Monday, December 14, 2009
Wednesday, November 11, 2009
Equine Accounting: Home, Sweet Home (Office Deduction)
If you use a portion of your home for business purposes, you may be able to take a home office deduction if you meet certain requirements. In order to claim a business deduction, you must use part of your home for one of the following two reasons: 1. Exclusively and regularly as either: your principal place of business, or as a place to meet or deal with clients in the normal course of your business. To meet the test for exclusive use, you must use use a specific area of your home only for your trade or business. And you must have no other fixed location where you conduct substantial administrative or management activities of your trade or business. For example, if you conduct part of your business from an office located in your barn, you could not also claim home office expenses for the same business activity. And you must use this space regularly, rather than incidentally or occasionally.
2. On a regular basis for certain storage use -- such as storing inventory or product samples -- as rental property, or as a home daycare facility.
The use of the office must be for “substantial managerial or administrative activities” such as billing customers, keeping books and records and scheduling appointments. The business activity associated with the home office need not be your main activity but the home office must be the principal place of business for your sideline activity. For example, an attorney working full time may judge at horse shows on weekends. If the home office is not used for purposes other than those associated with being a judge, the expenses associated with the home office should be deductible for tax purposes. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Usage is commonly allocated based on the percentage of square footage allocated for business use but any other reasonable method would be acceptable.
Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer. If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Depreciation is an allowance for the wear and tear on the part of your home used for business. You cannot depreciate the cost or value of the land.
HOWEVER (you knew there had to be a downside), if you sell your house, any depreciation taken on a home office after May 6, 1997 must be recaptured at the rate of 25 percent (for taxpayers in tax brackets over this amount). You cannot use the home sale exclusion to offset this tax. You cannot avoid the recapture by not reporting depreciation. Recapture applies to depreciation both claimed and claimable. If you want to avoid the depreciation recapture, you must choose to sidestep the deduction entirely by disqualifying the home office (by NOT using the space entirely for business). You will miss out on the depreciation expense but can still deduct related costs such as office maintenance.
For more information, see IRS Publication 587.
2. On a regular basis for certain storage use -- such as storing inventory or product samples -- as rental property, or as a home daycare facility.
The use of the office must be for “substantial managerial or administrative activities” such as billing customers, keeping books and records and scheduling appointments. The business activity associated with the home office need not be your main activity but the home office must be the principal place of business for your sideline activity. For example, an attorney working full time may judge at horse shows on weekends. If the home office is not used for purposes other than those associated with being a judge, the expenses associated with the home office should be deductible for tax purposes. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Usage is commonly allocated based on the percentage of square footage allocated for business use but any other reasonable method would be acceptable.
Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer. If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. Depreciation is an allowance for the wear and tear on the part of your home used for business. You cannot depreciate the cost or value of the land.
HOWEVER (you knew there had to be a downside), if you sell your house, any depreciation taken on a home office after May 6, 1997 must be recaptured at the rate of 25 percent (for taxpayers in tax brackets over this amount). You cannot use the home sale exclusion to offset this tax. You cannot avoid the recapture by not reporting depreciation. Recapture applies to depreciation both claimed and claimable. If you want to avoid the depreciation recapture, you must choose to sidestep the deduction entirely by disqualifying the home office (by NOT using the space entirely for business). You will miss out on the depreciation expense but can still deduct related costs such as office maintenance.
For more information, see IRS Publication 587.
Saturday, October 10, 2009
Equine Accounting: Franchises-The more we get together, the happier we'll be
Don't have $150,000 for a Grand Prix horse capable of competing on a national level? Just find 14 friends each with $10,000 to spare and create a syndicate. Is it that easy? No, not really. But syndicates, which have been popular for some time for race horses and breeding, are becoming a useful way to finance the purchase of a competition horse. Several friends of mine who were all students of a well-known dressage trainer combined funds and expertise with other interested parties and created a syndicate to allow the trainer to purchase a very talented horse that he had in training. One of my friends jokingly says that she "owns the tail".
