By Howard Abrams, PBS Tax & Bookkeeping
We receive many calls asking about employee classification – i.e., treating employees as independent contractors. Why? Because it’s less costly and less paperwork, plus the employer portion of the payroll taxes can be avoided. Also, the employer can avoid workers compensation insurance and other fringe benefits.
Q. I am paying my employee as an independent contractor, but I know he is not. What happens if the IRS finds out?
A. There will be back taxes and large penalties and interest. In other words, the hit to you will be huge. However, the IRS has introduced an amnesty program to prevent that and to get you on the proper track.
Q. What is the program about?
A. It is a new amnesty program called the Voluntary Classification Settlement Program (VCSP). It benefits companies such as an owner-operator’s small trucking business that has erroneously treated its workers as independent contractors and now want to correctly treat these workers as employees.
Q. What does it do?
A. It allows employers to reclassify their independent contractor worker(s), who are not independent, to employees going forward with minimal penalties and interest (just 10 percent of what the payroll taxes would have been for the past year).
Q. How do I qualify for this program?
A. You must have filed 1099s for the previous three years in addition to agreeing to the reclassification. File Form 8952 and then receive a closing agreement from the IRS before you make any changes.
Q. My equipment is older. It doesn’t get very good fuel mileage, and my repairs are more each year. Would I be better off with new equipment?
A. Do the savings in fuel cost, repairs and downtime combined with the depreciation write-offs more than offset the payments of a new rig? In other words, will you be in a better financial situation?
You will need to do projections to compare your options. Project your cash flow, both short and long term, paying particular attention to your fuel savings and your anticipated repair and downtime savings. Factor in your income tax savings as a result of buying a new rig. The potential tax savings – combined with savings from fewer repairs, parts, downtime and fuel efficiency – should give you a pretty good idea whether you can afford an increase in payments on the new rig, and whether you should move forward or not. You may find that financially you did yourself a huge favor.
The projection is also used as a tool in other business and personal decisions. But talk to other drivers with newer trucks to see if they are having trouble with the newer engines because of regulations.
Q. I’m an owner-operator and am concerned about losing my assets if I’m in a terrible accident. My buddies tell me to incorporate or operate under a limited liability company to protect my assets. Is this the proper thing to do?
A. Yes and no. You were correct to ask a professional about what to do. Some people just go ahead and act based on what their buddies say. However, we are not attorneys and therefore cannot recommend a type of entity to operate as to liability protection. What we can recommend is to talk to an attorney, who can judge whether a particular operating entity will provide you with the liability protection you seek.
Q. My father was an owner-operator who ran with his own authority. He owned one truck. He was divorced from my mom. He passed away several months ago and we’ve found out that he owed the IRS a load of money from unpaid income tax. Is the family liable to pay that back?
A. No. The responsibility of any debt the father may have, including unpaid taxes and medical bills, falls to the father’s estate. However, the heirs may not receive any money until the debt is paid off. Note to readers: Any issues involving estates should be resolved using an estate attorney.
Q. I did some jobs for a small outfit two years ago and they paid me cash. It was less than $1,800 total, and someone told me I did not have to report it to the IRS as earnings. Now I’m afraid that the company turned in the expense and the IRS will come back on me for not claiming it as income. If they did not turn it in, I don’t really want to bring it up. Is there a way I can tell if they turned in what they paid me on their tax filing?
A. No. You will not know if they ever deducted the $1,800 unless you receive a Form 1099 or the IRS contacts you. However, this question should never arise because you should always report any income you receive. You still have time to file an amended return (three years from the filing date including extensions) and report the $1,800. LL
This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at pbstax.com.
Please remember 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.