[Jewelry making - Article 00172] - Re: [Orchid] Geller's pricing system

[David S. Geller]

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    David Huffman brought up a point that slipped my mind altogether and
    that's the subcontractor status. 

    I have pasted below info form the company that helped me incorporate
    years ago about this. 

    John already said he will make more money using my book so he
    needn't get into the findings of cost, material, markup that David
    mentions. Good way, yes. But John using my book said he'd make more
    money. Why complicate life. 

    If the person BEING the subcontractor doesn't pay their own taxes on
    a timely basis (a real problem for small guys) the STORE OWNER COULD
    BE LIABLE FOR THEM. 

    Here's the article, the 2 or 3 paragraphs really tell the story as
    it might apply to John. 

David Geller
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    2/1/04 from nvinc.com Are You Using the IRS's most Recent 3 Factor
    Test vs the older 20 Factor Test? 

    Will your Independent Contractors Meet the Tests? When you hire a
    person in your business, understanding if the worker will be
    considered an employee or independent contractor for IRS purposes is
    critical. Many would rather not have the worker be viewed as an
    employee because your company must pay half the Social Security and
    Medicare taxes. If the worked is classified as an independent
    contractor, you have no withholdings or benefit costs. 

    If you are wrong and classify a worker as an independent contractor,
    the IRS will impose substantial assessments, penalties and fines. One
    potentially big problem is when you terminate an independent
    contractor and they apply for unemployment benefits because they felt
    they where an employee. The Old 20 Common-Law Factor Test 

    To help determine whether an individual is an employee under the
    common-law rules, the IRS has identified 20 common-law factors (Rev.
    Rul. 87-41). These factors-sometimes called the 20 factor
    test-indicate whether sufficient control exists to result in employee
    classification. The IRS developed these 20 factors based an
    examination of earlier cases and rulings considering worker
    classification. 

    a. The 20 factors outlined in Rev. Rul. 87-41 attempt to identify to
    the extent of a business's legal right to control how the worker
    performs the job. 

    b. Rev. Rul. 87-41 was intended to clarity the treatment of certain
    brokered technical service workers following changes made by the Tax
    Reform Act of 1986 to Section 530 of the Revenue Act of 1978. 

    1. The IRS Training Guide for agents and the Internal Revenue
    Manual, Employment Tax Handbook, Chapter 5 (IRM 4.23.5) sets forth
    guidelines for making worker classification determinations. The guide
    and the IRM reshuffle the 20 common-law factors into three categories
    of evidence (behavioral, financial, and relationship of the parties)
    and identify certain factors as no longer relevant to worker
    classification. 

    The New Three Categories of Evidence Test 

    I. Behavior Control: Facts that show whether the business has a right
    to direct and control how the worler does the task for which for
    which the worker is hired, including the type and degree of: a)
    Instructions the business provides the worker, and b) Training the
    business gives the worker. 

    II. Financial Control: Facts that show whether the business has the
    right to control the business aspects of the worker's job. These
    include: 

    a.	Reimbursement of business expenses 

    b.	Extent of worker's investment 

    c.	Extent to which worker makes services are available to the
    relevant market 

    d.	How the business pays the worker 

    e.	The extent to which the worker can realize a profit or loss (An
    independent contractor can make a profit or loss. An employee
    cannot). 

    III. Type of Relationship: Factors that show "type of relationship"
    (as provided by the IRS in Publication 15A): 

    a. Written Contracts describing relationship parties intend to
    create 

    b. Whether the business provides the worker with employee-type
    benefits, such as insurance, a pension plan, vacation pay or sick
    pay. 

    c. The expectation of permanency of the relationship - is the worker
    hired with the expectation that the relationship will continue
    indefinitely rather than for a specific project or period? If so,
    such expectation indicates an employer-employee relationship rather
    than independent contractor relationship. 

    d. The extent to which services performed by the worker are
    considered a key aspect of the company's regular business. The more
    important they are to company business, the more likely the business
    will have right to direct and control worker's activities, thus
    indicating an employer-employee relationship. 

    Here is a structured approach for applying the common-law control
    roles 

    A. Statutory employees. 

    1. In addition to treating common-law employees as employees for
    FICA purposes, IRC Sec. 3121(d) lists specific types of workers who
    are also treated as employees (i.e., statutory employees). The
    distinction between common-law employee and statutory employee is
    important for payroll tax purposes. 

    a. Although statutory employees are subject to social security and
    Medicare (FICA) tax withholding ( and employer matching), they may be
    independent contractors under the common law control rules. 

    b. In those situations, they are exempt from federal income tax
    withholding. 

    2. Statutory employees include corporate officers and individuals
    performing services included under an agreement pursuant to section
    218 of the Social Security Act (i.e.. certain nonfederal governmental
    workers) are normally considered statutory employees. In addition,
    the following types of workers are considered statutory employees
    when the agreement between the worker and the employer contemplates
    that substantially all services to be performed will be personally
    performed by the worker. 

    a. Food, beverage (other than milk), and laundry or dry cleaning
    delivery persons. 

    b. Full-time life insurance salesmen who work primarily for one life
    insurance company. 

    c. Home workers who perform work according to their employers
    specifications and use the employer's materials. 

    d. Traveling or city salesmen in specified industries. 

