Latest news with #taxobligations
Forbes
4 days ago
- Business
- Forbes
Employees Or Independent Contractors? How To Classify Workers
A business' tax and benefit obligations are limited when a worker is a contractor. But misclassification can be costly. getty When you're a small business, you may not have the resources (nor the need) for a full-time staff. You might choose to have one or two employees who work part-time, one or two who work full-time, or, depending on your circumstances, you might fill in the gaps seasonally by hiring temporary employees. From a tax and employment law perspective, all of them could potentially be your employees. Sometimes employers assume that only full-time, permanent workers are employees. This is not true. Employees can be full-time or part-time, seasonal or year-round, temporary or permanent. The question of how to classify workers as employees versus independent contractors depends on many factors, but the length of employment is not one of them. What distinguishes an employee from an independent contractor? If a worker is an employee, the employer has certain tax obligations on behalf of the worker. In contrast, an employer does not withhold any payroll taxes, including Social Security and Medicare taxes, nor does it pay the employer portion of those taxes for an independent contractor. The Internal Revenue Service (IRS) says that the general rule is that an individual is considered an independent contractor if the person paying for the work has the right to control or direct only the result of the work, not the manner in which it is done. Or, to put it simply, it's a question of control: The more you control the terms of the employment, the more likely it is that you are an employer. Obviously, control is relevant and cases are fact-specific. In an effort to clarify this, in 1987, the IRS developed a list of 20 factors to be considered. Those were memorialized in Revenue Ruling 87-41. (A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties, and regulations, and indicates how the IRS believes the law should be applied to a specific set of facts.) The 20 factors identified by the IRS in Revenue Ruling 87-41 are listed below. The more the answer to each question is yes, the more likely it is that the worker is an employee and not an independent contractor. Of course, that list isn't written in stone, just in a Revenue Ruling. Some of this is subjective, and there's no magic number of times you can answer yes that conclusively determines the outcome. Since that time, the IRS has updated its checklist to three categories of factors to be used alongside the 20 questions. For IRS purposes, as an employer, you must weigh all these factors to determine whether a worker is an employee or an independent contractor. The IRS also has a helpful section on its website that provides examples and definitions. So is this just about a paycheck? Not at all. Employers have different obligations towards employees than they do towards independent contractors—and that extends beyond tax obligations. For example, an employer is not responsible for providing the same benefits and tax-favored opportunities, such as health care insurance and retirement plans, to an independent contractor that they provide to those workers who are considered employees. An employer is not required to offer stock options or other incentive plans to an independent contractor. And when an independent contractor leaves, for whatever reason, there is generally no severance or unemployment compensation payable. In short, an independent contractor is, well, independent. Worker classification can also impact wages and overtime pay. That's why, as part of its efforts to address worker misclassification, the Wage and Hour Division of the Department of Labor (DOL) published a final rule, effective March 11, 2024, revising its guidance on how to analyze whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Additional information is available on the DOL website. Worker misclassification issues aren't limited to small businesses. Several high-profile companies, including Microsoft, Time Warner, and Lyft, have faced court cases over allegations of worker misclassification. Perhaps the most famous case involved FedEx, which was accused of classifying and paying its drivers as independent contractors for years (when they should have been classified as employees). After extensive litigation in multiple states, FedEx paid nearly half a billion dollars in settlement payments for misclassification. What happens if you do it wrong? As court cases around the country have demonstrated, if you erroneously classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. Depending on circumstances, you may be required to retroactively apply benefits. If you have concerns, you can get out in front of the problem. If you want the IRS to make a determination, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. (The form may be filed by either the business or the worker.) The IRS will review the facts and circumstances and officially determine the worker's status. But it's not quick: it can take at least six months to get a determination. If you've misclassified a worker as an independent contractor, but you have a reasonable basis for doing so, you may qualify under a safe harbor for tax relief. The relief, sometimes referred to as section 530 relief, requires you to meet certain criteria, including treating the worker consistently for filing obligations (for example, you filed Form 1099-NEC for a worker you considered an independent contractor). You must also have treated similar workers as independent contractors. The IRS also offers a Voluntary Classification Settlement Program (VCSP) that allows employers to reclassify workers as employees for future tax periods and obtain some tax relief. To participate, a business owner must meet certain eligibility requirements (similar to those for section 530 relief).
