainingPeriodic or on-going training provided by business about procedures to be followed and methods to be used strong indication business wants services performed in a particular manner

BEHAVIORAL – Cont’d

FINANCIAL CONTROL• Significant Investment• Unreimbursed Expenses• Services available to the market• Method of Payment• Opportunity for profit and loss• Compensation based on hourly, daily,

weekly basis– evidence of employer-employee

RELATIONSHIP OF THE PARTIES

• Written contracts

• Employee benefits

• Discharge/Termination

Employees...Some Factors that may indicate workers

are employees:

Required to wear uniformsRequired to work certain hoursDo not handle own sales receiptsDo not make own appointmentsOwner provides trainingOwner provides supplies and materialsStands no risk of loss

Independent Contractor

• Makes own schedule• Buys own products• Has own phone number• furnishes own supplies • furnishes own equipment• makes a profit or loss as a result of his

own business decisions

Factors that may indicate you are an Independent contractor:

DETERMINATION OF STATUS

• Consider all aspects of right to direct and control.

• Type of payment made

• SS-8 determination– an IRS determination based on individual

facts and circumstances– No charge

Employee or Contractor??

Many state and local government officials are employees by statute

Elected Officials are always employees

Withhold taxes

Report on Form W-2

Resources

• Publication 1779 - determination on status of worker as either an independent contractor or an employee

• Publication 963 Chapter 3

• Revenue Ruling 87-41 – 20 common law factors

• IRC 3401

Fringe Benefits

• Any property, service or cash

(other than salary)– Provided by employer

• Taxable unless excluded specifically by law– Example: Medical Premiums IRC

106

Taxable Fringe Benefits

• Include in Employee’s wages and on W-2 (Never on 1099-MISC)

• Subject to Federal Withholding, Social Security and Medicare

• Include on Form(s) 941—withhold and pay taxes

• Even if benefit is received by/for spouse or child of employee

Accountable Plan

• Business Connection

• Adequate ‘accounting’ by employee in reasonable time period

• Excess reimbursement returned in a reasonable time period

Non-accountable Plan

• Does not meet all 3 requirements for an accountable plan

• Benefit is fully taxable when paid

NON-TAXABLE FRINGE BENEFITS

• No additional cost service

• Qualified employee discounts

• Working condition fringe

• De minimis fringe

• Qualified transportation expenses

• Qualified Moving Expense Reimbursements

De Minimis Benefit

• Property or service, the value of which after taking to into account (Frequency) is so small that accounting for it would be unreasonable

• Must be small and infrequent• Frequency defined - an event which is not

haphazard but regularly reoccurring

Working Condition Fringe

• Use must relate to the employer’s business• Employee would be entitled to deduction under

IRC 162 or 167 if they paid for it• Business use is substantiated• Examples: desks, computers, possibly vehicles

Cash Allowances

• AKA “Stipends”• Do NOT qualify as a “working condition”

fringe benefit• Do NOT qualify as “de minimis” fringe

benefit• Taxable to the Employee

– Unless paid under the accountable plan rules

Meal Money/Reimbursement

• Taxable

- Meals away from tax home but not overnight

Nontaxable – Meals away from home overnight– Entertainment meals may be excluded if

directly related to or associated with conduct of business

– Meals officially scheduled as part of conference

Meal Allowance when not traveling Overnight

• May not be Taxable:– Directly-related Test

• Business actually conducted during meal

– Associated Test• Clear business reason

• Meals with business meetings – Officially scheduled as part of

conference/convention

MealsMay Exclude:• Meeting treats, parties, & picnics • De minimus meals that are occasional &

difficult to account for• Meals furnished on business premises for

employer’s convenience

• Employer buys you lunch – if provided to promote goodwill or improve

morale – Taxable as wages

Meal Money Allowance• De minimus fringe benefit if reasonable

and meets all three conditions:– Occasional basis

• Frequency and regularity• Employee by employee basis

– Provided for overtime work• Overtime work necessitates extension of normal

work schedule

– Enables overtime work

– Publication 15-B

Meal Money Allowance/Reimbursement :

• Meals away from home:

