Friday, October 9, 2009

A Real Life Example

I have written several posts about the wide reach of the IRS, and how I support the Fair Tax as a means for the government to collect revenue. I have several reasons for wanting the Fair Tax, or another type of simplified tax structure. Surprisingly to most, reducing the size of the government is not the reason I would like to see a simpler tax code. My main reasons are as follows. First, the cost of complying with our current tax system is ridiculous. Second, even if we honestly attempt to comply, the code is so convoluted and vague that we may inadvertently be doing something wrong, allowing the IRS to penalize us many times what our initial payment might have been. Let me give you a real life example.

I am attempting to find someone to sell my service as a commission only broker. This seemed simple enough until I looked at the IRS website describing how they differentiate a contractor vs. employee. From the IRS's own website, I find the following:

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Is it clear now? Look again at the bolded text above. The IRS is admitting that the answer might not be clear. Have no fear, they offer a solution. Fill out form SS-8, send it to your regional IRS office, and you will have an answer back. But when? As a business owner, every day somebody is not selling is a day I'm losing money.

OK, fine. I'm OK with hiring somebody as an employee, but how do I do it so I can establish a commission based compensation package and still conform to minimum wage laws. No problem, I'll just search for "Minimum Wage" on the IRS website. First returned link titled, "Increase in Federal Minimum Wage Will Not Reduce 45B Credit." That is nice to know, but not at all relevant for what I am looking for. Next one "Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips (IRC 45 B Credit)" is equally useless. In fact, there is nothing on the entire first page of search results that will even tell me what the minimum wage is, let alone whether it would apply to a commissioned sales employee.

I give up. Maybe I'll call my accountant or a tax attorney. Wait a minute. Is there a lobbying group for accountants and attorneys? What do they think of the Fair Tax, or Flat Tax, or anything else that would simplify the tax code? Maybe I should just give up my fight, both as a business owner and a tax reformist.

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