In my commitment to educate my clients nationwide and in the greater Atlanta area, please read about the payroll tax cut extension below:

Congress passed an extension of the 2% payroll tax cut that had been scheduled to expire at the end of February. The extension means 160 million working Americans will continue to pay social security tax on their wages at a 4.2% rate for the rest of 2012, rather than at a 6.2% rate.

Because Republicans and Democrats were unable to agree on how to pay for the extended tax cut, the law included no spending cuts to offset the estimated $93 billion cost of this provision.

The law also provides for long-term federal unemployment benefits, setting the maximum at 73 weeks in states with the worst unemployment and 63 weeks for other states.

Another provision in the law includes the so-called “doc fix” that prevents a scheduled 27% reduction in Medicare payments to doctors.

The unemployment benefits and doctor payments will be paid for by government sales of broadband spectrum, requiring federal workers hired after this year to contribute more to their pensions, and cuts in certain health programs.

I recently posted a response to a Business Audit question on Lawyers.com. I am happy to share the question and response on the blog as well:

Question: “I own a business here in Connecticut and I was audited; I do not have the money and the business is not doing well; can I close the business and if I do, I have nothing, will I be held for those taxes? The business is a LLC.”

Answer: You can shut down the business but that may not end your tax obligations with the IRS or state of Connecticut. The IRS or Connecticut may or may not pursue the business for the tax liability or may or may not asset a Trust Fund Recovery Penalty TFRP against you as an individual. THE TFRP is a penalty imposed on individuals who have financial control over the business. Specifically it is designed to penalize those who had control over the decision of where to divert assets to other creditors rather than paying IRS or Connecticut payroll taxes. The actual penalty imposed is equal to the income taxes, social security taxes, and Medicare taxes withheld from employee paychecks. If nothing is done during the audit, the IRS will likely disallow all expenses and may or may not adjust income depending on the specific facts and circumstances surrounding your audit. Fortunately, there are mechanisms for helping taxpayers try to resolve their liabilities. It may be possible to pursue a settlement agreement to compromise the tax liability for an amount less than you currently owe. It may be possible to seek a penalty waiver to reduce the penalties on some or all tax periods.  Additionally, it may be possible to enter into a payment arrangement to make monthly payments until the balance is paid in full. It might also be possible to pursue Bankruptcy.

I recently published an article to Google Knol titled: “Independent Contractor or Employee?”. To find out the difference between an independent contractor and employee, read the full article here on the blog.

Tax law is not easy. But it is crucial for both employers and the people they hire, whether they are employees or independent contractors, to have a basic understanding of their tax status and responsibilities to the Internal Revenue Service. As an expert tax attorney in Atlanta, I wanted to share some answers to help those of you with questions.

Whether you’re signing the paychecks or cashing them, you need to know whether a worker is classified as an employee or an independent contractor. The IRS expects each party to be familiar with their tax liabilities and to cleave to them. Failing to do so can result in a massive back tax headache and a potential tax levy. You don’t want to get audited and investigated for not paying payroll taxes on someone you thought was a contractor, but the government classified as an employee.

Talk to a tax lawyer and get the answers to your questions now, before your assumptions inadvertently create a tax problem or levy. A qualified CPA firm or tax attorney can help guide your business decisions and answer specific questions unique to your situation. Here are some points to consider.

• There are exceptions, but generally speaking, an employer withholds and/or pays from an employee’s paycheck: Federal and State income taxes, Social Security and Medicare taxes and unemployment tax.

• An independent contractor is not subject to any withholding. He is responsible for filing an annual return and paying his quarterly estimated self-employment taxes.

Failure on the part of a contractor to classify himself accurately and pay taxes quarterly can result in investigation by the IRS and the need to pay back taxes, interest and penalties. Likewise, an employer who tries to save money by treating its employees like contractors and not paying applicable employee taxes may be subject to an IRS and/or state audit and paying back taxes, interest and penalties and a possible tax levy. (See below for the exception.) Any top tax lawyer will tell you that the risk is not worth the back tax trouble you can get into.

If you are unfamiliar with tax law and are not sure whether someone qualifies as an independent contractor, you can use the three-part litmus test the IRS applies to make a determination. According to http://www.irs.gov, these elements are:

• “Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.” This means that an employer expects people to show up at a specific place and a specific time and micro-manages the project. This applies equally to employees who are doing such disparate things as building a fence or writing an annual report.

• “Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.” Does the employer provide you with the necessary shovels and laptops, or are you responsible for buying, maintaining and replacing your own tools? Are you free to work for other non-competing firms while you’re completing your current project?

