Author: Leon Clinton

As a business owner, you are obligated to collect and remit payroll taxes for your employees. But you are not required to collect and remit payroll taxes for independent contractors.

That’s why it’s important to correctly classify workers as either employees or independent contractors. 

But here’s the problem: the rules for correctly classifying workers as either employees or independent contractors are unclear and confusing. 

And what happens if you misclassify a worker as an independent contractor? Then you can find yourself owing hundreds of thousands of dollars in back employment taxes, penalties, and interest. 

But wait! If this happens to you, the safe harbor of Section 530 may provide relief.

The Section 530 safe harbor was passed by Congress as part of the Revenue Act of 1978 in response to complaints by business owners that the IRS was being too aggressive in reclassifying their workers as employees. 

The possible good news for you is that the Section 530 safe harbor prevents the IRS from retroactively reclassifying your independent contractors as employees and subjecting you to federal employment taxes, penalties, and interest. 

Reclassifications, if any, go forward only. You are not on the hook for any money as of the date of any reclassifications.

To qualify for the Section 530 safe harbor, you must meet all the following requirements:

1. You must have filed all federal tax and information returns consistent with treating the individuals as independent contractors.
2. You must show that you never treated the individuals in question, or other workers in substantially similar positions, as employees for federal employment tax purposes.
3. You must show that you had a reasonable basis for classifying the individuals as independent contractors.

You can meet the reasonable basis requirement by showing that you relied on any one of a number of authorities, including judicial precedents or administrative rulings, a prior worker classification tax audit, or industry practice.

Your classifications of workers for federal purposes do not have to match your classifications for state law purposes.

If you would like to discuss worker classifications, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 6, 2022

If you do some work at home, you’re probably using your home internet connection. Are your monthly internet expenses deductible? Maybe.

The deduction rules depend on your choice of business entity (proprietorship, corporation, or partnership).

Deduction on Schedule C

If you operate your business as a sole proprietorship or as a single-member LLC, you file a Schedule C to report your business income and expenses. As a Schedule C taxpayer, you may deduct ordinary and necessary expenses, which include business-related internet subscription fees.

You can deduct your use of your home internet whether or not you claim the home-office deduction, as follows:

• If you claim the home-office deduction on your Form 1040, the internet expense goes on line 21 (utilities) of IRS Form 8829 as either a direct or an indirect expense.
• If you do not claim the home-office deduction, enter the business portion of your internet expenses as utilities expenses on line 25 of your Schedule C.

Deduction When You Operate as a Corporation

When you operate your business as a corporation, you are an employee of that corporation. Because of the Tax Cuts and Jobs Act (TCJA), the only way for you to reap the benefits of the home internet deduction is to have your corporation reimburse you for the expense. In the case of a reimbursed employee expense,

• the corporation deducts the expense as a utility expense, and
• you receive the reimbursement as a tax-free reimbursed employee business expense.

Why is the reimbursement method the only way for the corporate owner to get the deduction? The TCJA eliminated the 2018-2025 deduction for miscellaneous itemized expenses. These include unreimbursed employee expenses, such as internet connection fees.

Deduction When You Operate as a Partnership

If you have deductible home internet expenses and operate as a partner in a partnership, you have two ways to get a tax benefit from the home office:

1. Deduct the cost as an unreimbursed partner expense (UPE).
2. Or get reimbursed from your partnership via an accountable plan (think “expense report”).

Substantiating Your Home Internet Expense Deduction

Where business owners can run into trouble with the IRS is in substantiating their internet expense deduction. 

You should have no problem showing the total cost for your home internet connection—just total your monthly bills. The problem is in establishing what percentage of the total cost was for business, because only that percentage is deductible. 

Ideally, you should keep track of how much time you use your home internet connection for business and how much time for personal use. A simple log or notation on your business calendar or appointment book—indicating approximately how many hours you were online for business each day while working at home—should be sufficient. 

Google it, and you can find software and apps that will track your internet use.

Instead of tracking your home internet use every day throughout the year, you could use a sampling method such as that permitted for tracking business use of vehicles and other listed property. There is no logical reason the IRS shouldn’t accept such a sampling for internet use.

If you would like to discuss how your work at home creates tax deductions, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 3, 2022

Taxable income has consequences.

• It causes income taxes. 
• And it causes you to pay either more or less for Medicare. 
• It boils down to this: there’s always a need to reduce your taxable income.

The monthly premium for the current year depends on your modified adjusted gross income (MAGI) as reported on your Form 1040 two years earlier. For Medicare, MAGI means the adjusted gross income (AGI) number shown on your Form 1040 plus any tax-exempt interest income. 

Your 2022 Part B premiums will depend on your 2020 MAGI, as reported on your 2020 Form 1040. 

Your 2023 premiums will depend on your 2021 MAGI, as reported on your yet-to-be-filed 2021 Form 1040. That means that things you do or don’t do on that 2021 return can impact your 2023 premiums. This is especially true if you’re self-employed or an owner of a pass-through business entity (LLC, partnership, or S corporation).  

For 2022, most individuals will pay the base Part B premium of $170.10 per covered person ($2,041.20 if you pay premiums for the full year). But higher-income individuals must pay a surcharge on top of the base premium for Part B coverage, as shown in the table below:

Your 2021 Form 1040 can reflect decisions that affect your 2021 MAGI and, in turn, your 2023 Medicare health insurance premiums. If you’re self-employed or an owner of a pass-through business entity, you have more ways to reduce your MAGI. For instance:

• Until the due date for your 2021 Form 1040 (October 17, 2022, if you get an extension), you as a self-employed individual can make a bigger or smaller deductible contribution to your self-employed retirement account for your 2021 tax year. Your choice will impact your 2021 MAGI and, in turn, your 2023 Medicare health insurance premiums. 
• You as an owner of a pass-through business entity (along with the other owners, if applicable) can make other choices that will impact your 2021 MAGI, such as choosing to maximize or minimize depreciation deductions for the entity. Those choices will impact each owner’s 2021 MAGI and, in turn, his or her 2023 Medicare health insurance premiums.

Key point. Sure, 2021 is over. But because your tax return has not yet been filed, you can choose from the possibilities listed above for reducing your taxable income, which also reduces your Medicare MAGI. 

If you would like to discuss how to reduce your Medicare premiums, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 28, 2022