What is a syndicate? A syndicate is a division of ownership. Each shareholder or member contributes a portion of the cost to purchase and/or maintain a horse or horses. Generally, the syndicate's legal form of organization is either a partnership or an LLC (Limited Liability Corporation). What does the Syndicate Agreement include? Generally, the agreement should include:1. the rights, interests, obligation and privilege of each member.2. identification of the animal(s) and where it will be held.3. warrants as to the health and title of the animal(s).4. conditions for transferability of shares.5. designation of syndicate manager and explanation of his/her duties and compensation.6. provision for the tax treatment of the syndicate.7. establishment of liability insurance coverage and in the case of stallion/mare, any warranties of fertility.8. any timelines for when the horse will be sold or the syndicate will terminate.9. explanation of procedure to modify current agreement, if necessary. What is the cost to purchase a share in a syndicate? The biggest variable in determining the cost of a share is the cost of the horse. Another variable is the issue of who bears the cost of future expenses. Many syndicates require that members make an annual contribution for the cost of maintaining the horse - feed, board, vet bills, farrier as well as costs for competition and shipping. However, some syndicates offer their shares at a one-time fee. This is more often the case if the current owner of the horse cannot afford the future costs of training and competing and creates a syndicate to obtain funding to campaign the horse further. In this case, there is no actual purchase of a horse. The revenues from sales of shares are used to fund future endeavors. What are the benefits of syndication? For members, the risk of ownership is significantly decreased. If the horse is not a successful performer or in injured, the loss is only a fraction of the purchase price. It is a relatively safe and inexpensive way to get involved in racing, breeding or competing and provides the opportunity to participate on a much higher level than individual ownership. Some syndicates offer perks such as the opportunity for members to attend select competitions with access to VIP hospitality or to obtain lessons on their own horses at discounted rates. For the trainer/rider, it provides funds to purchase a horse that may otherwise have been unobtainable. Because a syndicate is composed of many members and designation of the trainer has been included in the syndicate agreement, it provides a much more stable relationship for the trainer with the owners and the likelihood of a horse being moved from trainer to trainer is considerably diminished. What about taxes? An attorney, knowledgeable in this subject, is essential. A syndicate is treated under tax laws as either a joint ownership of property or as a partnership. The activities of the syndicate determine how it is treated for tax purposes. When the syndicate is treated as a joint ownership of property, each member files their tax return as a sole proprietor. They report their share of income and expense of the syndicate with no computation of the income and expense of the syndicate included with their return. They can choose the method of depreciation that is most beneficial to their tax situation. If the syndicate is treated as a partnership for tax purposes, Form 1065 K-1 (IRS filing on partnership informational return) must be included with each member's personal return and the method of depreciation is determined by the syndicate. Depending on the activities of the syndicate and the structure of the syndicate agreement, there is the possibility that syndicate shares may be treated as a security would be subject to specific requirements by the SEC (U.S. Securities and Exchange Commission). There are also murky tax issues such as "at-risk rules" and possible tax shelter status. So be sure to have an attorney that represents you look over the syndicate agreement.
What is a syndicate? A syndicate is a division of ownership. Each shareholder or member contributes a portion of the cost to purchase and/or maintain a horse or horses. Generally, the syndicate's legal form of organization is either a partnership or an LLC (Limited Liability Corporation). What does the Syndicate Agreement include? Generally, the agreement should include:1. the rights, interests, obligation and privilege of each member.2. identification of the animal(s) and where it will be held.3. warrants as to the health and title of the animal(s).4. conditions for transferability of shares.5. designation of syndicate manager and explanation of his/her duties and compensation.6. provision for the tax treatment of the syndicate.7. establishment of liability insurance coverage and in the case of stallion/mare, any warranties of fertility.8. any timelines for when the horse will be sold or the syndicate will terminate.9. explanation of procedure to modify current agreement, if necessary. What is the cost to purchase a share in a syndicate? The biggest variable in determining the cost of a share is the cost of the horse. Another variable is the issue of who bears the cost of future expenses. Many syndicates require that members make an annual contribution for the cost of maintaining the horse - feed, board, vet bills, farrier as well as costs for competition and shipping. However, some syndicates offer their shares at a one-time fee. This is more often the case if the current owner of the horse cannot afford the future costs of training and competing and creates a syndicate to obtain funding to campaign the horse further. In this case, there is no actual purchase of a horse. The revenues from sales of shares are used to fund future endeavors. What are the benefits of syndication? For members, the risk of ownership is significantly decreased. If the horse is not a successful performer or in injured, the loss is only a fraction of the purchase price. It is a relatively safe and inexpensive way to get involved in racing, breeding or competing and provides the opportunity to participate on a much higher level than individual ownership. Some syndicates offer perks such as the opportunity for members to attend select competitions with access to VIP hospitality or to obtain lessons on their own horses at discounted rates. For the trainer/rider, it provides funds to purchase a horse that may otherwise have been unobtainable. Because a syndicate is composed of many members and designation of the trainer has been included in the syndicate agreement, it provides a much more stable relationship for the trainer with the owners and the likelihood of a horse being moved from trainer to trainer is considerably diminished. What about taxes? An attorney, knowledgeable in this subject, is essential. A syndicate is treated under tax laws as either a joint ownership of property or as a partnership. The activities of the syndicate determine how it is treated for tax purposes. When the syndicate is treated as a joint ownership of property, each member files their tax return as a sole proprietor. They report their share of income and expense of the syndicate with no computation of the income and expense of the syndicate included with their return. They can choose the method of depreciation that is most beneficial to their tax situation. If the syndicate is treated as a partnership for tax purposes, Form 1065 K-1 (IRS filing on partnership informational return) must be included with each member's personal return and the method of depreciation is determined by the syndicate. Depending on the activities of the syndicate and the structure of the syndicate agreement, there is the possibility that syndicate shares may be treated as a security would be subject to specific requirements by the SEC (U.S. Securities and Exchange Commission). There are also murky tax issues such as "at-risk rules" and possible tax shelter status. So be sure to have an attorney that represents you look over the syndicate agreement.
