Employee vs. Independent Contractor – it’s getting interesting in California

Over the years in my tax practice, one common question that keeps coming up is whether a worker should be treated as an independent contractor or as an employee. The answer to that question is quickly evolving in California. For many years the rules for determining worker status were the same for federal and California. But last year, thanks to a decision in the California Supreme Court, that changed.

Under the old rules numerous factors were evaluated to determine whether someone was an employee or an independent contractor. The Supreme Court case decided last year used a 3 part test sometimes called the ABC test to determine the proper classification of workers. The 3 part test is more restrictive than the multi-factor test. The main difference is that in the ABC test you are presumed to be an employee unless you meet all 3 of the tests. The biggest difference in the two approaches is that the 2nd test of the 3 is that anyone hired to do a core function in your business must be an employee. As an example, if Big Trucking Company hires a truck driver, he must be an employee since he is involved in the core function of the business. On the other hand, if Big Trucking hires someone to fix the office copy machine, that worker could be deemed an independent contractor since repairing copy machines is not a core function in a trucking company.

Last years Supreme Court case only applied to wage claims so for regular employment tax purposes, California still evaluated workers based on the multi-factor test, but wage claims (handled by the Department of Industrial Relations) used the ABC test to determine the correct worker status. Last week I attended a payroll tax seminar sponsored by EDD and DIR and the representatives of both agencies confirmed that they were using different methods to determine worker classification.

However, that was last week. Also last week the California legislature passed AB 5. On Wednesday of this week Governor Newsom signed this law which makes the ABC test mandatory for all California employers unless they meet one of numerous exceptions enumerated in the law. Most of this law takes effect on January 1, 2020 so many independent contractors in California will need to be reclassified as employees to comply with this new law.

If you are a California employer, I urge you to meet with your tax professional to determine if you need to make any changes for your workers. The full text of AB 5 can be found here. We would be happy to answer any questions you may have regarding how this new law will impact your business in California.

Can the IRS revoke your passport?

Thanks to the FAST act passed by congress in 2015, the IRS now has another tool to use to collect back taxes by revoking the passports of taxpayers with seriously delinquent tax debt. As of now, seriously delinquent tax debt must be at least 52,000 dollars and meet other criteria. If the IRS determines that a person has “seriously delinquent tax debt”, they can now notify the State Department who can then deny a passport application or renewal and can also revoke a current passport. Before notifying the state department, the IRS will send Notice CP508C to the taxpayer.

So, if you owe less than 52,000 you will not receive this notice. If you owe more than 52,000 but have made arrangements to pay your back taxes or are experiencing a financial hardship and are deemed to be “currently not collectible ” then you should not receive this notice. The moral of this story is that ignoring IRS collection letters can cause you to lose your passport. But, if you are working with them, you should not have this problem. Anyone receiving Notice CP508C who needs help dealing with this issue can contact a local tax professional such as an Enrolled Agent to review your options to resolve the matter as quickly as possible.

Both parties unite to repeal Obamacare Provision

In a rare instance of unity in the House of Representatives, both parties voted overwhelmingly in favor of repealing a provision of Obamacare known as the “cadillac tax.” The vote was 419 to 6 to repeal this unpopular provision which would levy a 40% surcharge on employers for providing too much health insurance to their employees. This surcharge was supposed to help pay for the cost of Obamacare but the implementation has already been delayed until 2022 and now if it passes the senate and gets signed into law the provision will be gone for good.

There was a lot of opposition to this provision from unions and other employers who tried to attract the best employees by offering exceptional health insurance. If the cadillac tax is not repealed, it will be much more expensive for employers to be able to continue providing the kind of health care that there employees have been accustomed to receiving in recent years.

Trump’s Tax Returns

It seems that the obsession to obtain our president’s tax returns is still alive and well among certain democrats and members of the media. Some democrats say that Trump must turn over his returns based on an “obscure 1924 law” that gives the House Ways and Means committee the right to review anyone’s tax returns. One argument I have heard multiple times is that the Ways and Means committee can obtain the returns and then vote to release them to the public. The Trump administration has made various arguments claiming that there are other laws which override the request from the House Ways and Means Committee.

I’m certainly not a constitutional law expert, so I won’t attempt to comment on the administrations arguments, but I am familiar with tax law. The “obscure 1924 law” that the democrats are referring to is currently known as Section 6103 of the Internal Revenue Code. The general rule that the IRS must follow is that tax return information is confidential and cannot be shared with anyone for any reason. Exceptions to that general rule are found in Section 6103. If Section 6103 overrides any other laws, then the democrats are partially correct. IRC Section 6103 (f) gives 3 congressional committees the authority to review any tax return. However, at the end of IRC 6103(f)(1) it reads ” only when sitting in closed executive session unless such taxpayer otherwise consents in writing to such disclosure. ” So there are 3 committees that have the authority to review any tax return in closed executive session, but they do not have the authority to release any return information without the written consent of the taxpayer.