    3. Despite fitting within the definition or one of these four
    enumerated types of statutory employees, a worker with a substantial
    investment in facilities used in connection with the performance of
    the services (other than transportation facilities), or who performs
    the services as a single transaction rather than as part of a
    continuing relationship with the person for whom they are performed,
    is not a statutory employee [IRC Sec. 3121(d)(3)] 

    Example 1 Officers not considered to be employees. John Smith is an
    officer of ABC Corporation. He performs only minor services and does
    not receive any compensation from the corporation. Is John
    considered to be a statutory employee of the corporation? Although
    corporate officers are included in the list of statutory employees
    under IRC Sec 3121(d), an exception exists for officers with limited
    duties in the corporation. If John performs no services or only minor
    services for the corporation and neither receives nor is entitled to
    receive any compensation, he will not be considered an employee of
    the corporation [Reg. 31.3121(d)-1(b)]. 

    B. Statutory Independent contractors. 

    1. Certain workers (qualified, licensed real estate agents and
    direct sellers) have bean statutorily excluded from being classified
    as employees. Example 2 Proper tax status of real estate agents. Bob
    Ping is a full-time real estate agent who sells exclusively for
    Nationwide Realtors. Nationwide pays Bob a commission for each sale.
    The company provides Bob with a desk, a computer, and a telephone and
    requires him to attend weekly sales meetings. Bob will be treated
    statutorily as an independent contractor if [RC Sec. 3508(b)(1)]: 

    1. he possesses a valid real estate license; 

    2. his compensation is based on sales output such as a commission
    based on sales price (not in the form of fixed, periodic compensation
    paid for services rendered); and 

    3. a written contract exists between Bob and Nationwide Realtors
    stating that Bob will not be treated as an employee for federal
    income tax purposes. C. Filing Form SS-8. 

    1. If a taxpayer wants to eliminate uncertainty as to an
    individual's status as an employee or independent contractor, the IRS
    provides a means to accomplish this objective. By filing Form SS-8
    (Determination of Employee Work Status for Purposes of Federal
    Employment Taxes and Income Tax Withholding), the taxpayer can
    receive a ruling as to the individual's status. However, it appears
    that a high percentage of the requests for rulings usually result in
    the individual being classified as an employee. Furthermore, the
    filing of a Form SS-8 may greatly increase the chances for an IRS
    employment tax examination. 

    2. In the past, the design of Form SS-8 reflected the 20-factor
    common-law test for worker status. The 20-factor test has been
    largely replaced by the IRS's new categories of evidence analysis,
    which groups evidence into three categories (behavioral control,
    financial control, and relationship of the parties) and identifies
    certain factors as no longer relevant to worker classification.
    Accordingly, the IRS redesigned Form SS-8a in early 2001 to follow
    the new guidelines. 

    It is important to speak to a tax professional or attorney if you
    have questions in this area. You do not want your independent
    contracts to be reclassified as a employees. It is best to know from
    the start as this can be a very costly issue. Plus you will have the
    proper agreements in place for the new employee or independent
    contractor. Contact NCP at 1-888-627-7007 after you speak to your
    CPA to determine if forming a corporation will help you to avoid this
    problem as an employer. There are certain rules that allow a
    percentage of employees to help solve this issue (see two paragraphs
    below). 

    Incorporation Test: Under this test, an individual will be treated
    as an independent contractor if he or she conducts business through a
    corporation or a limited liability company. In addition, the
    independent contractor must be responsible for his or her own
    benefits, instead of receiving benefits from the service recipient.
    The independent contractor must also have a written contract with the
    service provider stating that the independent contractor will not be
    treated as an employee and is responsible for his or her own taxes. 

    To prevent the incorporation test from being abused, the bill limits
    the number of former employees that a service recipient may engage as
    independent contractors under this test. The limitation is based on
    the number of people employed by the service recipient in the
    preceding year and is equal to the greater of 3% of the service
    recipient's employees in the preceding year or 10 persons, as
    follows: Example: Business X has 500 employees in 2000. In 2001, up
    to 15 employees (the greater of 3% of Business X's 500 employees in
    the year 2000 or 10 individuals) could incorporate their own
    businesses and still have Business X as one of their initial clients.
    This limitation would not affect the number of incorporated
    independent contractors who were not former employees of the service
    recipient or independent contractors meeting the general test. 

    Disclaimer: 

    This information is intended to provide accurate and authoritative
    information with regard to the subject matter covered. It is offered
    with the understanding that NCP, Inc. is not engaged in rendering
    legal, accounting or other professional service. If legal advice or
    other expert assistance is required, the service of a competent
    professional person should be retained. 


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