October 29, 2008

California Employers: Do You Have Independent Contractors Or Employees?

Both California employers and California workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. To read other articles on the topic of independent contractor, see previous blog entries by clicking here and here.

Are your workers independent contractors or employees? For more information, see the IRS website by clicking here.

October 8, 2008

IRS E-mails

WARNING: be on the alert for phone calls and e-mails you may receive claiming to come from the IRS or other federal agency and which mention your tax refund or economic stimulus payment. A scam is likely to be in the making. The scam’s purpose is to obtain personal and financial information — such as your Social Security number, name, credit card or even PIN numbers and bank account information to use to commit identity theft. The e-mails and calls usually state that the IRS needs the information to process a refund or stimulus payment or deposit it into the taxpayer's bank account. The e-mails often contain links or attachments to what appears to be the IRS Web site or an IRS "refund application form." Don’t be fooled no matter how genuine in appearance.

The IRS does not send taxpayers e-mails about their tax accounts. Additionally, the way to get a tax refund or stimulus payment, or to arrange for a direct deposit, is to file a tax return.

Read more about identity theft and suspicious IRS e-mails.

October 6, 2008

What New California Business Owners Need To Know About Federal Taxes

California businesses often start out small. As a new business owner you need to know your federal tax responsibilities. Here are links to basic federal tax information for start-up businesses. Links are also provided to help in making certain business decisions. The list is not all-inclusive. Other steps may be appropriate for your specific type of business such as contacting a qualified California business attorney who can help.

Is it a Business or a Hobby?

Selecting a Business Structure

Employer Identification Number (EIN)

Business Taxes

Recordkeeping

When Do I Start My Tax Year?

Selecting an Accounting Method

Checklist for Starting a Business

Establishing a Retirement Plan

Small Business Publications

Call Mitchell A. Port at (310) 559-5259 to discuss your California-based business.

October 3, 2008

California Worker Status: Employee or Independent Contractor

About a year and a half ago, I asked: What are the consequences of treating an employee as an independent contractor? Now, I ask: Are your California workers independent contractors or employees?

Knowing the proper worker classification can be critical to your business. Don’t guess. Act now to make certain you know for sure.

How you answer that question can have a significant impact on how much tax you pay as a California business owner. Whether your workers who may be based in Los Angeles County, Santa Barbara County, Ventura County or Orange County are or are not independent contractors will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear to conform to California’s labor code and other laws, what documents and information those workers must provide to you, and what tax documents you must give to them.

California employers who erroneously classify workers as independent contractors can end up with large tax liabilities as well as penalties and interest for failing to pay employment taxes and failing to file required tax forms. Workers can avoid higher taxes and lost benefits if they know their proper status.

By filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the Internal Revenue Service, both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee.

Generally, whether a worker is an independent contractor or an employee depends on how much control you have as the owner. Your California workers are most likely employees if you have the right to control or direct not only what is to be done but also how it is to be done. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Three broad characteristics are used by the IRS to determine the relationship between businesses and workers - Financial Control, Behavioral Control and the Type of Relationship. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

Learn more about the determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, and Publication 1779, Independent Contractor or Employee.

October 1, 2008

IRS Enforcement Improving

The IRS seems to be growing more effective with enforcement in a number of key areas. The IRS is improving in areas important to maintaining an efficient and fair tax system while collecting billions of additional tax dollars. At the same time, the IRS says it continues to improve service to you and me.

Enforcement by the IRS increased in fiscal year 2007. For example, during 2007 the IRS audited 84 percent more returns of individuals with incomes of $1 million or more than during 2006. Overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006 and nearly $34.1 billion in 2002.

Highlights of the enforcement and services numbers for fiscal year 2007, which ended on September 30, include:

Individuals

The IRS filed 3.8 million levies and almost 700,000 tax liens during 2007, an increase from the previous year and a substantial increase from five years earlier.

Audit rates increased in 2007, both for overall individual rates and for higher-income taxpayers.

Overall, the total individual returns audited increased by 7 percent to 1,384,563 in 2007 from 1,293,681 in 2006. That’s the highest number since 1998.

One out of 11 individuals with incomes of $1 million or more faced an audit in 2007. Audits of individuals with incomes of $1 million or more increased from 17,015 during fiscal year 2006 to 31,382 during fiscal year 2007, an increase of 84 percent.

Audits of individuals with incomes over $200,000 reached 113,105 returns, up 29.2 percent from the prior year total of 87,885.

The IRS increased audits of individual returns with income of $100,000 or more, auditing 293,188 of these returns in 2007, up 13.7 percent from last year’s total of 257,851.

Businesses

With businesses, the IRS reviewed more tax returns of flow-through entities – S corporations and partnerships. Statistically, the IRS has placed more emphasis in the area of these flow-through returns. Though large corporate audits are slightly fewer, the Service has increased its focus on mid-market corporations – those with assets between $10 million and $50 million dollars.

Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year’s total of 52,223.

Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year’s total of 13,984.

Audits of partnerships increased to 12,195 during 2007, up almost 25 percent from the prior year’s total of 9,777.

Audits of mid-market corporations increased to 4,473, up 6 percent from last year’s total of 4,218.

Although the audits of large corporations declined slightly in 2007 to 9,644 audits, the number of audits is up 14 percent from the fiscal year 2002 level.

Taxpayer Services

More people visited the IRS internet site, IRS.gov. The IRS site was accessed more than 217 million times in 2007, up more than 10.5 percent from the same period in 2006.

The IRS helped more taxpayers find out about their refunds through the agency’s internet-based system ‘Where’s my Refund?’ The system was accessed 32.1 million times during 2007, up 30 percent from last year’s usage of 24.7 million.

The agency held a 94 percent customer satisfaction rating for its toll-free telephone service.

As in the prior year, the IRS accuracy was 91 percent on tax law questions answered through its toll-free telephone service.

More taxpayers chose to file electronically in 2007 than during the prior year, with 57 percent of individual tax filers choosing to e-file in 2007, up from 54 percent in 2006.

Have a problem with the Internal Revenue Service or California State tax agencies? Call a tax attorney - call Mitchell A. Port for tax help.