• “Type of Relationship factor relates to how the workers and the business owner perceive their relationship.” Does the employee fit into a slot in an established hierarchy within an organization, or is the contractor more of a partner, working in tandem with the client toward the project’s successful conclusion?

The bottom line is how much control a company has over the work being done. Being a professional tax attorney in Georgia, I like to say that if a company is telling a worker not only what to do, but when, where and how to do it, providing the tools to do it and expecting him to clock in and out while he does it, he is probably an employee. If the worker is free to complete his tasks off-site within his own timeframe and on his own equipment while working for other clients at the same time, he is probably a contractor.

As an employer or a contractor, you know how crucial it is to keep meticulous records in order to avoid back tax problems. Fortunately, tax law has provided a way to determine whether someone is an employee or contractor based on whether they filled out a W-2 or a 1099. Employees fill out a W-2. An experienced independent contractor will ask for a 1099 and already be familiar with his responsibilities to the IRS. If a worker asks for a W-2, and you weren’t planning to put him on the payroll, that’s a signal for you or a tax attorney to talk with him and get things squared away. Do this before any money exchanges hands and creates a back tax problem or tax levy in the future.

If one or both parties are unfamiliar with how to classify workers and there is a dispute over whether they are contractors or employees, either party can ask the IRS to make a determination by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. By doing this, everyone walks into the employment agreement knowing what their tax responsibilities are. This will go a long way toward creating a smooth working relationship, whether you’re punching a clock or not.

If an employer has been hiring contractors, but upon consultation with their tax lawyer decides they would like to reclassify some of the contractors as employees, they might be eligible to participate in a new program recently launched by the IRS. This new program comes with amnesty from paying the usual hefty penalties associated with this switch.

According to http://www.irs.gov, the Voluntary Classification Settlement Program “is a new program developed by the IRS that allows taxpayers to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. Under the VCSP, a taxpayer will pay 10 percent of the amount of employment taxes calculated under the reduced rates of section 3509(a) of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. In addition, the taxpayer will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers.”

For more information on how to avoid a back tax problem or tax levy, please visit www.irs.gov, or get the professional advice of a CPA or tax lawyer in your community.

About Jeffrey S. Gartzman, Atlanta Tax Attorney and Certified Public Accountant
Jeffrey S. Gartzman is an accomplished Atlanta tax attorney and CPA who has been practicing tax law in Atlanta for nearly 30 years. He will help you resolve IRS and state tax problems, find tax relief and settle tax debt. Jeffrey S. Gartzman has a Master of Laws (LL.M.) in Tax from Emory University School of Law. Jeffrey S. Gartzman is a former IRS Taxpayer Education Program instructor. He is also an accredited Personal Financial Specialist with the American Institute of CPAs. Mr. Gartzman is a member of the Atlanta Bar Association, State Bar of Georgia, Georgia Society of Certified Public Accountants, American Institute of Certified Public Accountants, and other professional associations.

It’s never too early to get together with your Atlanta tax attorney for some smart planning to save on next year’s taxes. If you are self-employed or in a position to claim business expenses, here is a short checklist to review and help you identify new business deductions for your tax return.

If you’re incorporated:
1. You may want to operate as an S corporation to save self-employment taxes.
2. If you have a Schedule C, hire your children (deductions for you, nontaxable or low-tax income for the children. Also, wages paid by parents to children are exempt from payroll taxes).
3. Operating as a C corporation may offer medical deductions.

If you travel or entertain for business:
1. Combine business and personal trips to obtain business deductions under the travel rules (for example, traveling by cruise ship to a convention).
2. Properly classify entertainment that qualifies for the 100% deductions rather than the 50% deduction.
3. Identify the vehicle deduction method that gives you the largest deductions (choosing between the IRS mileage method and the actual expense method).
4. Properly identify your maximum business miles so you deduct the largest percentage of your vehicles.
5. Know the entertainment facility rules so that your vacation home can become a tax deduction.

Other office tax items:
1. Properly classify business expansion or repair expenses as deductions rather than nondeductible capital costs.
2. Properly identify deductible start-up expenses (a common oversight).
3. Use a 1031 exchange to defer taxes (sometimes until death when the assets are marked up to fair market value and the income taxes are forgiven).
4. Qualify your office in your home as an administrative office, and use allocation methods that make your home-office deductions larger.
5. Install a section 105 medical plan to move your deductions to Schedule C for maximum benefits.