Business Tax Lawyers Minneapolis | IRS Classification of Workers

Determining the business relationship between your business and your workers can be one of the most important aspects of your business and tax planning. The consequences of worker mis-classification can carry a heavy penalty for your businesses, including liablity for employment taxes for misclassified workers.

There are many various competing definitions of how a worker should be classified, including specialized formulas developed by states for particular industries (for example, construction and trucking industries in Minnesota). In this essay, however, I will only generally describe the classifications used by the U.S. Department of Treasury, particularly the IRS.

There are four classification categories used by the IRS: common-law employees, statutory employees, statutory nonemployees, and independent contractors.

Common-Law Employees

The IRS states that, under common-law rules, anyone “who performs services for you is your employee if you have the right to control what will be done and how it will be done.” (See IRS Publication 15-A) The most important factor here is the right to control the details of how the services are performed. I will not further deal here with the specific factors of common-law employment and how it is distinct from the independent contractors (this discussion is left for a later article).

Remember, if you have an employer-employee relationship, it makes virtually no difference how it is labeled. The substance of the relationship, not the label, governs the worker’s status. Nor does it matter whether the individual is employed full time or part time. Finally, the IRS makes no distinction between classes of employees: superintendents, managers, and other supervisory personnel are all employees.

An officer of a corporation is generally an employee; however, an officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. Id. A director of a corporation is not an employee with respect to services performed as a director.

Leased workers (i.e. workers supplied by a firm to other firms) are considered “employees” of the firm furnishing the workers for the employment tax purposes. This situation usually arises with respect to temporary staffing agencies.

The most important consequence of this classification for tax purposes is the fact that the employer is usually required to withhold and pay income, social security, and Medicare taxes on wages that the employer pays to its common-law employees. There are a number of exceptions such as some religious employees.

Statutory Employees

Some classes of workers are considered as employees by the Federal Code (and, hence, the IRS) regardless of whether they may qualify for an independent contractor status under the common-law rules. This means that the employer should treat the worker as its employee and pay the necessary payroll taxes, while the worker may be able to report their wages, income, and allowable as if he were self-employed (using schedule C (or schedule C-EZ)). Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes.

A worker is considered by the Federal Code as a “statutory employee” if he falls within any one of the listed four categories. The categories are defined as follows:

1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is agent of the business employer or is paid on commission;

2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company;

3. An individual who works at home on materials or goods that the business employer supplies and that must be returned to the business employer or to a person the business employer names, if the business employer also furnish specifications for the work to be done; and

4. A full-time traveling or city salesperson who works on the business employer’s behalf and turns in orders to the employer from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for the business employer must be the salesperson’s principal business activity.

If the worker falls within one of the categories of statutory employment above, the employer should withhold social security and Medicare taxes from the wages of statutory employees only if all three of the following conditions are met:

a. The service contract states or implies that substantially all the services are to be performed personally by the worker;

b. The worker does not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities); and

c. The services are performed on a continuing basis for the same payer.

FUTA (federal unemployment tax) tax may be imposed only with respect to workers who fit into categories 1 and 4 above. The main reason is because the term “employee” for FUTA purposes does not include statutory employees in categories 2 and 3 above.

Remember, an employer should not withhold federal income tax from the wages of statutory employees.

Statutory Nonemployees

Under the Federal Code, there are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if:

a. Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked; and

b. Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes.

Independent Contractors

The final classification category is an independent contractor. The definition of an independent contractor can be complex and is a proper subject of another essay. Generally, however, an individual is an independent contractor if the employer (i.e. the person for whom the services are performed) has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Usually, lawyers, contractors, subcontractors, auctioneers, and other workers who follow an independent trade, business, or profession in which they offer their services to the public, are not employees. However, whether such people are employees or independent contractors depends on the facts in each case.

Conclusion

Determining the business relationship between your business and your workers can be a very complex issue fraught with dangers. Moreover, even if you comply with the regulations above and correctly classify your workers for federal tax purposes, this does not necessarily mean that your federal compliance will be sufficient to satisfy the conflicting requirements of the various state classification rules. Since the consequences of mis-classification can be very serious, it is advisable that you seek an attorney’s advice on these issues.

Sherayzen Law Office can help you correctly classify your workers and make sure that your business follows the necessary and advisable procedures to comply with various, often conflicting, state and federal regulations.

Call NOW to discuss your business situation with a business tax attorney!

International Contract Lawyers Minneapolis | New Incoterms 2010

The International Chamber of Commerce (“ICC”) has announced that Incoterms 2010 is scheduled to be launched in September and come into effect on January 1, 2011.

Incoterms is the abbreviation for “International Commercial Terms” and were introduced by the ICC back in 1936 to provide people engaging in international trade a common set of trade terms that would be understood across the world. Incoterms are crucial when trading across borders and should be included in all international sale of goods contracts because they help parties avoid misunderstandings by clearly identifying the obligations of the buyer and seller. They stipulate in one short acronym exactly who will pay for the freight, who wears the risk in the goods at which point in time, who pays for insurance and duty.