Wednesday, August 12, 2009
Equine Accounting: Hobby vs Business...What the IRS says
To you, it's a way to combine your passion with the need to eat and have a roof over your head. It's a business. But the IRS might have an alternative view. How do they decide and what difference does it make to you?
The IRS has created the Hobby Loss Rule for unincorporated businesses that it determines to be created mainly for recreation, sport or personal enjoyment. In addition to horses, examples of other activities that might qualify under this heading would be coin/stamp collecting or dog/cat breeding. For the IRS to classify your activity as a business, there must be a presence of a profit objective. The owner must have entered into or continued with the activity with the objective of making a profit.
The profit motive can be inferred by the IRS by examining the following factors (commonly known as the 9 Factors Test):
1. Is the activity carried on in a business-like manner - business records are separate from personal records, the business has a long-range business plan (preferrably written) and complete and accurate books are kept?
2. Does the owner invest a significant amount of time in the business?
3. Does the owner depend on the income from the activity for his/her livelihood?
4. What is the amount of occasional profits, if any?
5. Has the activity been profitable in some years and how much profit is realized?
6. Does the owner have the expertise to carry on the business? Do they solicit the advice of experts?
7. Are there elements of personal pleasure or recreation involved?
8. Is there an expectation that the assets used in the activity will appreciate in value?
9. Has the owner had success in other similar ventures?
The burden of proof is on the taxpayer. IRS regulations state that in determining whether an activity is enaged in with a profit motive, the IRS will look to "objective standards, taking into account all the facts and circumstances of each case."
What can you do to avoid having your business classified as a hobby activity? As a business owner, you need to operate in a way which conforms to the factors that indicate a profit motive. Available on the IRS website is the Audit Techniques Guide for Farm Hobby Losses with Cattle and Horse Activities. This guide is available to auditors, prior to visiting a horse/cattle activity. Read it and familiarize yourself with the areas are important to the IRS regarding this issue.
Another factor for you to consider is the possibility of timing the profit and loss years. In IRS terms, this situation is known as the "General Presumption" or more commonly as the "Two out of Seven Rule". This is a lengthy subject and will be discussed in a later issue of this newsletter.
If you think that your business is too big, has been in business too long, etc. to be determined to be a hobby by the IRS, consider this; in 1958, Tempel Smith decided to build a herd of Lipizzan horses and create an organization in the U.S. similar to the Spanish Riding School. Tempel Farms showed consecutive losses over the period from 1958-1976, totalling approximately $5.9 million dollars. By 1976, the herd size was approximately 400 horses. In Smith v Commissioner 1979, the IRS challenged the profit presumption and tried to establish that Tempel Farms was a hobby activity. Fortunately for Tempel Farms, the U.S. Tax Court disagreed with the IRS position.
If your activity IS determined to be a hobby, income is reported as other income on Form 1040 and deductions are reported as miscellaneous itemized deductions on Schedule A. However, any expenses your business sustains may not be deductible in excess of business income and the unused losses cannot be carried over to another year.
In these tough times, your business may not be able to show a profit. But you can operate your business with consideration for the eight factors listed above. Plan ahead.
