Tag Archives: IRS

7 tax tips for independent contractors

Working as an independent contractor (IC) has become a way of life for many people in the U.S. The Bureau of Labor Statistics’ most recent report suggests that nearly 7% of the workforce is composed of contingency workers. That is an estimated 10.6 million people working as ICs, and the number may very well have increased since then. If you’re part of this population, do you know the full extent of your tax obligations?

To simplify doing your taxes—and the filing deadline was extended to July 15 due to COVID-19, so you have plenty of time—the IRS has released several essential tax tips for independent contractors. Here’s our breakdown of these tax tips, plus one of our own.

1. ICs must still pay taxes on their earnings

It is a myth that ICs do not have to pay taxes on the wages they earn. Because ICs are paid differently from W-2 employees, they must also pay their taxes in ways that are unlike employees.

This usually means acquiring a 1099 form from any contracting companies you’ve worked with in the past year. This form will provide the information you need to complete and submit your taxes on your own (or with the help of tax software or a certified public accountant).

2. Are you a gig worker? You have to pay up as well

Like other contingent workers, gig workers must pay their taxes, including income taxes, Contribution Act taxes and Medicare taxes. Though terms such as gig worker and independent contractor may have different connotations and nuances, the IRS and Department of Labor place them in the same tax-paying category.

3. Both ICs and the companies they service have tax obligations

Adhering to government tax requirements is a fact of life for both ICs and the companies they provide services for. A company that uses ICs must require them to complete proper government forms (such as W-9s). This enables you to handle your own taxes in a way that is fair and responsible. The company must also maintain accurate and complete records as to how much contractors were paid. So if you need that information, you know whom to ask.

4. All income is taxable regardless of what form it takes

Some companies may think they can pay ICs or temporary workers in cash to avoid having to deal with tax-related paperwork such as verifying taxpayer IDs. This simply isn’t true. Though paying ICs in cash isn’t against the law, not maintaining payment records to show these cash payments may be, even for part-time or side work. Moreover, contractors must still pay taxes on cash payments they receive from these companies, so keep careful track in your own records as well.

5. Reduce your taxes the right way by writing off expenses

Another tax tip for ICs is keeping track of expenses that may be used as tax write-offs. For contractors in transportation, mileage is a common tax expense that can be written off—but only if records and receipts are maintained in an organized manner. In addition to mileage, home care nurses may be able to write off the cost of scrubs, medical equipment, sanitizing supplies and costs associated with maintaining or renewing licensing. Writing off these expenses can lower your overall tax obligation.

6. ICs have two ways to pay what they owe in taxes

Want valuable tax tips as an independent contractor who also has standard employment? Submit a new W-4 to your employer to have additional taxes withheld. These additional tax withholdings can cover the taxes you are required to pay when you provide services as a contingent worker.

Independent contractors who do not have standard employment can make tax payments on a quarterly basis. Making quarterly payments helps prevent a surprise tax bill from creeping up at the end of the year. To simplify this process, the IRS has set up a no-cost Electronic Federal Tax Payment System (EFTPS) on its website.

7. Get help through Openforce

If you contract through the Openforce platform, you have a member benefits portal. This gives you access to serious discounts on all kinds of products and services, including tax filing, accounting and bookkeeping services through Equinox, a leading provider of business solutions.

Simply sign in through the User Login button at www.oforce.com and click on Perks in the upper right-hand corner to start exploring your member benefits today.

The hidden cost of an IRS “B” Notice: More expensive than you think

Getting a notice from the IRS is rarely a pleasant experience. Whether it’s a warning that a balance is overdue or that an audit is coming up, such letters can trigger a variety of emotions, from indignation and anger to uncertainty and fear. For businesses that rely on an independent contractor (IC) workforce, however, one of the most frustrating, costly and time-consuming notices is without a doubt the IRS “B” notice.

“B” notices result from a mismatch between IRS records and the tax identification number (TIN) on a non-employee worker’s 1099 Form. The IRS calls them “B” notices because a failure to respond initiates a mandatory backup withholding of 28% on future payments to the workers in question. These notices come in two parts:

  1. The first notice (CP2100) is sent by the IRS to the payer, who has 15 days to send the associated “B” notice to the contractor along with a copy of Form W-9 to be completed correctly.
  2. The second notice tells the payee to contact the IRS directly to obtain the correct combination of name and TIN and should not be forwarded with a W-9.

