Thursday, November 17, 2011
Use of Employer-Provided Mobile Phones Is Non-taxable Fringe Benefit
By Marcia Richards Suelzer, Toolkit Staff Writer
If you provide your employees with a cell phone for business use, both their business and personal use of the cell phone is a non-taxable fringe benefit. More importantly, the IRS will not require record keeping of business use in order to receive this tax-free treatment: If your cell phone policies meet the requirements for exclusion from income, then the employee's expenses are considered to be substantiated.
This tax-free treatment is available only if you provide the phone for a non-compensatory business use. This test is met if you have substantial business reasons for providing the employee with a cell phone. Once the non-compensatory business use test is met, all of the employee's use of the phone, whether business or personal, is non-taxable. The following are examples of substantial business reasons for providing a cell phone:
you need to contact the employee at all times for work-related emergencies;
the employee is required to stay in contact with other employees outside of the employee's normal working hours; an employee must contact clients or customers when the employee is away from the office, or the employee needs to speak with clients located in other time zones at times outside of the employee's normal work day. Caution. A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for non-compensatory business purposes. In this case, the value of the cell phone must be included in the employee's income as a taxable fringe benefit.
Reimbursement for Phone Use Is Also Non-Taxable
Small businesses often don't provide a cell phone to their employees; instead, a small business owner will provide a cash allowance or reimbursement for the employees' work-related use of their personal cell phones. In recognition of this, the IRS also determined that a similar administrative approach will apply to these arrangements. If you require your employees to use their personal cell phones for business purposes, reimbursements of the employees' expenses for reasonable cell phone coverage will be considered non-taxable. However, the use must be primarily for non-compensatory business reasons; the expenses can not be unusual or excessive expenses and the reimbursements can not be made as a substitute for any part of the employee's regular wages.
Tuesday, November 8, 2011
IRS Makes Voluntary Reclassification of Workers Less Costly
By Marcia Richards Suelzer, Toolkit Staff Writer
The IRS takes a very dim view of the misclassification of employees as independent contractors. In fact, tracking down employers who misclassify workers is a high priority for the IRS, as the recent collaboration with the Department of Labor indicates.
Despite its aggressive enforcement actions, the IRS also seems to be aware of the old bromide: "You can catch more flies with honey, than with vinegar." So the agency has announced a new Voluntary Classification Settlement Program (VCSP).
Why Misclassify?
At first glance, classifying workers as independent contractors seems to be an excellent way of reducing both paperwork hassles and out-of-pocket costs for tax payments. After all, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on the wages that you pay to your employees. You are spared all of these obligations if the person doing the work is an independent contractor.
In tax law, as in much of life, the easiest option in not necessarily the wisest one. Leaving aside the disruption and unpleasantness associated with an extensive IRS audit, you risk owing more in taxes than you would have had you correctly classified your workers. If you classify an employee as an independent contractor without a reasonable basis for doing so, you may find yourself paying a portion of the employee's Social Security taxes and a portion of the income tax withholding on their wages, as well as your own portion of Social Security taxes.
Tip. If you can control what the worker does and how it will be done, and not simply the result to be accomplished, then it is likely the worker is an employee. Over the years, 20 factors have been developed that help analyze whether the worker is an employee or independent contractor.
Why Voluntarily Re-classify?
One of the biggest benefits of reclassification is peace of mind. Employers who participate in the voluntary reclassification program will not be audited on payroll taxes related to these workers for prior years. In the words of IRS Commissioner Doug Shulman: "This settlement program provides certainty and relief to employers in an important area."
A second important benefit is that you will save a considerable amount of money if you voluntarily reclassify, rather than waiting for the IRS to find you and reclassify your workers following an audit. Under the voluntary program, you will only owe 10 percent of the employment tax liability due on compensation paid to the workers for the most recent tax year, determined under the rules that apply to reclassifications.
Example. You own a construction company. You have been classifying your drywall installers as independent contractors. During an audit, the IRS disagrees and reclassifies them as employees. The workers' total compensation for 2010 was $500,000 and none of the compensation exceeded the Social Security wage base. Even if you qualify for reduced liability, you will owe $53,400 (10.68 percent of $500,000) for 2010 wages. You will owe a similar amount for previous years for which the workers were misclassifed.
Assume the same facts as above, but you apply to participate in the Voluntary Classification Settlement Program. Under this program, the maximum amount you will owe is $5,340: 10 percent of the most recent year's applicable employment taxes.
If a 90 percent savings isn't enough to pique your interest, you also will be spared any interest and penalties on the liability.
Warning. Your tax issues could be even worse if you are considered a person who is responsible for withholding and paying over taxes (and nearly every small business owner is going to be a responsible party). You could be held personally liable for the amount of tax that should have been paid over to the IRS, in addition to owing the worker's portion of employment taxes and income tax withholding.
There is one downside to participation--but the benefits are likely to outweigh it. In order to participate in the VCSP, you must agree to extend the employment tax limitations period from three to six years for the first three years after you enter into the agreement. This means that the IRS has longer to determine if you are honoring the terms of the agreement or surface other issues with your employment taxes.
Who Can Participate?
The IRS takes a very dim view of the misclassification of employees as independent contractors. In fact, tracking down employers who misclassify workers is a high priority for the IRS, as the recent collaboration with the Department of Labor indicates.
