Honorarium vs Self Employment vs Employee
- To be considered INCOME it must be derived from
- the conduct of a trade or business
- be involved in the activity with continuity and regularity, as distinguished from an occasional action
- and the primary purpose for being involved in the activity is for income or profit.
e.g. A tax preparer is asked to present a seminar at a tax preparer’s annual convention in which an honorarium is received. As the tax preparer is not in the business of being a professional speaker, it is not income. This would be an Honorarium.
e.g. “Batok was an automobile mechanic who took a one-month job painting houses, earning $ 4,200 which he reported as other income, not Schedule C [Self-Employment]. The IRS charged SE [self-employment] tax in audit, but the court determined that Batok wasn’t “in the business” of painting houses (John A. Batok v. Comm,TCM 1992-727).” This was neither self-employment income nor Employee Income; it was Other Income.
- Worker Classification as Self-Employed or Employee
The IRS and courts look at three classifications in making a determination of a worker’s status
In 2013 the IRS looked at more cases of worker misclassification than in the previous 5 years combined.
- Does BEHAVIORAL control over worker exist?
- To what extent are instructions given and taken?
An employee is general subject to the business’s instructions about when where and how to work.
- What training does the business give the worker?
Employees generally are trained to perform services in a particular manner.
- Do FINANCIAL controls over worker exist?
- Can the worker realize a profit or incur a loss?
An independent contractor can make a profit or loss whereas an employee can only make a profit.
- Is the worker’s investment significant?
An independent contractor provides the tools and has unreimbursed expenses and business and travel expenses.
- To what extent does the worker make services available to the general public?
An independent contractor generally workers for more than one business or is actively looking for work from more than one business.
- How does the business pay the worker?
An independent contractor is generally paid by the job but some professions are paid hourly.
- What type of RELATIONSHIP between the parties exist?
- Does a written contract exist that describes the relationship the parties intend to create?
A written contract could create a de facto employee contract if it contains HOW the work is to be performed.
- Does the business provide the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay?
Employee benefits are only paid to employees.
- How permanent, on-going, is this relationship?
Permanent and indefinite relationship indicates an employee-employer relationship, but independent contractors can have a long-lasting relationship.
- To what extent are the services performed by the worker a key aspect of the regular business of the company?
An employee-employer relationship exists if the success of the business is dependent upon the relationship. E.g. Brick laying company – brick layers – employees, accountant – independent contractor. It is essential for a company to retain a good accountant, but accounting is not the company’s regular business.
- Self-Employed Individuals
A 1099 must be issued to all self-employed individuals if $ 600 or more is paid for services.
A 1099 must be issued to all lawyers for ANY dollar amount paid for services.
“Employers who fail to withhold income, FICA and Medicare tax because its workers are improperly classified as independent contractors are assessed a tax of 1.5% OF THE EMPLOYEE’S WAGES FOR Federal income tax withholding and 20% of the employee’s portion of FICA and Medicare. The percentages are doubled to 3% and 40% respectively if the employer fails to file Form 1099.”
- Depositing the payroll taxes
Whether a company has payroll done in house or hires a payroll service, the employer is responsible to the deposit of payroll taxes and the filing of returns.
The IRS will hold responsible persons personally liable for 100% of the corporate payroll tax. The 100% penalty is not necessarily imposed on the most responsible taxpayer.
There is an exception for volunteer and tax-exempt organizations. “The IRS may not impose the trust fund recovery penalty on volunteers, unpaid members or a board of trustees or directors of a tax-exempt organization to the extent that such members serve solely in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and do not have actual knowledge of the failure to pay the trust fund taxes for which the penalty is imposed. However, the relief does not apply if it result in no other person being liable for the penalty…”
- A responsible person is one who had the duty to collect and pay over the taxes. The following have been held to be responsible – board members, corporate officers, manager, payroll check signers, payroll report signers.
- The responsible person must have acted willfully in failing to pay the collected taxes. “Willful” can be nothing more than knowing the liability exists and paying another creditor.
The IRS has said that a person could be held liable for the unpaid trust fund taxes if they could have obtained information about the financial affairs of the corporation by simply asking for the information. A person cannot avoid liability by “wearing blinders” to avoid obtaining actual knowledge of the tax delinquency.
- Employee Rights
If a person is a de facto employee but the company is treating them as an independent contractor, the individual can file a Form 8919 with their personal tax return and only pay ½ of the self-employed taxes. The company would then be held responsible for the additional taxes, interest and penalties.
The information above comes from a 35-page continuing learning training seminar.
The Presbytery of Tropical Florida does not provide legal or tax advice. This is not intended to substitute for the advice of legal or tax counsel.