■ Payroll Tax Audits: Detailed federal employment tax audits will begin in November and will focus on: (1) worker classification (employee vs. independent contractor); (2) fringe benefits; (3) officer's compensation; and (4) reimbursed expenses. Don't wait to get tagged, review your policies and procedures now. Review employee classification and correct any inappropriate treatment of employees as independent contractors. Corroborate the legitimate classification of appropriate workers as independent contractors (e.g. document relevant facts, collect business cards, advertisements, etc.). In closely held businesses have your CPA confirm the reasonableness of salary. If you're underpaying salary to avoid payroll tax in an S corporation, that could be an issue. Be sure expenses are properly corroborated and that firm policy requires appropriate recordkeeping and reporting.
■ Deductions and Employee Status: A surgeon
was held by the court to be an employee, not an independent contract. So what?
His business expenses were therefore only deductible as unreimbursed employee business
expenses on Schedule A, not as a business expense on Schedule C under IRC Sec.
62. These are subject to the 2% floor on miscellaneous itemized expenses -
i.e., the have to exceed 2% of adjusted gross income ("AGI") to be deductible.
IRC Sec. 67. No surprise, they didn't so the entire deduction was lost. Maimon,
TC Summary 2009-53. Here's some of
the facts: ◙ Executed an employment agreement
expressly identifying him as an "employee". He should have signed a consulting
agreement stating he was a contractor. ◙ He served as an officer and
director of the employer/corporation. Bad move. ◙ He was reimbursed for CME,
hospital staff dues, professional societies, professional publications, and
other professional expenses in accordance with policies established by the
employer. Contractors should have the risk of economic loss. If many costs are
reimbursed, the risk of loss is mitigated. ◙ Received Form W-2 for "Wages,
tips, other compensation". He should have been given a 1099. ◙ He did not pay self-employment tax. You can't have
your cake and eat it too. ◙ He did
not receive compensation from any other source, and he did not perform medical
services for a fee outside of his relationship with the employer. A contractor
holds himself out to others for similar work.
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