In order to keep up with the rapid expansion of world trade and globalization, the Incoterms rules are revised about once a decade. Since the last revision in 2000, much has changed in global trade and the current revision will take into account issues such as developments in cargo security and the need to replace paper documents with electronic ones.

Therefore, the new 2010 edition includes 11 terms instead of the 13 in the previous edition. The following terms from Incoterms 2000 have been deleted from the list: DAF, DES, DEQ and DDU. These two new terms have been added to the list: DAT and DAP.

Another significant change has to do with categories of the Incoterms. Incoterms 2000 had four categories, while Incoterms 2010 only has two categories. The first category can be called “Rules for Any Mode of Transport” (also knows as “multimodal” Incoterms) and includes the following terms:

CIP – Carriage and Insurance Paid
CPT – Carriage Paid To
DAP – Delivered At Place
DAT – Delivered At Terminal
DDP – Delivered Duty Paid
EXW – Ex Works
FCA – Free Carrier

The second category is described as “Rules for Sea and Inland Waterway Transport Only” and includes the following terms:

CFR – Cost and Freight
CIF – Cost, Insurance and Freight
FAS – Free Alongside Ship
FOB – Free On Board

All current and potential exporters should be aware that new Incoterms are expected to take effect in 2011. Sherayzen Law Office will continue to update the readers on the progress of the revisions. In the meantime, we recommend that you ensure, and if necessary seek legal advice to ensure, that your commercial trading terms accurately reflect the transaction.

Call NOW to discuss your contract with an international trade attorney!

Estimated Tax Payments are due on September 15, 2010

Estimated tax payments for the third-quarter (June 1-August 31) of 2010 are due on September 15, 2010. The estimated tax payments should be made using Form 1040-ES. Note, if the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if it is made on the next business day.

Minnesota Money Transmitter License Application: Required Enclosures

When a business entity applies for a Minnesota money transmitter license, the applicant must be aware that, in addition to answering the questions on the application, the Department of Commerce (“Department”) requires a large number of additional documents that must accompany the original license application. While the precise nature of the required documentation varies depending on whether the applicant is a corporate entity or noncorporate entity and how many locations the applicant intends to operate, the following documents usually must be submitted with the original license application.

1. Sample of the authorized delegate contract(s), if applicable;
2. Sample of the form of payment instrument(s);
3. If the applicant is a corporation, copy of the “Certificate of Incorporation” or, if incorporated in another jurisdiction, copy of the “Certificate of Foreign Incorporation” from the Minnesota Secretary of State. If, however, the applicant is not a corporation, then a copy of the “Article of Organization”;
4. Certificate of good standing from the state in which the applicant is incorporated (if applicable);
5. Copy of criminal history verification for each person listed in Section III or IV of the application;
6. Required financial statements;
7. Surety bond, irrevocable letter of credit, or other similar security device for the required amount (the form is included in the application);
8. Uniform Consent to Service of Process and acknowledgment form;
9. If the applicant has employees in Minnesota, then evidence of current worker’s compensation coverage;
10. Authorization to Release Information form;
11. Affidavit of Official Signing Application form; and
12. Check of money order for the applicable fee amount payable to the “Department of Commerce”.

Sherayzen Law Office can help you correctly collect all of this information, review your money transmitter license application, and file the application with the Minnesota Department of Commerce.

Please, call NOW to discuss your license application with a business attorney!

Minnesota Money Transmitter License Application: Expiration of Initial License Considerations

Applying for a money transmitter license in Minnesota can be an expensive enterprise, and the applicant should make sure that he will be able to maximize the benefits that can be derived from the license. The definition of the licensed period, therefore, becomes one of the most important considerations.

The Department of Commerce (“Department”) states that the licenses issued under Chapter 53B (the statute which grants the Department authority to issue money transmitter licenses) expire annually on December 31. In order to conduct money transmissions after December 31, the applicant will have to timely submit the application for the license renewal. Hence, it does not matter whether the license is issued on January 1 or October 30 of the same year – the license will still expire on December 31 and, in the latter case, the applicant will need to file the license renewal application almost immediately after the initial license application is granted.

Therefore, if the applicant applies for a money transmitter license in the last quarter of a calendar year, it may be beneficial for him to insist that the license should be issued as of the first of January of the following calendar year. Obviously, in this situation, the applicant may not conduct any transmissions prior to January 1 of the following calendar year. Hence, a cost-benefit analysis must be conducted in order to determine whether it is more profitable for the applicant to obtain the license now or to postpone it until January 1 of the following year.

Sherayzen Law Office can help you file your money transmitter license application with the Minnesota Department of Commerce.

Please, call NOW to discuss your license application with a business attorney!