Ask CPA Sam

Q. I am a OTR driver and am the only person working for this company. Now he’s shutting down the company. He classified me as self employed. Can I draw unemployment? I do not have a home, but license is North Carolina. Employer was in Nebraska.

A. The arrangement between you and the company providing your work is very important to get right.  The key here is, how much financial and behavioral control over your work did the hiring entity have?  If he provided your truck and directed all of the shipments you hauled, you may have been an employee.  If you have your own truck and were allowed to contract with other companies, you may actually be independent.  How have you filed your tax return since working with this individual?  Did you use Schedule C, which is typical for self-employed individuals?  Were you provided a 1099 or W-2 at the end of previous years?

The biggest problem with mis-classification is when termination, layoff or work stoppage occurs.  Employers typically attempt to avoid the employee classification simply to save money on the Social Security/Medicare match, unemployment taxes and workmen’s compensation insurance.  If you were actually an employee, then you are due unemployment compensation.  If you were not, then you are not eligible to collect unemployment benefits.  It makes sense that as a self-employed individual, it is my responsibility to keep myself busy.  If I am not finding enough work and lose clients, it is my own responsibility to find more business. No unemployment benefits should be received.  In an employee/employer situation, it is the employer’s responsibility to pay into the unemployment system and thus provide benefits for those employees who are terminated.

The state where you were based is likely the state where you will need to attempt to collect unemployment.  That state will make the determination if you were truly an employee or not.  If it is determined that you were not, you are out of luck.  This may take some time to sort out unfortunately.  In the meantime, the best thing you can do is find another source or income instead of waiting around for an answer. You can read a more in depth article a few years back regarding this topic as well.

The IRS also has a very good publication regarding worker classification.  You can read it here.

Q. We recently ran a fireworks stand for a business in another state.  They have stands over about 4 different states and they hire people to manage them for them.  This was our first year running the stand.  We sold off of commission.  We were to receive 20-25% of net sales that we took in.  I just received the check from the company.  The check made out to me in the amount of just over $6,000.  It is my understanding that when tax time comes, I will be receiving a 1099 for that amount.

Here is my problem, I do not want to have to pay taxes on the full amount when I’m planning on giving about $4,500 in wages to 9 workers.  I also have about $500 in expenses.  The way it looks to me right now, is that in April, I will be paying income tax on the whole amount.  Can I write them checks as contract labor?  If so, what is the max on it?  How do I show those expenses after I get the 1099 so it doesn’t look like I received the whole $6,000?

A. Taxes, Taxes, Taxes.  Everyone seems to want to avoid paying taxes on their income for some reason.  Actually, it is your legal right to only pay the taxes you actually owe.  You should be taking advantage of all possible legal deduction opportunities that are available in the tax code.  In your case, yes, you will receive a 1099 for the amount you earned running the stand.  The arrangement described almost sounds like a franchising opportunity. I wonder whether you are actually “self-employed” as you are being classified or if you are indeed an employee.  I wrote an article about that one awhile back that you can read here.

If you are actually considered a small business, then you need to track your expenses incurred while running the stand like a regular business would.  As a self-employed individual, the income and expenses from your business will be reported to the IRS on Schedule C of the tax return.  Schedule C allows many types of deductions.  You can read instructions for that form here.  Valid expenses could be everything from vehicle mileage or depreciation, office supplies, employee and benefit expenses, licenses you were required to purchase, business meals, commissions, insurance, etc.  If you paid people to run the stand with you, those people were likely employees and should have been paid and reported properly through a payroll system.  Basically a valid expense is something that a an auditor would allow during the course of an examination.  If you take a conservative approach and have receipts and documentation for expenses, you are much more likely to keep your claimed expenses from being denied if you are audited.

Of course, the best way to make sure you are doing this correctly is to retain the services of a knowledgeable accountant.  Both the IRS and the state government will have unique tax laws relating to your situation.  Your accountant will become your trusted advisor while guiding you through the labyrinth of tax laws that exist today and helping you make better business decisions.  Good luck!

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

It’s been in the news a lot lately—how unfit Americans have become. The First Lady is advocating programs to fight childhood obesity while AARP started an online movement to get its members fit over this summer. Everyone is being asked to join in and help. But for employers and especially for payroll helping fight obesity is a two-edged sword. If the employer takes office space and puts in a gym on site for employees to use under IRS regulations it is tax free. According to Publication 15-B:

Athletic Facilities
You can exclude the value of an employee’s use of an on-premises gym or other athletic facility you operate from an employee’s wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee’s dependent child is a child or stepchild who is the employee’s dependent or who, if both parents are deceased, has not attained the age of 25.
On-premises facility. The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.

