Employee and Independent Contractor Classifications Defined

As your company grows, the size of your staff will, too.  Depending on the roles the people on your team will fulfill, they can either be classified as independent contractors or employees.  This distinction can be a complicated process and revolves around the working relationship between the individual and the company.

 If a company has the right to control what is to be done, how it is done, which tools are provided and if expenses are reimbursed, a person is probably an employee.  Conversely, an individual is probably an independent contractor if the company directs only the result of the work.  Independent contractors generally have invested into their services and may provide these services to others outside of your company. 

Other factors taken into consideration for worker classification include:

1.  Can the employer and worker part ways without penalty?  The right to discharge or terminate a relationship is present in an employer/employee relationship; however, discharge or termination in an independent contractor situation may constitute a breach of contract.

2. Is the worker paid fixed wages calculated on hourly or weekly basis?  If yes, the worker is more likely an employee.  Independent contractors typically perform a specific job at a fixed price.

3. Does the worker have the right to employ assistants?  The exclusive right of the worker to hire, supervise and completely delegate the work of assistants is an indication of an independent contractor.

An employer misclassifying an employee as an independent contractor fails to pay mandatory employee withholding taxes, FICA taxes, unemployment taxes and workers’ compensation premiums.  Not only does this jeopardize a fair and competitive marketplace by underbidding honest law-abiding businesses, this can also result in devastating penalties and fines, interest on back taxes and criminal charges to the employer under various laws.  In addition, the employer may be responsible for the incorrectly classified employee’s unpaid income taxes.

The IRS has provided a video workshop that outlines and demonstrates the differences between independent contractors and employees.  Click here and when the video loads, select Lesson 6.  

Taking the time on the front end to determine the correct classification for your team members will save time, money and your sanity in the long run.

Iowa Modifies Renewable Fuel Incentives and Creates Biodiesel Refund and E-15 Credit

The following summaries tell of upcoming changes to the various Iowa renewable fuel tax credits.

Ethanol Promotion Tax Credit
The ethanol promotion tax credit has been increased from 6.5 cents per gallon to a maximum credit of 8 cents per gallon.  In addition, retail fuel dealers may now claim the credit on a company-wide basis along with the location-by-location basis allowed previously.  The amendments are applicable retroactively to January 1, 2011.

E-85 Gasoline Promotion Tax Credit
The phase-down of the current E-85 credit has been eliminated and replaced with a 16-cent per-gallon credit, effective January 1, 2012, through December 31, 2017.

Biodiesel Blended Fuel Tax Credit
The December 31, 2011 expiration date for the biodiesel blended fuel tax credit has been extended until December 31, 2017. In addition, retailer’s diesel gallon sales no longer are required to meet a threshold of at least 50% biodiesel to qualify for the credit.

The legislation also establishes new per-gallon tax credit rates. In calendar year 2012, biodiesel blended fuel classified as B-2 or higher, but less than B-5, is at the designated rate of 2 cents while fuel classified as B-5 or higher, is at 4.5 cents.

Beginning in calendar year 2013, biodiesel blended fuel must be classified as B-5 or higher to qualify for a credit of 4.5 cents.

E-15 Plus Gasoline Tax Credit

A new credit has been created for ethanol blends between E-15 and E-69 equaling 3 cents per gallon for calendar years 2012 through 2014 and 2 cents per gallon for calendar years 2015 through 2017.

Biodiesel Production Refund
The legislation creates a per-gallon production refund on no more than 25 million gallons of biodiesel per facility produced in Iowa by a qualified manufacturer. Specifically, a qualifying producer may apply for a refund of the amount of the sales tax imposed and paid upon purchases made by the producer. The refund is made on a quarterly basis, according to the following per-gallon rates; 3 cents for calendar year 2012; 2.5 cents for calendar year 2013; and 2 cents for calendar year 2014.

For corporate and personal income tax purposes, a subtraction adjustment is allowed for the amount of any biodiesel production refund, to the extent included in federal taxable income or adjusted gross income.

The refund provision is repealed on January 1, 2015.

Elimination of the LIFO Method?

One of the biggest revenue-raisers proposed by President Obama, as talks continue regarding the nation’s debt ceiling, is what he describes as an arcane change in the tax treatment of business inventories — things like steel, groceries and oil. The elimination of this method would dramatically affect the manufacturing and distribution industries.