The IRS has created the Hobby Loss Rule for unincorporated businesses that it determines to be created mainly for recreation, sport or personal enjoyment. In addition to horses, examples of other activities that might qualify under this heading would be coin/stamp collecting or dog/cat breeding. For the IRS to classify your activity as a business, there must be a presence of a profit objective. The owner must have entered into or continued with the activity with the objective of making a profit.
The profit motive can be inferred by the IRS by examining the following factors (commonly known as the 9 Factors Test):
1. Is the activity carried on in a business-like manner - business records are separate from personal records, the business has a long-range business plan (preferrably written) and complete and accurate books are kept?
2. Does the owner invest a significant amount of time in the business?
3. Does the owner depend on the income from the activity for his/her livelihood?
4. What is the amount of occasional profits, if any?
5. Has the activity been profitable in some years and how much profit is realized?
6. Does the owner have the expertise to carry on the business? Do they solicit the advice of experts?
7. Are there elements of personal pleasure or recreation involved?
8. Is there an expectation that the assets used in the activity will appreciate in value?
9. Has the owner had success in other similar ventures?
The burden of proof is on the taxpayer. IRS regulations state that in determining whether an activity is enaged in with a profit motive, the IRS will look to "objective standards, taking into account all the facts and circumstances of each case."
What can you do to avoid having your business classified as a hobby activity? As a business owner, you need to operate in a way which conforms to the factors that indicate a profit motive. Available on the IRS website is the Audit Techniques Guide for Farm Hobby Losses with Cattle and Horse Activities. This guide is available to auditors, prior to visiting a horse/cattle activity. Read it and familiarize yourself with the areas are important to the IRS regarding this issue.
Another factor for you to consider is the possibility of timing the profit and loss years. In IRS terms, this situation is known as the "General Presumption" or more commonly as the "Two out of Seven Rule". This is a lengthy subject and will be discussed in a later issue of this newsletter.
If you think that your business is too big, has been in business too long, etc. to be determined to be a hobby by the IRS, consider this; in 1958, Tempel Smith decided to build a herd of Lipizzan horses and create an organization in the U.S. similar to the Spanish Riding School. Tempel Farms showed consecutive losses over the period from 1958-1976, totalling approximately $5.9 million dollars. By 1976, the herd size was approximately 400 horses. In Smith v Commissioner 1979, the IRS challenged the profit presumption and tried to establish that Tempel Farms was a hobby activity. Fortunately for Tempel Farms, the U.S. Tax Court disagreed with the IRS position.
If your activity IS determined to be a hobby, income is reported as other income on Form 1040 and deductions are reported as miscellaneous itemized deductions on Schedule A. However, any expenses your business sustains may not be deductible in excess of business income and the unused losses cannot be carried over to another year.
In these tough times, your business may not be able to show a profit. But you can operate your business with consideration for the eight factors listed above. Plan ahead.
Equine Accounting: Tax Records - What, what, where, when and how (long to keep it)...
The IRS requires that you keep permanent records that are "sufficient to establish the amount of gross income and deductions, credits and other matters shown on your tax return." To accomplish that goal, tax law requires that your business maintain an accurate and complete set of books. J.K. Lasser Publications estimates that the average small business owner spends ten hours each week working on their company's financial records.
Examples of deductible expenses for a horse business could include costs for wages, training, supplies, feed, breeding fees, veterinary visits, donations, trailering, interest, taxes, repairs, auto, travel, advertising and insurance.
Documentation for most types of expenses require that you maintain basic information for each expense - date of purchase, amount, description and business purpose. But some categories of expenses have specific requirements for documentation:
Auto - Keep a log of all business-related travel including destination, purpose of trip, name of party visited and start and end odometer readings.
Charitable Contributions - For cash contributions, you need either the bank record or written communication from the donee with the date, amount and donee name. For cash contributions of $250 or more, a contemporaneous, written acknowledgement from the donee indicating the amount of donation is required.
Gift - The amount, date given, description of the gift, business reason for giving the gift, name and occupation of person receiving the gift and their business relationship to you must be documented.
Travel & Entertainment - Records must show the amount, time, place and business purpose of the expense. The written proof must be recorded "contemporaneously" with the expense. In other words, you can't spend the money one day and document the expense in writing six months later.
How long do you need to keep this documentation?
