PBS TAX & BOOKKEEPING
Q: Can I deduct health insurance if I am an S Corporation?
A: In order to deduct health premiums as an adjustment to gross income, the policy must be purchased in the corporate name.
The premium is deductible by the corporation as compensation and reported on the shareholder’s W-2. If the policy is in the name of the individual, the premiums are deducted only as an itemized deduction, and only the excess of 7.5 percent of adjusted gross income. And if you don’t itemize, the owner is really out of luck. The same rule applies to partnerships.
On a side note, ask your insurance agent about a medical reimbursement plan.
Q: What are the rules when married filing separate?
A: In most circumstances, married taxpayers filing “married filing separate” returns should have uniform below-the-line deductions, i.e., both must itemize or both must take the standard deduction. Income can vary depending on to whom it belongs. As it relates to divorce, a taxpayer who qualifies as unmarried under “head of household” rules can claim the standard deduction even if the other spouse has itemized deductions.
If there is a divorce, once the divorce is final, and the parents of one or more children have legal joint custody, it is extremely important to keep accurate records of days of custody for purposes of filing “head of household” and the earned income tax credit.
Q: I got a 1099 from my employer. I thought I was an employee. What should I do?
A: If an employer misclassifies a worker as an independent contractor, the employee is still responsible for paying his or her share of federal income tax withholding and their share of social security taxes. Employers are still liable for the full amounts of their share. If the employee corrects the misclassification, IRC Code 3509 provides reduced rates.
An employer can get relief from paying the federal income tax that should have been withheld by providing evidence that the employee reported the income on his or her tax return and paid the tax due.
Section 530 of the Revenue Act of 1978, as amended provides for relief for the employer. It is necessary to meet all three of the following requirements:
- Reasonable basis for not treating a worker as an employee (a, b, or c will qualify for meeting rule
- Judicial precedent
- Past IRS audit regarding this matter when there was no assessment of tax
- Long standing recognized industry practice.
- All workers must have been treated as independent contractors for all applicable periods beginning after Dec. 31, 1974.
- If required, Form 1099 MISC for each worker must have been filed.
Q: Can you provide me with the “common-law rules” used to determine if a worker is an employee or an independent contractor?
A: This is known as Revenue Ruling 87-41. Following, you’ll find an overview of the factors, organized into four groups:
1. Behavior control factor. An employer has the right to control how an employee does the work. An independent contractor usually retains control over how the work is done.
2. Financial control factor. An employer has the right to control how the business aspects of an employee’s activities are conducted. An independent contractor has the right to control his or her own business activities.
3. Relationship factor. The following factors illustrate how the worker and the business perceive their relationship.
- Written contract – The contract must have substance – a method of payment, handling of expenses, how work is done – designating the worker an independent contractor.
- Employee benefits – Health insurance, pension plans, vacation and sick pay benefits are only paid to employees.
- Continuing relationship – A temporary relationship is more likely to indicate independent contractor status – even if long term.
- Integration – If the worker’s services are an integral part of the business operations, the worker is generally an employee.
4. Less important factors. The following common-law factors are considered less important than those in groups 1-3.
- Employer’s right to discharge the worker
- Worker’s right to terminate the relationship
- Part-time or full-time work requirement
- Work required to be done on employer’s premises
- Setting of hours to do the work
- Setting of an order or sequence of the work and
- Interim oral or written reports requirement
If you have more questions regarding employee vs. independent contractor status, contact your tax professional.
This article was written by PBS Tax & Bookkeeping Service. Contributions to this article were made by Shasta May, director of business development for PBS. If you would like further information, please call 1-800-697-5153 or visit www.pbstax.com on the Web.
Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.