Despite its aggressive enforcement actions, the IRS also seems to be aware of the old bromide: "You can catch more flies with honey, than with vinegar." So the agency has announced a new Voluntary Classification Settlement Program (VCSP).
Why Misclassify?
At first glance, classifying workers as independent contractors seems to be an excellent way of reducing both paperwork hassles and out-of-pocket costs for tax payments. After all, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on the wages that you pay to your employees. You are spared all of these obligations if the person doing the work is an independent contractor.
In tax law, as in much of life, the easiest option in not necessarily the wisest one. Leaving aside the disruption and unpleasantness associated with an extensive IRS audit, you risk owing more in taxes than you would have had you correctly classified your workers. If you classify an employee as an independent contractor without a reasonable basis for doing so, you may find yourself paying a portion of the employee's Social Security taxes and a portion of the income tax withholding on their wages, as well as your own portion of Social Security taxes.
Tip. If you can control what the worker does and how it will be done, and not simply the result to be accomplished, then it is likely the worker is an employee. Over the years, 20 factors have been developed that help analyze whether the worker is an employee or independent contractor.
Why Voluntarily Re-classify?
One of the biggest benefits of reclassification is peace of mind. Employers who participate in the voluntary reclassification program will not be audited on payroll taxes related to these workers for prior years. In the words of IRS Commissioner Doug Shulman: "This settlement program provides certainty and relief to employers in an important area."
A second important benefit is that you will save a considerable amount of money if you voluntarily reclassify, rather than waiting for the IRS to find you and reclassify your workers following an audit. Under the voluntary program, you will only owe 10 percent of the employment tax liability due on compensation paid to the workers for the most recent tax year, determined under the rules that apply to reclassifications.
Example. You own a construction company. You have been classifying your drywall installers as independent contractors. During an audit, the IRS disagrees and reclassifies them as employees. The workers' total compensation for 2010 was $500,000 and none of the compensation exceeded the Social Security wage base. Even if you qualify for reduced liability, you will owe $53,400 (10.68 percent of $500,000) for 2010 wages. You will owe a similar amount for previous years for which the workers were misclassifed.
Assume the same facts as above, but you apply to participate in the Voluntary Classification Settlement Program. Under this program, the maximum amount you will owe is $5,340: 10 percent of the most recent year's applicable employment taxes.
If a 90 percent savings isn't enough to pique your interest, you also will be spared any interest and penalties on the liability.
Warning. Your tax issues could be even worse if you are considered a person who is responsible for withholding and paying over taxes (and nearly every small business owner is going to be a responsible party). You could be held personally liable for the amount of tax that should have been paid over to the IRS, in addition to owing the worker's portion of employment taxes and income tax withholding.
There is one downside to participation--but the benefits are likely to outweigh it. In order to participate in the VCSP, you must agree to extend the employment tax limitations period from three to six years for the first three years after you enter into the agreement. This means that the IRS has longer to determine if you are honoring the terms of the agreement or surface other issues with your employment taxes.
Who Can Participate?
- You can participate in the program if you meet these three requirements:
- You must have consistently treated your workers as nonemployees;
- You must have filed all required Forms 1099 for these workers for the past three years; and
- You currently are not under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.
Tuesday, November 1, 2011
Take a Moment to Fine-tune Your Withholding
By Marcia Richards Suelzer, Toolkit Staff Writer
As summer winds down, this is an excellent time to make sure you are on track to have the correct amount withheld from your wages this year. This is especially true if you got married or divorced, added or lost a dependent, purchased a home, changed jobs or retired. In addition, you should also check your withholding if you are going to have a significant amount of income that is not subject to withholding (such as capital gains) or if you start or stop a second job.
Use the IRS Withholding Calculator
The IRS has made it easier than ever to verify that your withholding is correct by creating an interactive calculator. The Withholding Calculator at IRS.gov can help you figure the correct amount of federal withholding and provide information you can use to complete a new Form W-4, Employee’s Withholding Allowance Certificate.
You will need to have your most recent pay stubs and your most recent federal income tax return to use the calculator effectively. In order to get the most accurate result, the IRS advises that you:
- Fill in all the information that applies to your situation.
- Avoid estimating or guessing at amounts. While you can estimate if it's necessary, the results are only as accurate as the information you provide.
- Take advantage of the information links that are built into the calculator to help you answer the questions correctly.
- Print out the final screen that summarizes your entries and the results. Use it to complete a new Form W-4 (if necessary) and give the completed W-4 to your employer.
Make sure to keep a copy of your new W-4 with your tax records.
Use Publication 919 for Complex Situations
For many people, the withholding calculator is a great tool that can simplify the process of determining your withholding. However, some tax situations are more complex. You are likely to fall into this category if:
- you are subject to the alternative minimum tax or self-employment tax;
- your current job will end before the end of the year;
- you are going to be able to claim significant tax credits (other than the child and dependent care credit or the child tax credit);
- you expect to have a net capital gain;
- you expect to have qualified dividends;
- you will be able to exclude foreign earned income; or
- you can deduct or exclude foreign housing allowances.
If you have one or more of these tax complications, then you will probably achieve more accurate withholding by following the instructions in http://www.irs.gov/pub/irs-pdf/p919.pdf Publication 919, How Do I Adjust My Tax Withholding, which is available at www.irs.gov or by calling 1-800-TAX-FORM (1-800-829-3676). This publication has worksheets that enable you to accurately determine withholding regardless of the complexity of your tax picture.
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