The IRS has three years from the date the return is due or filed OR two years from the date the tax was paid (whichever is later) to assess the tax. There are also longer statutes of limitation for unreported income, filing a credit or claim for refund and losses from worthless securities. However, if the taxpayer files a fraudulent return or doesn't file a return, there is NO statute of limitations for the IRS to assess tax. Also, for any property, supporting documentation for the cost and any improvements should be kept until the property is sold. Since each situation is different, business owners should consult with their financial advisor before deciding to throw away any documentation that support their tax return.
For more information, visit the IRS website.
Examples of deductible expenses for a horse business could include costs for wages, training, supplies, feed, breeding fees, veterinary visits, donations, trailering, interest, taxes, repairs, auto, travel, advertising and insurance.
Documentation for most types of expenses require that you maintain basic information for each expense - date of purchase, amount, description and business purpose. But some categories of expenses have specific requirements for documentation:
Auto - Keep a log of all business-related travel including destination, purpose of trip, name of party visited and start and end odometer readings.
Charitable Contributions - For cash contributions, you need either the bank record or written communication from the donee with the date, amount and donee name. For cash contributions of $250 or more, a contemporaneous, written acknowledgement from the donee indicating the amount of donation is required.
Gift - The amount, date given, description of the gift, business reason for giving the gift, name and occupation of person receiving the gift and their business relationship to you must be documented.
Travel & Entertainment - Records must show the amount, time, place and business purpose of the expense. The written proof must be recorded "contemporaneously" with the expense. In other words, you can't spend the money one day and document the expense in writing six months later.
How long do you need to keep this documentation?
The IRS has three years from the date the return is due or filed OR two years from the date the tax was paid (whichever is later) to assess the tax. There are also longer statutes of limitation for unreported income, filing a credit or claim for refund and losses from worthless securities. However, if the taxpayer files a fraudulent return or doesn't file a return, there is NO statute of limitations for the IRS to assess tax. Also, for any property, supporting documentation for the cost and any improvements should be kept until the property is sold. Since each situation is different, business owners should consult with their financial advisor before deciding to throw away any documentation that support their tax return.
For more information, visit the IRS website.
Equine Accounting: General Guidelines for Tax Deductible Expenses
We'll be covering specific expenses such as depreciation, meals and entertainment and auto/travel expenses in future issues of the newsletter.
Here are general guidelines as to the deductibility of an expense. The expense has to be part of the cost of carrying on a trade or business and the business is operated with the goal of making a profit. The expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your business. For example, limo service may be an ordinary expense to a literary agent but not to a plumber. A necessary expense is one that is helpful and appropriate to your business, but need not be indispensable. For a riding school, a bridle for each school horse would be an example of a necessary expense.
When deciding whether an expense is both ordinary and necessary, examine industry guidelines, speak with others in your field and check related literature. But keep in mind that the IRS tends to be conservative in its interpretation of this topic.
For more information, visit the IRS website.
Here are general guidelines as to the deductibility of an expense. The expense has to be part of the cost of carrying on a trade or business and the business is operated with the goal of making a profit. The expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your business. For example, limo service may be an ordinary expense to a literary agent but not to a plumber. A necessary expense is one that is helpful and appropriate to your business, but need not be indispensable. For a riding school, a bridle for each school horse would be an example of a necessary expense.
When deciding whether an expense is both ordinary and necessary, examine industry guidelines, speak with others in your field and check related literature. But keep in mind that the IRS tends to be conservative in its interpretation of this topic.
For more information, visit the IRS website.
Monday, July 13, 2009
Equine Accounting: Employee vs. Independent Contractor. Who's Who?
An independent contractor (IC) is someone who provides services to others, outside the context of employment. Examples of possible ICs to an equine business would be a contractor and an attorney. An employee is a person who provides services to a company on a regular basis in exchange for compensation and does not provide these services as part of an independent business. Examples of possible employees to an equine business would be your office manager and daily barn help.
Why is this information important to you? In recent years, the IRS has focused considerable attention on this issue. Classifying a worker as an IC avoids the payroll tax liability and reporting responsibility of having an employee. But misclassification of employees as independent contractors can cause the IRS to levy penalties and interest which could significantly affect your company.
The IRS considers three general categories - behavioral controls, financial controls, and the relationship of the parties.
Behavioral control exists when the company who has hired the worker has the right to control and direct the worker. The company does not have to actually control and direct the worker – only have the right to do so. Behavioral control includes the type and degree of instruction, any training provided and the type of evaluation performed.