TIN errors can happen for a variety of reasons. The first and perhaps most obvious is the typo; maybe the TIN—which could be an IC’s own Social Security number (SSN) or Employer Identification Number (EIN)—was simply typed incorrectly, as can sometimes happen when filling out reems of paperwork. But it could also be the result of administrative errors or even falsified information from a contractor who is not the person they claim to be.

You might be thinking that “B” notices sound trivial; after all, how much could it possibly cost to correct a typo? Indeed, some companies write off “B” notices as the cost of doing business, planning their margins around such roadblocks as if they’re inevitable. It is important to remember, though, that these inevitabilities can cost you more than you might think.

Why you should worry about “B” notices

On the surface, dismissing “B” notices as just another business expense seems like a reasonable reaction, considering a single notice only results in an initial penalty of $100 to $260 per incorrect TIN—a small price to pay for many businesses. But, when evaluating your strategy for dealing with IRS notices, you should keep a few factors in mind:

  1. Penalties stack per TIN. For businesses that work with dozens or even hundreds of ICs (such as those in logistics and delivery), administrative errors across multiple 1099s can result in accumulated fines in the thousands of dollars.
  2. You might not know who you’re contracting. During contracting, an IC could fill out a W-9 using business info and an EIN, but what if the EIN matches the individual while the business is a DBA? Or what if the IC submits an incorrect SSN but you don’t have a verification system in place? A lack of clarity here could create exposure in the event of a future misclassification claim.
  3. It’s just the tip of the iceberg. Fixing a notice is often easier said than done and may lead to larger potential complications for your business.

In short, when thinking about “B” notices, you need to consider the hidden costs. Be sure to ask yourself, what impact will this have beyond the penalty?

Identifying the hidden costs

There is an administrative burden associated with correcting information required by the IRS. Depending on how many out-of-compliance individuals are listed on a report, this can require scouring your records, TIN checking all independent workers, issuing and tracking all “B” notice notifications, performing follow-ups, and enforcing new withholding requirements if necessary. For some businesses, it can take up to two weeks to address all the items outlined in a single “B” notice and then follow through to ensure they are corrected.

The second hidden cost is the impact on the ICs you work with. As mentioned, if a “B” notice goes uncorrected, the IRS sets a default backup withholding rate of 28% for future payments to affected workers. It should come as no surprise that withholding nearly a third of their settlement could dissuade ICs from working with you in the future.

Finally, sending incorrect data to the IRS may cause them to evaluate whether other concerns exist within your independent workforce model—errors the government could interpret as signs of possible misclassification of workers. Even if the workforce model is proven to be 100% compliant, nobody wants to deal with a costly and distracting audit.

These examples explain why you should beware the “B” notice, but what should you do if one arrives on your doorstep? Better yet, how can you avoid receiving one in the first place?

Avoiding “B” notices with a more consistent model

To pinpoint why “B” notices happen—and break down how to avoid them—let’s take a deeper dive into the two places where mistakes are most often introduced: during the collection of data from ICs and during the reporting of that data to the IRS.

Whenever an IC submits a Form W-9, there is a chance, however slim, that it may contain errors or false information. If you are dealing with many ICs, this onboarding data could also be stored incorrectly or misplaced altogether. When it comes time to submit the data to the IRS, other errors could be introduced. The more times information changes hands, the more likely it is that something could go wrong.

Naturally, the first step toward mitigating the introduction of errors is to find a system that specializes in reducing them without requiring additional administrative work. Openforce’s independent contractor management platform provides a worry-free experience from onboarding to settlement, integrating a comprehensive suite of checks, validations and tools that eliminate errors while also reducing compliance risk. Here’s how it works in three steps:

  1. You decide to contract with an IC.
  2. The contractor begins enrollment via Openforce, entering all required information into our secure portal, including their TIN.
  3. Our system verifies with IRS databases that every piece of information is accurate; if an error exists, the system stops onboarding and alerts all involved.

Preventive practices are, hands down, the best way to avoid not only an IRS “B” notice but also many of the stumbling blocks that can set your business back during dealings with ICs.

Ready to build best practices into every stage of your contracting process? Contact Openforce today using the form below or by emailing sales@oforce.com.

NJ Unemployment Tax Owner-Operator Exemption Gutted

The New Jersey Department of Labor and Workforce Development recently published notice that it had adopted substantial changes to the regulations interpreting what constitutes necessary evidence under New Jersey’s unemployment tax independent contractor exemptions applicable to a wide range of industries. Specifically, motor carriers wanting to take advantage of the owner-operator exemption must show that the owner operator in question is exempt from the Federal Unemployment Tax Act (FUTA) before asserting that the New Jersey exemption applies.