The added bonus of offering an on-site gym is the employee good will it creates. But for the employer to use valuable and sometimes nonexistent “extra” office space to put in a gym can cause a lot of “bad will” among workers who are crammed into cubicles. And let’s face it not too many companies have an extra 500 square feet just laying empty. Plus I really have to ask how many of us overweight and out of shape payroll professionals want to huff, puff, and sweat in front of our staff and fellow co-workers. I know I never did. Plus with no shower facilities it could make the small and cramped payroll office somewhat—shall we say, unpleasant. And if the employer does put in a shower, I really don’t want to strip and shower in front of my staff!

But the employer really wants to offer a healthier lifestyle to its employees. And they also want to help other local businesses by buying services. So they buy a gym membership for all their employees. It might be a one-off benefit or even part of a larger and more complex wellness program that includes quitting smoking and diet tips. Either way it doesn’t matter. If the employer buys the gym membership everyone is paying taxes on it. FIT, FICA, FUTA, SIT, SDI (where required), SUI, Local Taxes–all of them. In essence the employer is made to pay more simply because they don’t want a gym next to their conference room.

My point is if the government wants Americans to get fit why make it harder and more expensive to buy a gym membership rather than gym equipment. Why should employers and their employees have to pay more for basically the same thing? Putting in a gym or buying a membership should be the same thing if it is for the employee’s health and for the health of America.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Q. I have a unique variation of your “Social Security Tax on Everything” post… My wife’s small company decided to change their paycheck provider in July. The provider “reset” all employees yearly total earnings to zero and are therefore collecting the Social security tax from scratch. The provider claims they have to do this by IRS law. My wife had already paid the maximum of $6621.60. Will we be able to get the overpayment for the rest of the year back on our taxes? The instructions for line 69 of 1040, and form 843, seem to indicate that if your employer overwitholds then you are ineligible for a refund. She has not changed employers, just paycheck providers.

A.  This is a very good question.  Unfortunately, there is not enough information to answer your question.  It sounds like this employer may have switched to a PEO also known as a Professional Employer Organization.  Sometimes these are referred to as Employee Leasing Companies.  When an employer joins a PEO, the employer of record changes from the employee perspective and all Social Security and unemployment taxes start over for each employee.  PEOs can be a big cost savings for an employer by allowing a bunch of smaller employers to pool together for health insurance purposes to become one big client.  In your case, it would restart SS withholding however because technically, there is a different employer.  If this is not the case, I have no idea why SS would have started over.  Simply switching payroll providers would not cause this problem because the employer would be the same.  The employer would also feed in all Year-To-Date information from the old payroll provider to keep this kind of problem from surfacing.

Your second comment however is incorrect.  You can still obtain a refund of excess Social Security withholding from a single employer.  However, you must first ask the employer to refund the tax.  This quote is taken directly from the instructions from IRS Form 843 which is needed to request this kind of repayment, “A refund of excess social security or railroad retirement (RRTA) tax withheld by any one employer, but only if the employer will not adjust the overcollection.”  Refunds are available if your employer simply will not work with you.

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Q. Can a nonprofit corporation issue tax-deductible receipts while waiting for approval of 501(c)3 status from the IRS? Would the deduction be only for the state in which the nonprofit is located and not for a federal return?

A. Non-profits fulfill a great need in our society. Thankfully, the IRS still considers donations to qualified non-profits to be tax deductible within certain limits. There are certain types of non-profits that do not need to go through the official recognition process with IRS Form 1023.

• Churches, including synagogues temples, and mosques.
• Integrated auxiliaries of churches and conventions or associations of churches.
• Any organization that has gross receipts in each taxable year of normally not more than $5,000.

Regardless, it’s still recommended to get the official blessing of the IRS on your organization.

If your organization does not fall into one of those categories, it is not an official non-profit in the eyes of the IRS or your state (most likely) until Form 1023 is filed and you receive your official acceptance letter.  Donations made to the organization prior to the official designation are likely not deductible.  Even if you are accepted at the federal level, it’s a good idea to look into the requirements of registering your non-profit organization at the state level.  If there are extra steps required to provide non-profit status at y0ur state level, it would be a shame to ignore them and cause confusion amongst your donors.  They want to help fulfill your mission, so make sure you have completed all necessary steps to provide the tax benefit available from the IRS.

Unfortunately, the process of completing the form is onerous. There is a 38-page instruction booklet to mull over for requirements. The application form itself is 30 pages!  There is also a new fee structure.  Just to apply, get ready to hand over at least $400.  According to the application,

The entire process can even take up to a year.  For those with more complicated organizations, an attorney may be necessary to insure that the purpose and structure are properly communicated to the IRS.