Employee IC
Instruction Detailed General
Training Provided Worker uses own methods
Evaluation Ongoing Only end result evaluated
Financial control is measured by the degree of significant investment in the work, unreimbursed expenses, availability of services to the general marketplace and the opportunity for profit or loss. More financial control is usually indicative of an independent contractor.
Relationship of the parties covers factors such as whether the worker receives benefits, the existence of a written contract, permanence of the relationship, and whether the worker provides services which are a key activity of the business.
You may request a determination by the IRS as to the status of a worker by submitting Form SS 8 to the IRS. Be aware that the worker themselves may also file if they feel improperly classified as ICs and are held responsible for payment of employment taxes and denied benefits. The IRS will investigate the claim and you may be held responsible for all employment taxes as well as significant penalties and interest.
What is your responsibility as someone who hires an IC? If you anticipate that your annual payments to this vendor will meet or exceed $600, before commencement of work, you should obtain a signed W-9 Form. At the end of the year, you are responsible to complete a 1099 Misc Form for each unincorporated vendor meeting the $600 or more threshold. Submit a copy to the vendor by Jan 31 of the following year and a copy to the IRS by Feb 28.
If you determine the worker to be an employee, you are responsible for withholding and submitting to the IRS income and FICA taxes and paying unemployment taxes. You must also submit periodic reports regarding these withholdings and payments to the IRS. There is a lot of record-keeping involved and if you are not familiar with this process, it would probably be in your best interest to outsource the payroll. QuickBooks offers several affordable payroll solutions.
Prepare now for several proposed changes to 1099 reporting which include
Payments to corporations would now require a 1099 form when they exceed the $600 limit.
IC would be subject to withholding if they do not provide a valid Tax Identification Number.
IRS Publications 1779 and 15A on IC/Employee classification provide more detailed information on this issue and can be found at http://rs6.net/tn.jsp?t=ul9id6cab.0.0.tnz777cab.0&p=http%3A%2F%2Fwww.irs.gov%2F&id=preview.
Why is this information important to you? In recent years, the IRS has focused considerable attention on this issue. Classifying a worker as an IC avoids the payroll tax liability and reporting responsibility of having an employee. But misclassification of employees as independent contractors can cause the IRS to levy penalties and interest which could significantly affect your company.
The IRS considers three general categories - behavioral controls, financial controls, and the relationship of the parties.
Behavioral control exists when the company who has hired the worker has the right to control and direct the worker. The company does not have to actually control and direct the worker – only have the right to do so. Behavioral control includes the type and degree of instruction, any training provided and the type of evaluation performed.
Employee IC
Instruction Detailed General
Training Provided Worker uses own methods
Evaluation Ongoing Only end result evaluated
Financial control is measured by the degree of significant investment in the work, unreimbursed expenses, availability of services to the general marketplace and the opportunity for profit or loss. More financial control is usually indicative of an independent contractor.
Relationship of the parties covers factors such as whether the worker receives benefits, the existence of a written contract, permanence of the relationship, and whether the worker provides services which are a key activity of the business.
You may request a determination by the IRS as to the status of a worker by submitting Form SS 8 to the IRS. Be aware that the worker themselves may also file if they feel improperly classified as ICs and are held responsible for payment of employment taxes and denied benefits. The IRS will investigate the claim and you may be held responsible for all employment taxes as well as significant penalties and interest.
What is your responsibility as someone who hires an IC? If you anticipate that your annual payments to this vendor will meet or exceed $600, before commencement of work, you should obtain a signed W-9 Form. At the end of the year, you are responsible to complete a 1099 Misc Form for each unincorporated vendor meeting the $600 or more threshold. Submit a copy to the vendor by Jan 31 of the following year and a copy to the IRS by Feb 28.
If you determine the worker to be an employee, you are responsible for withholding and submitting to the IRS income and FICA taxes and paying unemployment taxes. You must also submit periodic reports regarding these withholdings and payments to the IRS. There is a lot of record-keeping involved and if you are not familiar with this process, it would probably be in your best interest to outsource the payroll. QuickBooks offers several affordable payroll solutions.
Prepare now for several proposed changes to 1099 reporting which include
Payments to corporations would now require a 1099 form when they exceed the $600 limit.
IC would be subject to withholding if they do not provide a valid Tax Identification Number.
IRS Publications 1779 and 15A on IC/Employee classification provide more detailed information on this issue and can be found at http://rs6.net/tn.jsp?t=ul9id6cab.0.0.tnz777cab.0&p=http%3A%2F%2Fwww.irs.gov%2F&id=preview.
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