ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, February 12, 1996 TAG: 9602130062
SECTION: THE MONEY PAGE PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
IN this era of corporate downsizing and outsourcing, some companies may be asking workers to become independent contractors rather than employees. And some people are setting up shop for themselves and looking for work as contractors.
Your status as employee or independent contractor will have a major impact on how you handle your taxes.
Independent contractors must pay estimated taxes quarterly, for instance, and they must keep track of their business expenses in order to take tax deductions. This can be either an asset or a liability, depending on tax status.
More importantly, an independent contractor receives no benefits. Some employers, therefore, may wrongly try to classify workers as contractors in order to escape paying for unemployment compensation, workers compensation, insurance and the like.
If you are in business for yourself, you may be tempted to use independent contractors if you need to hire help.
Harry Schwarz, a certified public accountant with the Roanoke firm of Schwarz & Co., said Congress is considering legislation that would affect this question.
The pending bills, Schwarz said, resulted from the large number of cases in which the IRS reclassified as employees people who had claimed to be independent contractors. He said Congress is trying to define the difference.
But how can you tell what your proper status really is under present conditions?
The Virginia Society of Certified Public Accountants said the Internal Revenue Service has a list of 20 factors that it uses to determine whether an individual qualifies as an independent contractor or as an employee.
There are, however, four key areas.
The first question is the degree of company control over the worker.
The more control a company has over your schedule, such as determining how, when and where you work, the more likely you will be classified as an employee.
Also, the more support and assistance you receive from a company, whether it is typing assistance, a computer or even computer training, the more the IRS will assume the company has control over you and the more likely it will view you as an employee.
The second factor is the method of compensation.
Receiving payment by the hour, week or month - unless it is a lump sum spread over time - usually suggests you are an employee. Payment by the job or on a straight commission basis generally indicates a subcontractor relationship.
Third is the number of clients you have.
If you work for only one client, and continue to do so for a long period of time, you are likely to be classified as an employee.
If, on the other hand, you regularly promote your services to prospective clients, and if you hire and pay your own assistants to perform some of the work, you have a better chance of being classified as an independent contractor. That is true even if your client list is limited to a single company.
The final key factor is the chance for a profit or loss in your venture.
Most self-employed people can potentially suffer economic loss because they have investments in equipment or inventory or they have a liability toward employees. If there is no risk of a loss in operating your business, the CPAs said, the IRS may not view you as an independent contractor.
If you are an employee, you share the costs of Social Security and Medicare taxes with your employer. You are responsible for paying 7.65 percent tax on the first $62,700 of your wages and a reduced rate of 1.45 percent on wages above that level.
If, on the other hand, you qualify as an independent contractor, you must pay both the employee's and the employer's share. That means you pay 15.3 percent tax up to $62,700 and 2.9 percent on all net earnings above that amount. However, you can deduct one-half of your self-employment tax when computing your adjusted gross income.
Additionally, independent contractors can qualify for more business deductions than employees can.
Employees claim unreimbursed trade or business expenses as itemized miscellaneous deductions on Schedule A. However, they can deduct only those expenses that together with other miscellaneous expenses exceed 2 percent of their adjusted gross income.
Independent contractors generally report their self-employed income on Schedule C (or Schedule C-EZ if they meet additional requirements) and can deduct all qualified business expenses without regard to the 2 percent threshold.
They also can establish a retirement plan and deduct the portion of their business income that is used to fund the retirement plan.
Independent contractors must make quarterly estimated tax payments to the IRS if they have taxable income. Employees have their taxes withheld from their paychecks by their employers and typically need not file estimated tax returns unless they have substantial income from other sources.
If you're weighing the benefits of remaining an employee or opting for independent contractor status, the Virginia Society of CPAs recommends that, in addition to taxes, you consider the cost of benefits.
As an independent contractor, you cannot participate in your client's tax-free benefit programs such as pension, life or health insurance plans. Be sure you can afford the benefits necessary to protect yourself and your family.
LENGTH: Long : 102 lines ILLUSTRATION: GRAPHIC: color graphic by STEVE STINSON STAFFby CNB