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Q.  I have a full-time and a part-time job with different companies.  My employers are both taking out Social Security tax.  Is this correct?

A. Good Question! There are several common misconceptions about Social Security withholding from a paycheck. This is probably one of the biggest. The answer is….a resounding YES!!! Each employer of record is required to withholding 6.2% of your taxable wage for Social Security purposes up to the annual limit.  That is $106,800 for 2010. Even if you have 5 jobs at once, each employer is required to withhold this amount. Even if you are retired and collecting Social Security and have a job somewhere just for fun, the employer is still required to withhold Social Security tax.

You may ask, “What happens if the income from all my jobs add up to more than that limit?  Can I get all my employers to stop withholding Social Security?”  The answer is no.  You do have the ability to get a refund on your tax return if the total Social Security tax paid during the year was more than the maximum required.  That is $6621.60 for 2010.  You’ll see this on line 69 of the 1040 form.  The biggest drawback to this is that the multiple employers are not permitted to recover the overpaid Social Security.  They will match 6.2% up to the limit for everyone regardless whether that employee will be refunded overpaid tax later in the year.

My blog submission this month is not about payroll itself but rather the view that other professions, careers, occupations or basically anyone other than a payroll professional has of our chosen career field. I know that you have encountered the same reactions to being a payroll professional that I have. It can range from “what will you do when you finally decide on a career?” to “that’s not a bad job at least you get to know what everyone makes” to the worst of all “payroll really isn’t a profession it’s just a job”. That last one gets me most of all. I am proud of what I do for a living and of the people I associate with and the job we do.

But why isn’t payroll considered a profession in our society?

Well let’s look first at the definition of profession. As described at dictionary.com a profession is:

1. A vocation requiring knowledge of some department of learning or science: the profession of teaching.
2. Any vocation or business.
3. The body of persons engaged in an occupation or calling: to be respected by the Medical profession.

So if you go by the literal definition of profession we qualify. We have knowledge of some department or science. We have to know the law, the tax code, and computer software. These are areas that are used by other occupations that are deemed to be professions. There is definitely a body of persons engaged in our occupation. For every company in the United States with employees there is a payroll person paying somebody somewhere. And we certainly are a vocation and there is definitely big business wrapped up in payroll. Just check out the bottom lines of the major payroll processors, not to mention the fact that over 30 IRS publications or forms are created specifically for us.

So why then aren’t we given the respect we deserve as a profession? Last December I was involved in expert witness for a court case concerning payroll. I was asked to give my opinion about whether or not I thought a practice by the defendant was within the bounds of normal payroll procedures. When I gave my written report I used the word payroll industry rather than payroll profession because I know that society does not accept payroll as a profession. Well the attorney taking my deposition for the defense jumped on that one. He asked “Don’t you consider payroll a profession?” in a smug tone. And I got on my soap box. Yes I do, I stated forcefully but the rest of the professional world such as lawyers, CPAs and medical personnel do not. He had to agree that it is definitely viewed that way. And again I ask why?

When I first started in payroll back in 1977 personnel (as it was called in the old days) and payroll were pretty much equal. We both were paper pushers and clerks. But 12 years later, in 1989 I received my BBA in Personnel Management because there was no academic degree for payroll only personnel. And in the 20 years hence, Human Resources has soared into a profession with Masters degrees and maybe even doctorates at some universities. But yet there is still not one course of training at the college level that I am aware of for payroll other than the odd payroll accounting course or labor studies. But you certainly can’t get a full BA in it. Again I have to ask why?

I guess for one answer to my question maybe I have to quote Shakespeare in the play Julius Caesar, “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.” Did we spend so much time doing payroll that we didn’t push payroll? That is certainly a question to ponder.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Q. My question is: I work for a school. Sometimes parents gift money or gift cards at holiday time or for an appreciation event. Are these taxable. How about gift cards from a school committee (holiday drawing etc.) Even a child will offer a dollar in a card. If they are I am really upset. These are given from the heart, and not meant to be a burden. But I must know, as I’ve gotten different answers from different sources. thanks so much!

A. There are two things that come to mind in answering your question.  First, money given to a teacher from a child would generally not be considered taxable.  This would fall under the gift provisions of the IRS code.  Most children will give a $10 or $20 gift or gift card.  Unless the parent of the child is an employer of the teacher as well, there is probably no tax liability created by this gift.  If the child gives a large, extravagant gift to the teacher, it would be best to consult with a tax advisor regarding the potential liability issues in this case.