Personally, there are many things I think are more important than finding out what is on President’Trump’s tax returns. However, one positive thing I see in this whole debate is that apparently the IRS takes it’s mission to protect the confidentiality of private tax information very seriously. In recent years we have seen numerous leaks of information from congress, the executive branch and the nations top law enforcement agencies. But to date, no one at the IRS has leaked the private tax information of the president, in spite of the public outcry for that information. At least in this area, the IRS is doing it’s job well.

Who can you trust for tax advice?

The IRS has a website with some useful information for taxpayers but is their information always accurate?  This morning I was looking at a news release from their site containing a table comparing business tax provisions before and after TCJA.  Here’s a snippet from their explanation about the new limitation on deducting business interest.

“The change limits deductions for business interest incurred by certain businesses. Generally, for businesses with 25 million or less in average annual gross receipts, business interest expense is limited to business interest income plus 30% of the business’s adjusted taxable income and floor-plan financing interest”

Unfortunately the opposite is true.  Businesses with over 25 million in gross receipts are subject to the new limitations while businesses with gross receipts of 25 million or less are exempt.  I suppose that they will eventually find and correct this error, but I would suggest that if you want accurate advice you go to a competent tax professional to verify what you see from the IRS.  We at L&S Tax Services can help you with any questions you may have about how the new changes can affect your individual situation.

Wesley Snipes loses to IRS again.

After serving 3 years in prison for failing to file tax returns and filing fraudulent claims, Wesley Snipes still can’t win with the IRS.  He owed roughly 23.5 million in federal taxes and filed an Offer In Compromise offering to pay roughly 850,000 to settle his debt with the IRS.  The Offer In Compromise program allows people to settle their debt by offering less than they owe, but the offer will not be accepted by the IRS unless it reflects the RCP.  (Reasonable Collection Potential)  The IRS originally calculated his RCP as over 17 million dollars.  Their investigation showed that he owned numerous assets through various entities he controlled.  After further negotiations they reduced their calculation to 9.5 million dollars.  

Wesley appealed their decision to tax court but lost again.  He couldn’t convince the judge that the IRS position was wrong. The Offer In Compromise is one of several alternatives available for someone who owes back taxes.  A competent tax professional such as an Enrolled Agent can assist you in determining the best options available for your given situation.

Tax Break for Disabled Vets

There has been some mention in the press recently about a tax break for disabled vets.  To explain this tax break let’s start with the basics of how retirement pay is taxed for a disabled veteran.  First off, disability pensions for a veteran are non-taxable, but regular retirement pay of a veteran is subject to federal income tax.  So, for a totally disabled veteran their retirement pay is completely non taxable. A partially disabled veteran would pay tax on their regular pension but the portion that represents retirement disability pay is not taxable.  Typically, this is accounted for on the 1099-R received by the retired veteran.  For example, a retired veteran with a 30% disability and annual pension of 30,000 would pay tax on 21,000.  This 21,000 taxable amount would be reflected on the 1099-R issued by the Department of Defense

However, many combat injured veterans received severance pay upon leaving the military but their disability rating was not determined until some future date.  As a result, the severance pay was listed as fully taxable in the year it was received.  As an example, let’s say an injured combat veteran received 25,000 in severance pay in 2015, but his disability rating was not completed until 2016.  In 2015, he would have received a 1099-R showing that the 25,000 was taxable.  In 2016 he is determined to be 50% disabled.  For 2016 and each succeeding year his 1099-R would reflect that 50% of his pension is tax free, but what about 2015?  50% of his severance pay should have been non-taxable and he would have to file an amended return to get his refund.

I have filed amended returns for wounded veterans with this exact situation, but there are many veterans who were unaware of this tax benefit.  In late 2016 Congress addressed this issue and passed a law allowing disabled vets who had retired since 1991 an opportunity to claim those missed refunds.  As part of the Combat Injured Veterans Tax Fairness Act, the Department of Defense has issued over 130,000 letters to disabled veterans who may be entitled to refunds for overpaying the tax on their disability severance pay.  Affected veterans will have one year from the receipt of the letter to file any needed amended returns to claim their refunds.

Summer Time Tax Check Up

I frequently recommend to my clients with complicated tax situations to do a summertime checkup to see if they are paying sufficient amounts through withholding or estimated payments in order to avoid a negative surprise at tax time.  This year that activity is especially important because of the various changes made to the tax law last December.  Because tax rates dropped for virtually everyone, nearly all wage earners are having less federal withholding from their pay than last year.  However, not all taxpayers will see an overall reduction in their tax liability for 2018.  Tax rates dropped and there are some new and expanded tax credits, but some deductions also went away.  The standard deduction nearly doubled, exemption allowances were eliminated, the child credit was expanded and there is a new credit for all other dependents that don’t qualify for the child credit.

The IRS has a calculator available to help people in determining the correct number of withholding allowances to claim on their W-4 forms.  I have heard various complaints about the limitations of this IRS tool, but it works well for fairly simple situations.  If you have multiple sources of income or other factors that make it more difficult to estimate your tax liability, you probably should consult with a competent tax advisor such as an Enrolled Agent to help you with this task.  Proper tax planning can avoid that negative surprise when you file your taxes next spring.