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Tax Questions
For IRS purposes, how is an LLC classified? Is it a sole proprietorship, a partnership or a corporation ?
Answer:
If a domestic LLC has only one owner, it will automatically be treated as if it were a sole proprietorship (a disregarded entity), unless an election is made for it to be treated as a corporation. As a sole proprietorship (a disregarded entity) the LLC income tax information is reported on a Schedule C as part of the 1040 return of the sole proprietor.
If a domestic LLC has two or more owners, it will automatically be treated as a partnership unless an election is made for it to be treated as a corporation.
However, if the LLC has employees, for employment tax purposes the LLC will be treated as a corporation.
The LLC can make a classification election using the form 8832, Entity Classification Election. Different classification rules may apply in special situations, including banks, insurance companies, and nonprofit organizations that are LLCs.
What is the difference between employees & independent contractors?
Answer:
People working for a business are classified as either employees or independent contractors, disputes are common, and the stakes are huge.
The major incentive for employers to treat workers as independent contractors is to avoid the cost of accounting for payroll tax withholding, payment of social security taxes, purchasing workers compensation insurance, payment of federal & state unemployment insurance taxes, plus, employers avoid the cost for pension and fringe benefit plans and the cost of complying with a mountain of federal and state labor and employment laws. In addition, the classification effects workers compensation, providing no-fault coverage for employee injuries on the job and unemployment insurance benefits when employees are out of work, both which are general not available to independent contractors.
Classically, employees go to work at set hours, at the employers office or factory, using tools and equipment supplied by the employer, follow orders, work under direct supervision, receive regular payroll paychecks subject to withholding, and there earnings are reported on a W-2 form.
On the other hand, independent con¬tractors determine their own work schedule, in the manner they prefer, are paid by the job, have control over the method, manner, and means of production, their earnings are not subject to payroll withhold by the employer and are reported on a 1099-MISC form.
Many companies go out of their way to classify workers as independent contractors, but the IRS is bring increasing review of such arrangements. The IRS and a variety of state and federal agencies make these determin¬ations. In fact, a worker can be an employee for one purpose and an independ¬ent contractor for another.
Originally, the IRS set out its 20-factor hit list in Revenue Ruling 87-41. As follows:
1. Instructions. The more instructions that are given, the more likely is employee status.
2. Training. The more training, the more likely is employee status.
3. Integration. The more closely integrated the work is with the employer’s business, the more likely is employee status.
4. Services Rendered Personally. If the worker must personally do the work, is more likely an employee.
5. Hiring, Supervising, and Paying Assistants. Doing these things is more likely an independent contractor.
6. Continuing Relationship. The longer the arrangement’s term, the more likely is employment status.
7. Set Hours of Work. Set hours tend to indicate employment status.
8. Full Time Required. Working full time tends to indicate employment status.
9. Doing Work on Employer’s Premises. Working on the employer’s premises suggest employment status.
10. Order or Sequence Set. Performing services in a particular order or sequence suggests employment status.
11. Oral or Written Reports. Reports to an employer tend to suggest employee status.
12. Payment by Hour, Week, or Month. Payment by the hour, week, or month suggests employee status.
13. Payment of Business and Traveling Expenses. Payment of business & travel expense suggests employee status.
14. Furnishing of Tools and Materials. A company furnishing significant tools, materials, and other Equipment suggests employee status.
15. Significant Investment. A worker’s significant investment suggests independent contractor status.
16. Realization of Profit or Loss. A worker’s potential to realize a profit or suffer a loss suggests Independent contractor status.
17. Working for More Than One Firm at a Time. Working for more than one firm at the same time Suggests independent contractor status.
18. Making Service Available to the General Public. Making services available to the general public on a regular and consistent basis suggests independent contractor status.
19. Right to Discharge. The right to discharge a worker suggests employee status.
20. Right to Terminate. A worker’s right to terminate the relationship without incurring a liability suggests employee status.
Currently, three basic characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means. The more The employer requires an order or sequence (rather than just the end result), the closer toward employment you get. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This characteristic focuses on whether you pay the worker by the hour, week, month, or by the job and whether the worker can experience a profit or loss. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
The government has a heightened interest in worker misclassification, the stakes are now huge, and policy and revenue goals seem to coincide. There are bills in the works that would increase penalties on employer failures to withhold and bills that would require companies using independent contractors to disclose to each such person in writing their federal tax obligations plus information about labor and employment issues.
Can I Make a Tax Free Withdrawal from my IRA ?
Answer:
A beneficiary of a IRA who is under the age of 59 can make an early withdrawal from the IRA for the first time purchase of a home without the early withdrawal penalty, but the beneficiary is still liable for the federal income taxes on the withdrawal. Normally, a withdrawal from a IRA or other qualified pension plan before the beneficiary is 59 would result in a 10% early withdrawal penalty on top on the federal income tax liability. The withdrawal is limited to $10,000.00 over the taxpayer’s lifetime. This provision actually applies to all IRAs and is found in IRC Section 72(t)(2)(F).
The distribution must be a "qualified first time home buyer distribution." This is a distribution received by an individual which is used for the payment of "qualified acquisition costs" for the "principal residence" of a "first time home buyer." The distribution must be made before the close of the 120th day after the day on which the payment or distribution is received to pay "qualified acquisition costs with respect to a principal residence of a first time home buyer who is such individual, the spouse of such individual, or any child, grandchild or ancestor of such individual or the individual’s spouse." [IRC Section 72(t)(8)(A)]. The Act defines "qualified acquisition costs" as the costs of "acquiring, constructing, or reconstructing a residence. Such term includes any usual or reasonable settlement, financing or other closing costs."
A first time home buyer is defined as an individual (and, if married, such individual’s spouse) who over a two year period has had no present ownership interest in a principal residence, beginning on the date of the acquisition of the principal residence acquired by the home buyer. A principal residence is defined as a residence which was the primary residence of the home buyer for two out of the last five years as defined under IRC Section 121(a). The Code also defines the date of acquisition as either the date on which a binding contract to acquire the principal residence was entered or the date upon which construction or reconstruction commenced [IRC Section 72(t)(8)(D)]. If there is a delay in construction or acquisition of the residence which would cause the distribution to fail to meet the requirements of the 120 day rule, the distribution may be re-contributed to the IRA within the same 120 day period without penalty.
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