Let’s say the same class of students decided to be very efficient.  Instead of donating 25 or 30 different gifts cards or cash items to a teacher, they instead collected money and donated to the school.  The school was instructed to pay this to the teacher as a lump sum.  In this scenario, the gift idea is thrown out the window.  Now the money transfers as part of an employee/employer relationship and must be considered income because the school is the employer.  The employer will either need to withhold on the payment or “gross up” the payment and pay the taxes on behalf of the employee.  This is the same as providing gift cards to teachers in lieu of cash.  I wrote about that topic in another blog article here.

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Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

A good question today for discussion:
“My husband is self-employed with no other employees.  I generate his paychecks.  This year, he has been doing a few jobs outside of our county; therefore, the local tax amounts vary from county to county.  The payroll program I use is a very basic program so there are not a lot of different options to use.  (This is a new program I started using this year.)  To keep local taxes correct, I have to issue him a check for each job completed outside of our county.  When I generated a paycheck to him for a small job in a different county, ($300 paycheck), I noticed there were no federal withholding taxes.  I didn’t know this before, but it appears tax calculations are different based on daily, weekly, monthly, etc. pay periods.  I played around with this in the program and noticed the variance each time I changed this option.  With the flexibility of him being self-employed, I generate a paycheck on an as-needed basis to cover our personal needs.  It is never a fixed amount and the frequency varies. Taking the issue of local tax variances out of the picture, I am now worried if the federal and state taxes are being calculated correctly because of the varied amounts and time frames of the paychecks.  I don’t know whether to choose the option of him getting paid daily, weekly, bi-monthly or monthly. The federal and state withholdings changes in each of these categories.  I feel that it is incorrect to have no federal withholding if I generate a paycheck to him for only $300.00.  Can you help?”

A.  Your question contains one of the most common misconceptions of those who are self-employed.  You did not state if you were an LLC, S corp or a C corp.  I assume by your use of the words “self-employed” that you are simply a Schedule C filer with the IRS.  Most of the included fact pattern is actually irrelevant to answer your question.  Simply put, schedule C sole proprietors do not receive paychecks.  The profit earned from the business each year is the “paycheck” for your husband for tax purposes.  You will pay income taxes based on the profit of the business, less any allowed personal deductions on the form 1040.  Self-employed individuals make estimated payments to the IRS based on their estimated tax liability each year.  These estimated payments are made on a quarterly basis.  Your CPA or tax adviser should be able to look at your situation and determine what estimated payments are required.

While you do not have employees now, it is important to note that when you do have employees, you should match your pay frequency with the way you pay.  If you are having employees work in a different city each day, and your payroll system cannot accommodate multiple city tax rates, you would pay based upon a daily frequency for federal, state and local purposes.  If you pay daily and use any other table, the amount of wages will be too low to trigger withholding for federal and state in most cases.  If you think about it, $300 per day is about $81,000 when annualized (assuming a 270 day work year).  If you annualized $300 using a weekly table, it only adds up to $15,600 of gross wages.  There must be a low-cost system available that could handle such a problem when you get to the point of actually having employees and needing it.

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Samuel Kerch, CPA

At my day job at Symmetry Software, we have been searching for some new employees to fill some open positions.  We are outsourcing the candidate search to a local employment agency.  In this economy, with almost 10% of  those looking for a job unemployed, there is a huge pool of well qualified labor just waiting to be had.  We have interviewed several folks over the last few weeks.  Throughout these interviews, I see one common problem that keeps us from hiring candidates that are good people and very well qualified.

When you are shopping for a new car, do you go in to a dealership without researching and determining which car you are looking for?   Do you accept the words of the salesman to understand what you are buying?

What if you were trying to figure out which college or university to attend?  Would you determine the best schools based on your interests, or would you simply find the closest one to your home?

There are two sides to a job interview; the employer and the applicant.  The employer tries to find out everything possible about the prospective employee before offering a job.  This could include searches of Facebook posts, Google searches for a name, background and credit checks and finally, the actual interview.  That is where the secret lies.

If you make it to an interview, preparation is absolutely the most important thing you can do.  That includes rehearsing answers to potential questions, dressing up, planning to arrive early and preparing extra copies of resumes to distribute.  The employer however, wants to know if you know what you are getting into.  Did you research the company first?  What do they do?  What product lines do they offer?  Do these interrelate?  If you have no idea what the company does, then you will stumble when asked questions about your prospective employer.  That sends a signal that you don’t take things seriously.   Stumbling around trying to make a cohesive answer about something that is so dear to the heart of this prospective employer will win no points.  In fact, it will likely cost you the position.

At least having some familiarity with the structure and product lines of a company will allow you to ask clarifying questions.  This gives the employer the notion that you actually care about the company and that you are not a “fly by the seat of your pants” kind of person.  I think you’ll find that prospective employers will take more notice of what you bring to the table with this trick.

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Samuel Kerch, CPA