Previously, an entity with owner-operators operating vehicles over 18,000 lbs and not subject to the entity’s / motor carrier’s vehicle lease purchase program could show that the owner operator was exempt by providing evidence of an:

  1. (a) IRS private letter ruling;
  2. (b) IRS audit;
  3. (c) IRS determination letter ruling (any of which must find the worker to be an independent contractor under FUTA), but most readily demonstrable;
  4. (d) or by providing evidence that the workers satisfied the IRS 20 Factor test.

Transportation law firm Scopelitis shared that effective September 17, 2018, most notably the (d) method has been eliminated. Entities may now only show under New Jersey’s unemployment tax law that the owner-operator in question is exempt from FUTA by providing:

  1. 1. Evidence of an employment tax audit conducted by the IRS or;
  2. 2. An IRS determination letter ruling that the owner-operators in question are not

Unless a transportation company has one of the above, nothing has changed for that company. And, if they do possess one of the above, it now no longer provides an exemption for FUTA.

The only factor that can provide an exemption is the evidence of an employment tax audit conducted by the IRS or an IRS determination letter ruling that the owner operators in questions are not employees.

This is a departure from recent case law, and according to Scopelitis, could significantly impact the independent contractor landscape by making the statutory IC exemption far less accessible across industries, including transportation in New Jersey. Without the exemption, the independent contractor determination defaults to the common law—ABC test—which has been difficult for motor carriers using owner operators in the past.

Excerpt shared via Scopelitis Transportation Law Alerts

 

Confused about Independent Contractor Classification? Factors to Consider for Compliance

Independent Contractor vs. Employee

Several key factors can be used to distinguish the difference between the classification types.

IC vs Employee Characteristics

Other factors and helpful questions to consider for independent contractor classification include:

BEHAVIOR : Does the company dictate control? 
Independent contractors are not subject to control or guidance. The independent contractor decides how to provide the contracted services and determines their hours of work, work site and equipment.

FINANCIAL : Are the business aspects controlled by the company?
Independent contractors provide their own training and tools, and are responsible for their own costs and expenses.

RELATIONSHIP TYPE : How is the relationship governed and are benefits provided?
The relationship with the independent contractor is not an employment relationship, rather a contractual arrangement exists. Independent contractors perform a specific project, are paid in accordance to the agreement, do not receive benefits beyond their financial compensation, and are not eligible for unemployment or workers’ compensation.

While these factors are high-level guidelines, there are still quite a few grey areas that can be tricky to navigate without implementing independent contractor management best practices. No one factor stands alone in making this determination. It’s vital to look at the entire relationship and consider the degree or extent of the company’s right to direct and control the independent contractor’s services.

Maintain an Arm’s Length Relationship to Help Mitigate Risk

Adhering to best practices regarding classification and verifying documentation remains up-to-date is crucial for compliance. Companies conducting business with independent contractors need to be prepared for an audit and have the required documentation to support their position of ‘an arm’s length relationship’.

Here are some additional best practices to help ensure compliance is maintained:

  • Develop a company-wide independent contractor policy to ensure a distinct and separate relationship
  • Verify your independent contractors have an established business entity with a business name and EIN to make invoiced payments
  • Negotiate rates for service, agreed upon by both parties and outlined in a signed contract with a detailed statement of work and a non-renewable contract end date

Trying to achieve compliance without a systematic approach can put your business at risk. One way to reduce this risk is to leverage a technology and services provider like Openforce. Openforce product and services have streamlined onboarding workflows, established documentation practices to demonstrate compliance, and processed billions in on-time settlement for tens of thousands of independent contractors. Openforce’s technology solutions integrates your best practices with custom streamlined compliance workflows specific to your business needs, then designs a complete solution to automate your current process.

Openforce is uniquely positioned to help companies leverage leading technology for the adoption and management of independent contractors to help maximize flexibility, reduce cost and mitigate risk. To learn more about how Openforce can help, contact us today.

[1] “Employers Do Not Always Follow Internal Revenue Service Worker Determination Ruling.” Treasury Inspector General for Tax Administration, June 14, 2013.

[2] “Behavioral Control” Internal Revenue Service, October 4, 2016.

[3] “Financial Control” Internal Revenue Service, October 4th, 2016.

[4] “Independent Contractor (Self-Employed) or Employee?” Internal Revenue Service, November 28, 2016.