– Overnight

• Accountable Plan - Not taxable

– Not Overnight

• Taxable as wages

Cell phones

• Listed property §280F(d)(4)

• Susceptible to personal use

• Substantiation rules §274(d)

• MUST allocate cost between business and personal use

• Personal use is taxable fringe benefit

– Taxable even if usage is not over monthly amount paid by employer

Cell phones

• Need itemized bills• Need written policy• Employees can reimburse or Employer

can include in Employees’ wages• Employees need to check the bills for

personal calls• Taxable even if usage is not over

monthly minutes allowed in plan

Cell Phone Examples

• Plan is 500 min. & Employee used 400 minutes total. 50 minutes used personally.

• Personal use is still taxable even though Employee didn’t go over total plan minutes

• If using “free” nights/weekends minutes--still personal use and is taxable

• If no Employee accountability (they don’t keep track of personal calls) then tax entire phone bill each month

Personal Cell Phone

• If personal (Employee owned) cell phone is used for business:– Employee must account for business calls– Reimburse only business calls

• If a flat amount or allowance is given for using personal cell and no accountability then total amount paid is taxable

UniformsMay be excluded from income:1. Must be required by employer, AND

2. Cannot be adaptable to every day street wear(both requirements must be met)

• Employer may provide the clothing or an allowance paid to employees

• Allowances must be paid through an accountable plan to be excluded from income

• Treasury regulations 1.62-2(c)(1)

Uniforms

• Clothing suitable for taking the place of regular clothing, include in wages on form 941 and in form W-2– IRC 162 & 262– Mella v. Commissioner T.C. Memo 1968-594

• Not enough that the employee does not wear the clothing away from work– Pevsner v. Commissioner 628 F.2d 467

Clothing Allowance/Reimbursement

• Cost and upkeep of the work clothes may be excluded from income if:

1. Required as condition of employment and

2. is NOT suitable for everyday wear

• Protective or safety clothing required by an employer, although it may have some personal use can be excluded

• Substantiation of costs incurred and paid by Employee (required under accountable plan rules)

Automobile Expenses• Employee car used for employer’s

business – 2007 Federal Mileage Rate - .485– 2008 Federal Mileage Rate - .505

• At this rate or less: Non-taxable to employee

• Excess over rate: Taxable to employee - only the excess amount

– Substantiation required

Substantiation

• Employee reports to Employer:– Date, Purpose, Place of each trip– Mileage – Examples: Diary, log, trip sheet,

expense statement or similar record

– IRC 274(d) - IRC 280F(d)(4)

Employer-Provided Vehicles

• Personal Use is taxable

• Business Use is not taxable

• Employee can reimburse Employer for personal use

• Commuting is taxable

Personal Usage

• If employer provided vehicle does not meet the qualifications for non-personal use vehicle, and

• Employee is not restricted from using the vehicle for personal use, then

• Personal use is usually a non-cash taxable fringe benefit

Valuing Personal Use

• Lease Valuation rule – Reg. 1.61-21(d)

• Cents-per-mile Rule – Reg. 1.61-21(e)

• Commuting Rule – Reg. 1.61-21(f)

Cents-Per-Mile Rule

• Vehicle “regularly used” in business OR• Vehicle driven 10,000 miles a year and FMV in 2008 limited to $15,400

• Regularly used means– 50% or more of mileage is for business or– Vehicle is used to transport at least 3

employees to work

Commuting Rule

$1.50 per one-way commute if: Vehicle owned or leased by employer Employer requires the employee to

commute for bona fide noncompensatory business reasons

Written policy on personal use No control employees (elected officials)

Lease Valuation Rule

1. Determine FMV of vehicle

2. Use table in Reg. 1.61-21(d)(iii)1. Also in Pub 15-B

3. Determine % of personal use

4. Multiple Annual Lease Value by % of personal use

5. Value the fuel if provided 5.5 cents

SPECIAL ACCOUNTING RULES (Automobiles):

• Employer can elect when to withhold

• Employer can withhold at 25%

• November and December benefits may be treated as paid in next year

• Employer can elect not to withhold FIT– Employer must tell employee– Employer includes in wages on W-2

Qualified Non-personal Use Vehicles

• Must have policy restricting personal use

• Commuting is non-taxable to employee

• Substantiation and record keeping not required

• Regs. 1.274-5T(k)

Qualified Non-personal Use Vehicles

• Clearly marked police and fire vehicles

• Unmarked vehicles used by law enforcement officers

• The officer must be:

1. Authorized to carry firearms

2. Execute search warrants

3. Make arrests

Qualified Non-personal Use Vehicles continued

• An ambulance or hearse

• 20 passenger bus or school bus

• Vehicle designed to carry cargo with a loaded gross weight over 14,000 lbs.