Yahoo
26-05-2025
- Business
- Yahoo
ATO warning 2.6 million Aussies ahead of tax time: ‘Will face consequences'
The Australian Taxation Office (ATO) has small businesses in its sights and has flagged its key areas of concern as we head into tax time. Australia's 2.6 million small business owners will receive emails from the ATO in the coming months reminding them of their tax and superannuation obligations. It's part of the ATO's 'Ready for Business' campaign, which aims to give extra support to new business owners to ensure they get things right from the start and avoid landing in hot water. While most small businesses try to do the right thing, the ATO warned there were some that were 'deliberately' not complying. The ATO said GST registration and payment was a key 'ongoing area of concern', with an estimated $8 billion in GST each year not collected due to non-compliance. RELATED Forgotten ATO deductions that can boost your tax refund by $974 ATO warning ahead of $1,288 cost-of-living cash boost: 'Shooting yourself in the foot' $3 million superannuation tax change sparks property warning as 'panic' selling begins Not every small business needs to be registered for GST. But if their GST turnover is $75,000 or more, or when they provide taxi, limo or ride-sourcing services, then they must register and collect GST and pay it to the ATO. ATO deputy commissioner Will Day urged small businesses to set aside GST, along with pay as you go (PAYG) withholding and super, if they had employer obligations. 'Don't be tempted to dip into GST, PAYG withholding or super to manage your cash flow – set up separate bank accounts for these funds so you're always prepared when it's time to pay,' Day said. The ATO wrote to ride-sourcing operators and taxi drivers in early 2025, warning them it was focused on those operating outside the system. This resulted in more than 3,000 new GST registrations. 'Ride-sourcing operators and taxi drivers who deliberately operate outside the system will face consequences,' Day warned. The ATO shifted around 3,500 small businesses with a history of non-payment, late or non-lodgement, or incorrect reporting from quarterly to monthly GST reporting in April. The more than 70,000 taxpayers who are boosting their income with side hustles, including gig economy and sharing economy activities, are also "in the spotlight" by the ATO. The high cost of living has pushed many Australians to pick up side hustles to help them get by, with the Australian Bureau of Statistics finding there were one million multiple job-holders in December. If your side hustle has turned into a profit-making business, you will be responsible for certain tax, super and registry obligations. "Generally, a business involves continuous and repeated activities aimed at making a profit,' Day explained. The ATO has a handy guide here to help figure out whether your side hustle qualifies as a business and your obligations. The tax office is also encouraging new small business owners to plan ahead to avoid a big tax bill when they lodge their first tax return. Owners can voluntarily enter and prepay their estimated tax liability through PAYG instalments when they start their business.
RNZ News
11-05-2025
- Business
- RNZ News
IRD targets outstanding student loans in property investment crackdown
Photo: Supplied Inland Revenue is cracking down on property investors who aren't meeting tax obligations, including those with outstanding student loans. IRD estimates there was about $153 million in unpaid taxes in the property sector in the first nine months of this financial year , about the same as the amount found in the whole of the year before, including undeclared tax gains on properties subject to the bright line test, as well as upaid GST on sales. IRD has more resources to chase unpaid taxes with proactive use of other information sources such as land transfer information. Property Investment Federation's advocacy and communications manager Matt Ball said there could be some investors unaware of their obligations, but most were well informed about tax policies where property investments were concerned. "Another example that they've shared with us is around around student loan obligations, people who have student loan obligations but who also have investment properties here in New Zealand," Ball said, adding IRD's investigations included property investors living overseas. "IRD are even tracking those people down and making sure they pay their student loans and their taxes in relation to an investment property." IRD had been running a campaign to help people understand their obligations under the bright-line rules resulting in about $3.7 million in voluntary disclosures.
