It seems like every year we have the discussion with one or two of our clients whether someone is an employee or independent contractor.  I also see court cases each year where someone was not categorized properly by the taxpayer (usually treating them as a contractor rather than an employee).  If someone is an employee, the employer is required to withhold taxes from that person as well as pay their share of employment taxes.  If they are a contractor, there is generally no withholding and all tax is the responsibility of the individual.  Recently there was another case on this very point, Bruecher Foundation Services Inc v. U.S. (CA 5 06/18/2010) 105 AFTR 2d ¶ 2010-997.  If you’re paying someone to do work for you and you’re not withholding taxes, you may want to evaluate if they truly are a contractor or should they be an employee.  These determinations are generally done on a “facts and circumstances” basis.  If you wait for the IRS, state revenue agency or department of labor to make the determination for you, it can be a very painful and expensive process to fix this.  In the above mentioned case, they list some of the items that are looked at when making such a determination, starting with:

“Whether a worker is an independent contractor or employee generally is determined by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Under the common-law rules (so-called because they originate from court cases rather than from the Code), factors used to determine if an individual is a common law employee are”

• The degree of control exercised by the principal;
• which party invests in work facilities used by the individual;
• the opportunity of the individual for profit or loss;
• whether the principal can discharge the individual;
• whether the work is part of the principal’s regular business;
• the permanency of the relationship;
• the relationship the parties believed they were creating; and
• the provision of employee benefits.

This is by no means an exhaustive, list, but a start to get you thinking about the issue.  There has been a great deal published in this area.

For additional information view our previously posted blog “Misclassification of employees as independent contractors”.

Congratulations to the Colorado State Board of Accountancy for changing the continuing education (CE) requirements!  The State adopted the CE guidelines of the National Association of State Boards of Accountants and the American Institute of Certified Public Accountants.  Prior to the change, CE was segregated in two categories; A, or technical education, and B, non-technical.  Everyone referred to A as good and B as bad.  The fact that B was in a separate bucket had a negative connotation.  The first sentence of guidance – Other programs or courses which contribute to the development and maintenance of other professional skills may be acceptable – didn’t really put a positive spin on it.  A is where it was at. 

But if you looked further, the guidance from the State regarding B CE read – Such programs may include, but are not limited to, the areas of communication, quantitative methods, behavioral sciences, statistics and practice management.  Although it isn’t very clear, it doesn’t sound all bad.  Coursework aimed at being effective at communicating with clients, mentoring co-workers and running our practices.  Maybe it just got overlooked because of the presentation.

I love the new format.  No more A and B CE.  No more good and bad.  Just twenty three equally weighted fields of study that do contribute to the development of the professional skills necessary to be good at what we do.

Good communication skills won’t get you very far in the tax biz if your technical skills aren’t there.  But top-notch technical skills combined with communication, writing, counseling, leadership, time management, technology and other skills that the State is now promoting?  That’s where it’s at!

For entities with a calendar year-end, it’s that time of year – time to calculate the second quarter income tax provision.  Income tax expense for interim periods is based on an estimated annual effective income tax rate multiplied by the year-to-date ordinary pretax book income.  To get your interim provision right the first time, remember the following:

• Ordinary pretax book income does not include significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect.  Such items include, but are not limited to, discontinued operations or the cumulative effect of a change in accounting principle. 
• Certain items are not included in the estimated annual effective tax rate.  Instead, these items are allocated 100% to the quarter in which they occur.  Such items include, but are not limited to, certain releases of a valuation allowance, certain changes in a liability for uncertain tax positions, the impact of a change in tax law and the true-up of the tax provision from the prior year.
• Just like the annual tax provision, the interim tax provision is based on enacted tax law.  As of June 30, 2010, the American Jobs and Closing Tax Loopholes Act of 2010 (a.k.a. the Extenders Bill) has not been signed into law by the President.   As such, it is not appropriate to include in the second quarter provision any benefit for Research Credits generated during 2010.   
• Jurisdictions in which a company is unable to recognize a tax benefit for losses (i.e. a full valuation allowance has been recorded) are excluded from the estimated annual effective income tax rate calculation. 

Sometimes it’s hard to tell the difference between the two.  Is what I’m experiencing truly the problem or is it a symptom of an underlying problem?  The terrible headache isn’t the problem, only a symptom resulting from a large brain tumor.  I’ve learned that whenever I think I’ve identified the problem, I need to dig deeper to determine if it is only a symptom.  We need to get to the root cause.

I was talking with a friend last week and he was frustrated with his sales results.  He had identified the problem; his sales force and channel partners were not being effective.  We talked about it for awhile and it became clear that the problem he identified was only a symptom.  The company had not clearly identified who its customer was.  Pretty tough to develop a go to market strategy when you haven’t identified who your market is.  He needed to dig deeper to diagnose the tumor.  To get to the root cause.

When I interview people about their public accounting experiences, I typically ask what they love and what they hate.  They typically love the people, the clients and the caliber of work.  They hate the problems; the long hours, tremendous stress, and lack of control over their schedules (along with plenty of others).  These are symptoms folks. 