• Delivery trucks with driver seat only, or driver plus folding jump seat

Categories for Pick Up Trucks:

1. Vehicle is clearly marked with permanently affixed

decals or with special painting, AND2. is equipped with at least one of the following:

--hydraulic lift gate, --permanently installed tanks or drums,--permanently installed side boards or panels

materially raising the level of the sides of the bed of the pickup truck,

--other heavy equipment, such as: electric generator, welder, boom, or crane used to tow automobiles and other

vehicles.

Categories for Pick Up Trucks:

3. Vehicle is clearly marked with permanentlyaffixed decals or with special painting, AND

4. Is actually used primarily for transporting a particular type of load other than over the public highway in connection with construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation, AND 5. Has been specially designed or modified to a significant degree for such use.

How a Van Qualifies:1. Van is clearly marked with permanently affixed

decals or with special painting, AND2. Has a seat only for the driver or the driver and one

other person, and 3. Has either:

a. permanent shelving installed that fills most of the cargo area, or

b. the cargo area is open and the van constantly (during both working and nonworking hours)

carries merchandise, material, or equipment used in

the employer's trade, business, or function.

This Qualifies:

Sorry- No:

Definitely Not!

This Qualifies:

Because it has this:

Educational Assistance

• IRC 127• Not required to be job related

• Separate written plan• Exclude up to $5,250 per year• Nondiscriminatory • Includes graduate level courses• Tuition, books, fees, equipment & supplies

– Unless employee can keep tools or supplies (excludes books) when course ends

Educational Assistance

• IRC 132(d)

• Job Related

• Any form of Educational instruction or training

• May discriminate

• No written plan required

• No dollar limitation

Educational Assistance

• IRC 132(d) continued• Must be:

– Job Related– Maintain or improve job skills– Be required by Employer or by Law

• May NOT:– Meet minimum educational requirements of

current job– Qualify employee for new trade or business

Awards and Prizes

• Cash Prizes or awards are always taxable

• Performance awards are always taxable

• Non-cash: – Use Fair Market Value

• IRC 74

FORM W-9

• Who Must use Form W-9?– Anyone required to file an information

return with IRS– Use Form W-9 or an Acceptable

Substitute

• Who Does Form W-9 apply to?– Any US person

• Including Resident Aliens

Form W-9

• Use to obtain a correct Taxpayer Identification Number (TIN)

• Anyone required to file an information return with IRS must use Form W-9 or substitute

• Applies to any US person including Resident Aliens

• IRC 6041A(f) requires vendors to furnish information

NO W-9 INFORMATION• No TIN — Payments subject to Backup

Withholding– IRC 3406(a)

• Backup Withhold 28% - Publication 1281- Form 1099 instructions

• File 945 to report withholding

• Get the W-9 information before job is awarded

Form 1099-MISC Reminders

• Form 1099-Misc required to report payments of $600 or more for the year for:

• Services or a combination of services and products (including parts and materials)

• Rents• Medical/Health Care payments• Attorneys• Prizes/Awards• Other Income

Payments to be Reported• Paid in the course of your trade or business

– This includes payments made by Federal, State and Local Governments

• Paid to:– Individuals– Partnerships– Certain LLC’s (single owner and partnership)– Estates and Trusts– Certain Corporations

Instructions for Forms 1099, 1098, 5498, and W-2G

Examples of Service

• Auto repair• Construction• Custodial• Maintenance• Landscapers• Locksmiths• Referees• Printing Services

