Month: October 2021

Millions of American businesses hire independent contractors to perform all types of services. And millions of American workers prefer to work as contractors rather than employees. 

Indeed, due to the COVID-19 pandemic, it’s likely that more people than ever want the freedom that comes with being an independent contractor.

But for decades, many state and federal agencies have had it in for businesses that hire independent contractors rather than employees. They prefer that you classify your workers as employees because then you must

• pay unemployment insurance premiums, 
• provide workers’ comp, and 
• withhold taxes from employee pay. 

Employees are also protected by state and federal labor laws that regulate worker rights such as a minimum wage, overtime, and the right to unionize. 

In 2020, California launched the broadest assault on independent contractors in recent memory when it passed a law popularly known as AB-5 that established an incredibly strict new “ABC test” for determining whether California workers should be classified as employees for purposes of California law. Many feared this would spell the end of independent contractors in California.

It hasn’t worked out that way. The California legislature received a firestorm of complaints from California-based independent contractors and the firms that hire them. As a result, it significantly watered down the new law by providing over 100 exemptions to the ABC test. Meanwhile, California voters responded by passing Proposition 22, which completely exempted most drivers for app-based rideshare and delivery platforms such as Uber, Lyft, and DoorDash.

This outcome appears to have dampened the appetite of many other state legislators to make it harder to hire independent contractors. 

But the new Biden administration wants to take up where California left off. It supports adoption of the ABC test across all federal law. This is not likely to happen anytime soon. 

Thus, despite everything you may have heard, businesses can still hire independent contractors. But you need to be careful and hire only bona fide independent contractors. 

Employers who misclassify employees as independent contractors to reduce labor costs and gain an advantage over competitors can end up paying large back taxes, fines, and judgments. 

If you have any questions or need my assistance on this matter, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 28, 2021

Some withdrawals are taxable. 

Even worse, some can be socked with a 10 percent early withdrawal penalty tax, and this can happen even when there’s no income tax hit. 

Any withdrawals from any of your Roth accounts are federal-income-tax-free qualified withdrawals if you, as a Roth IRA owner,

• are age 59 1/2 or older, and 
• have had at least one Roth IRA open for over five years.

Such withdrawals are usually state-income-tax-free too. Good! 

You must pass both the age and the five-year tests to have a qualified withdrawal.

The five-year period for determining whether your withdrawals are qualified starts on January 1 of the first tax year for which you make a Roth contribution. It can be a regular annual contribution or a conversion contribution.

A non-qualified withdrawal is potentially subject to both federal income tax and the 10 percent early withdrawal penalty tax. The only exceptions are 

• when the special first-time home purchase provision applies, or 
• when the account owner (that would be you) is disabled or dead. 

If you have a Roth and want to take a non-qualified withdrawal, make sure you know the tax consequences. If you have questions, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 24, 2021

When you travel out of town overnight, you need to know the tax-home rule. The IRS defines your tax home, and it’s not necessarily in the same town where you have your personal residence.

If you have more than one business location, one of the locations will be your tax home. It’s generally your main place of business.

In determining your main place of business, the IRS takes into account three factors:

1. the length of time you spend at each location for business purposes;
2. the degree of business activity in each area; and 
3. the relative financial return from each area. 

Here’s a recent court case that illustrates this rule. 

Akeem Soboyede, an immigration attorney, was licensed to practice law in both Minnesota and Washington, D.C., and he maintained solo law practices in both Minneapolis and Washington, D.C.  

Although Mr. Soboyede’s primary personal residence was in Minneapolis, he divided his time between his office in Minneapolis and his office in Washington, D.C.

Get ready for a chuckle: in court, Mr. Soboyede admitted in his testimony that he did not keep the necessary documentation because he “did not know . . . [he] was going to get audited.”

Due to the lack of records, the IRS disallowed most of the deductions. The remaining issue for the court was the travel expenses for lodging for which Mr. Soboyede had the records.

The court noted that Mr. Soboyede’s lodging expenses were only deductible if he was “away from home” as required by Section 162(a)(2).

In deciding whether Mr. Soboyede’s tax home was in Minneapolis or Washington, D.C., the court used the following two factors:

• Where did he spend more of his time? 
• Where did he derive a greater proportion of his income?

Answer: Washington, D.C. Think about this: He had his home in Minneapolis, but the court ruled that his “tax home” was in Washington, D.C. As a result, he lost his travel deductions.

If you are in a similar situation, please call me on my direct line at 408-778-9651 to see how we might create a better result than the one described above.

• By Leon Clinton
• October 20, 2021