The proposal would prohibit the use of an accounting technique known as last in, first out, or LIFO. The technique is used to determine the cost of goods sold, and therefore the income earned, by a company. 

The repeal of LIFO would have a tremendous impact on closely held businesses using LIFO. The LIFO reserve would be brought back into income and taxed accordingly. Many closely held businesses have significant LIFO reserves that have built-up over time and the taxation of these reserves will result in a major tax hit to the company. In some cases, the tax effect may be significant enough to force a company out of business given the current economic challenges that exist. We will continue to monitor the developments relating to LIFO and assist our clients as necessary.

Final Regulations on 3% Withholding Released

We have been carefully monitoring a new law passed on May 6, 2011 that says federal, state and other units of government with annual payments for goods and services – including contractors – of $100 million or more must withhold income tax of 3% of the total payment for goods and services. The final regulations for the provisions taking effect January 1, 2013 are summarized below.  

The following are subject to the new requirement:

1. The entire U.S. government, including all federal agencies, the executive branch, the legislative branch and the judicial branch.
2. All states including the District of Columbia (but not including Indian tribal governments).
3. All political subdivisions of a state government or every instrumentality of such subdivisions unless the instrumentality makes annual payments for property or services of less than $100 million.

Exception for Small Entities
Subdivisions of a state, or instrumentalities of a subdivision of a state, are exempt from the withholding requirement if its total annual payments for property and services (not including wages) are less than $100 million. The proposed regulations provide a simple rule for determining whether an entity makes annual payments less than $100 million. In general the entity looks to its accounting year ending with or within the second preceding calendar year For example, if total payments for the entity’s 2011 accounting year exceed $100 million, the withholding requirement will apply in 2013.

Under an optional rule, an entity may average payments made during any four of the previous five accounting years ending with the accounting year ending with or within the second preceding calendar year.

Payments Subject to Section 3402(t) Withholding
Generally, withholding is required on all payments to all persons providing property or services to the government, including individuals, trusts, estates, partnerships, associations, and corporations. Withholding is required at the time of payment. If the government entity fails to withhold the tax required under section 3402(t), it becomes liable for the payment of the tax.

Payment Threshold
The proposed regulations create a payment threshold of $10,000 and provide that payments below the threshold are not subject to withholding. The regulations also include an anti-abuse rule that payments of $10,000 or more may not be divided into payments of less than $10,000 solely for the purpose of avoiding the withholding requirements.

Exceptions
The regulations provide the following exceptions from the withholding requirements:

1. Payments otherwise subject to withholding, such as wages. Payments for retirement benefits, unemployment compensation, or social security.
2. Payments subject to backup withholding, if the required backup withholding is actually performed.
3. Payments for real property, including land or completed buildings.
4. Payment of interest.
5. Payments to other government entities, foreign governments, tax exempt organizations, or Indian tribes.
6. Payments made under confidential or classified contracts, as described in IRC 6050M(e)(3).
7. Payments made by a political subdivision of a state, or instrumentalities of a political subdivision of a state that make annual payments for property of services of less than $100 milllion.
8. Public assistance payments made on the basis of need or income. However, assistance programs based solely on age, such as Medicare, are subject to the requirements.
9. Payments made under a government grant principally for a public purpose.
10. Payments to employees in connection with service, such as retirement plan contributions, fringe benefits, and expense reimbursements under an accountable plan.
11. Payments received by certain nonresident aliens and foreign corporations.
12. Payments in emergency or disaster situations.
13. Certain payment card transactions reportable under section 6050W.

We will continue to monitor this important change so check back regularly for updates!

The Path to a Differential Standard-Setting Framework

The Financial Accounting Standards Board (FASB) staff recently completed an initial assessment of the differences in the way that private company financial statements are used by lenders, investors and others.  The assessment examined how and why the needs of those who use private company financial statements differ from those who use public company financial statements and how the cost-benefit-considerations of financial reporting vary between private and public companies.  These findings will assist the Board in developing a new framework for deciding when and how to modify specific U.S. GAAP accounting standards for private company use. 

The initial findings by the staff indicated six key differences in the way private and public companies’ financial statements are used; types of users, investment strategies, ownership structures, accounting resources and education. Click here for a more in depth analysis of these differences.

The FASB staff will continue to work with the Private Company Resource Group in developing a differential framework for the Board’s consideration.  During this time, the FASB will continue to solicit input from those using, preparing and auditing the financial statements of private companies.