• Professional Services

• Accountants

• Appraisers

• Architects

• Consultants

• Engineers

• Advertising

General Exemptions to Filing Form 1099-MISC

• Payments for products only • Wages/Fringe Benefits paid to Employees• Payments to organizations exempt from tax

under IRC 501(a)• A state or political subdivisions• Payments to Corporations

• Exceptions:• Payments to medical and health care

providers • Payments to Attorneys for legal services

Payments Reportable to Corporations

Medical and Health Care Payments•$600 or more reported in Box 6•Medical Payments include:

-Doctor’s fees, Drug testing, Lab fees,

Physical therapy-Regulation 1.6041-3

•Do not report payments to tax exempt hospitals or pharmacies

Instructions for Forms 1099, 1098, 5498, and W-2G

Payments Reportable to Corporations

Payments to Attorneys• Attorney’s Fees

– Reported in Box 7– Payments of $600 or more

• Gross Proceeds paid to Attorneys– Report in Box 14– Any Amount Paid– Don’t report in Box 14 if reported in box 7

• IRC 6045(f)

Shouldn’t be on 1099-MISC

• Payments to employees

– Fringe benefits

– Travel reimbursements• if taxable, travel reimbursements and

auto expenses should be included in wages and reported on W-2

Common Errors

• Failure to obtain identifying information before making payment (use Form W-9)

• Failure to aggregate payments from all expense categories (use vendor files)

• Assuming payee is a corporation:– because name is “Company or Associates”– because an EIN is furnished

Information Return Penalties

Failure to File by Due Date

• Correctly file by March 31-- $15/return

• Correctly file between April 1 and July 31-- $30/return

• Correctly file after August 1-- $50/return

• IRC 6721

Failure to Furnish to Payee

• $50 per Information Return not filed

• IRC 6722

Information Return Penalties

TIN Matching Program

• Allows authorized designees to submit TIN/Name combination to match against IRS records

• Matching completed prior to filing information return

• Via Text File Submission– Up to 100,000 Payee TIN/Name combinations

• Submitted on-line– limited to 25 requests per session

Taxpayer Identification Number (TIN)

• TINs include:– SSN - Social Security Number– EIN - Employer Identification Number– ATIN - Adoption Taxpayer Identification

Number– ITIN - Individual Taxpayer Identification

Number

Registration/Application

• Every user must register to use e-services– Register at e-services page at www.irs.gov

• E-file logo or• Tax professionals, e-services, new products now

available

– Get PIN and password

• Free Service—No User Charge

List of Resources

• Business and Specialty Tax line 1-800-829-4933• EFTPS hotline 1-800-555-4477• Employee Plans Taxpayer Assistance 1-877-829-5500• Form 941 Online filing program (E-help) 1-866-255-0654• To get IRS Forms 1-800-829-3676• Copy A, Form W-2 reporting questions, SSA employer

reporting service 1-800-772-6270 or [email protected]

• Information reporting program customer service 1-866-455-7438 or [email protected]

• Information reporting web page www.irs.gov/smallbiz

List of Resources

• The quarterly “Federal, State and Local Governments Newsletter” is available on the IRS Web site at www.irs.gov/govts.

• The Taxable Fringe Benefit Guide provides basic information for determining the taxability, withholding, and reporting requirements regarding employee fringe benefits. This resource guide can be found at www.irs.gov/govts , link to Educational Products, then on the Taxable Fringe Benefit Guide 119 pages

Trudee Billo (419) [email protected]

• Adams• Brown• Butler• Champaign• Clark• Clermont• Clinton• Delaware• Fayette

• Pickaway• Pike• Preble• Richland• Ross• Scioto• Shelby• Union• Vinton• Warren

Greene Hamilton Highland Jackson Logan Madison Marion Miami Montgomery Morrow

Amy Myers (419) [email protected]

• Ashland• Athens• Belmont• Carroll• Columbiana• Coshocton• Fairfield• Franklin• Gallia• Guernsey

• Harrison

• Hocking

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• Knox

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Wendy Speelman (419) [email protected]

• Allen• Ashtabula• Auglaize• Crawford• Cuyahoga• Darke• Defiance• Erie• Fulton• Geauga

• Hancock

• Hardin

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