Independent Contractor vs. Employee: The Basics (Part 2 of 3)

Section 530

Congress directed IRS not to reclassify workers as employees when a company demonstrates a good faith believe that its workers were independent contractors.

These rules, referred to Section 530, were not incorporated into the Internal Revenue Code, but, nevertheless, remain part of the law and are critical in protecting companies against a reclassification.

Section 530 is available to companies that treated workers as independent contractors, if –

  1. The company always treated the particular worker as an independent contractor and the general class of workers performing similar work as independent contractors;
  2. After 1978, the company filed all returns (including information returns) required for the worker and all such returns were consistent with independent contractor status; and
  3. The company had a “reasonable basis” for treating the worker as an independent contractor.

Safe Harbors

In general, there are three safe harbors under Section 530:

  1. A judicial precedent, published rulings or technical advice or letter ruling to the employer;
  2. A prior IRS audit in which no assessment was made on account of improper treatment of the worker; or
  3. A long-standing recognized practice of a significant segment of the industry in which the individual worked.

Independent Contractors vs. Employees: The Basics (Part 1 of 3)

Introduction

The classification of workers as independent contractors is fraught with potential disaster. A misclassification could ruin the company financially and, potentially, its officers and owners. The rules are complex and sometimes contradictory.

In addition to the IRS and state taxing authorities, state labor agencies may examine the company’s practices.

Key Tests

Traditionally, the key test on whether a worker is truly an independent contractor or is merely an employee who has been misclassified as such, involves the issue of control: Are the services of the worker subject to the taxpayer’s (company’s) will and control over what must be done and how it must be accomplished?

However, another equally important consideration is whether the company contracted with an independent business owned by the worker, rather than the worker directly. This is becoming a much more important factor than in the past.

Mistakes

Remember the “duck” theory: If it walks like a duck, swims like a duck, looks like a duck and quacks like a duck, it is a duck, no matter what you call it.

Do not treat someone who is obviously an employee as an independent contractor. Treating receptionists, secretaries, office managers, cooks, wait staff and office personnel as independent contractors will never fly.

Also, do not treat temporary or new hires as independent contractors during a trial period. The focus is on the tests described above, not the number of hours worked or the duration of employment.

Do not try to force a worker into independent contractor status, because if the worker quits and files for unemployment, expect a big-time legal problems from the state paying the unemployment benefits.

 

Buffet on Taxes

Introduction

On August 14, 2011, plain-speaking, multi-billionaire Warren Buffet inked a New York Times editorial that rocked the world.

In essence, the globe’s second wealthiest person (next to Bill Gates) stated U.S. tax policy favored billionaires (like him) over middle-class working stiffs and it was time for a change.

Buffet’s Position

Warren Buffet is fond of saying that there is class warfare in the U.S. and his class is winning. He observed that:

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species.

His effective tax rate is 17.4%, which is lower than the tax rates of the other 20 people employees in his office. Buffet noted that most of his income came from capital gains and dividends, taxed at 15% and that billionaires pay little, if any, payroll taxes.

Those earning middle-class wages pay between 15-25% in income taxes, plus payroll taxes of roughly 7.65%.

Taxes and Investing

Buffet declared there was no correlation between tax rates and the amount of investing, noting that he and his billionaire buddies invested when the capital gains rates were 39.9% during 1976 and 1977.

Taxes are not the driving force for investors, money-making is, and this occurs when the economy is stable and growing, and when workers can find jobs.

Taxes and Jobs

The same is true regarding job creation, as Buffet noted:

… a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Note: the extension of the Bush tax cuts after 2010 has produced no significant job creation by those so-called “job creators,” because, as Buffet proclaimed, there is no connection between tax cuts and job creation. To the contrary, many small business lament that it is demand by customers, not tax breaks, that causes companies to hire.

Who Cares?

Why write about what Warren Buffet says? Because when those advocating a fairer tax system speak, their critics scream “class warfare.” Now that the world’s most successor investor says the same thing, the tables are turned.

This is not someone asking for a government handout, Buffet is at the top of the economic food chain and understands how the political system has been rigged against the poor and middle class.

Howls of Betrayal

For his frankness, Buffet was vilified as a “traitor to his class,” ironically, a charge leveled at President Franklin Delano Roosevelt for proposing the New Deal. Curiously, the blowback was personal and not aimed at the essence of Mr. Buffet’s argument.

Buffet, the world’s leading investor and the most successful capitalist on the planet, was actually deemed a “socialist” by those too ignorant to distinguish between capitalism and socialism.

Conclusion

Judging by the rabid personal attacks against Mr. Buffet, those who favor continuing the Bush tax cuts lack solid economic evidence or arguments to seriously debate him.

Their responses are focused on protecting multi-millionaires and billionaires, who pay handsomely for this political support.

And Warren Buffet has just blown the cover off of this politically-motivated racket.