Likewise, we’ve talked with hundreds of companies over the past years.  There is a common theme to the message we hear.  Most of the pains we hear about are symptoms stemming from the symptoms described in the previous paragraph.  The headache affects one’s ability to focus.

In order to be the professional service firm that provides better results to the people that work in it and the clients that benefit from it, we are digging deeper in order to tackle the root cause.

We typically don’t comment on new legislation until it’s passed, but we’ve been receiving many questions on the status of the American Jobs and Closing Tax Loopholes Act of 2010 which was passed by the House of Representatives of May 28.

 On June 8, the Senate began its consideration of its substitute amendment to the bill and is expected to vote this week on its version of the extenders package (technically the Senate substitute amendment to the House amendment to the Senate amendment), and Senator Charles Schumer (D-NY) has predicted that the measure will pass.

 The bill before the Senate is very similar to the bill passed by the House. Both bills would retroactively reinstate and extend for one year a host of important tax breaks for businesses and individuals. And they both include many revenue raisers, such as a crackdown on carried interest, a crackdown on using certain S corporations as a way to minimize Medicare and Social Security taxes, and another assault on “foreign tax loopholes.” However, the Senate bill makes several important modifications to the tax provisions in the House-passed bill.  

• The Senate bill drops the House bill’s new rules for defined contribution plan fee disclosure requirements.
• The Senate bill keeps the House’s carried interest crackdown but modifies it to soften the blow
• The Senate bill would increase the Oil Spill Liability Trust Fund financing rate to 41 cents per barrel (up from 34 cents in the House version).

 We’ll update with all the details when the bill is passed.

We usually defer the dissemination of proposed legislation until passed by Congress and signed by the President. We’re getting lots of questions about what Congress is considering in its proposed Health Reform Bill, so here are a few key highlights coming out of the Senate Finance Committee which passed earlier this week:

- Starting in July 2013, the bill would establish a requirement for U.S. legal residents to obtain insurance and would in many cases impose a financial penalty on people who don’t do so.
- A 40% nondeductible excise tax would be levied on health coverage in excess of $8,000/$21,000 (indexed for inflation), effective for tax years beginning after 2012. Increased thresholds would apply for over age 55 retirees and certain high-risk professions (e.g., firefighters, construction and mining workers), and a higher threshold would apply for health insurance plans maintained in the 17 states in which health care was least affordable for the year ended Dec. 31, 2012. For employees, the employer would aggregate the coverage subject to the limit and issue an information return for insurers indicating the amount subject to the excise tax. The excise tax would be levied at the insurer level.
- Employers would be required to report the value of health benefits on employees’ Form-W-2s, effective for tax years beginning after 2009. For purposes of employer provided health coverage (including health reimbursement accounts (HRAs) and health flexible savings accounts (FSAs), HSAs, and Archer medical savings accounts (MSAs)), the definition of medicine expenses deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses. But this change would not apply to doctor prescribed over-the-counter medicine. Thus, the cost of over-the-counter medicine (other than doctor prescribed) could not be reimbursed through a health FSA or HRA. In addition, the cost of over-the-counter medicines (other than doctor prescribed) could not be reimbursed on a tax-free basis through an HSA or Archer MSA. These changes would be effective for tax years beginning after 2009.
- The penalty for nonqualified HSA distributions would be increased from 10% to 20%, effective for disbursements made during tax years beginning after 2010.
- Allowable contributions to health FSAs in cafeteria plans would be capped at $2,500, effective for tax years beginning after 2010.
- Effective for tax years beginning after the enactment date, Code Sec. 501(c)(3) hospitals would be subject to new requirements, e.g., a community health needs assessment, promulgation and dissemination of a written financial assistance policy, and new reporting and disclosure rules.
- Effective for payments made after 2011, the bill would modify the general information reporting requirement by eliminating the exception for payments to corporations. The class of payments with respect to which reporting is required would be clarified to include gross proceeds for both property and services.
- The floor beneath itemized medical expense deductions would be raised from 7.5% of adjusted gross income (AGI) to 10%, effective for effective for tax years beginning after 2012. The AGI floor for individuals age 65 and older (and their spouses) would remain unchanged at 7.5%.
- The deduction for expenses allocable to Medicare Part D subsidy would be eliminated, effective for tax years beginning after 2010. A $500,000 deduction limit would apply to the remuneration of officers, employees, directors, and service providers of covered health insurance providers. This limit would be effective for remuneration paid in tax years beginning after 2012 with respect to services performed after 2009.
- For tax years beginning after 2010, the bill would provide for a safe harbor from the nondiscrimination requirements for cafeteria plans for an eligible small employer. The safe harbor would also apply to the nondiscrimination requirements for specified qualified benefits offered under the cafeteria plan, including group term life insurance, coverage under a self insured group health plan, and benefits under a dependent care assistance program. The safe harbor would require that the cafeteria plan satisfy minimum eligibility and participation requirements and minimum flex-credit contribution requirements.
- The bill would create a temporary tax credit, subject to an overall cap of $1 billion, to encourage investments in new therapies to prevent, diagnose, and treat chronic diseases, effective for expenditures paid or incurred after 2008, in tax years beginning after 2008. The credit would sunset at the end of 2010.