Tax Forms 940 Ez

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					                                                                                  Chapter 3




                                      Chapter 3

        Reporting Compensation to Employees, Volunteers, and
                     Independent Contractors
A.     Employee v. Independent Contractor

Perhaps the most common form of IRS audit is the short one-or-two day visit in which
they come in and through a quick review of your records, determine that you have mis-
classified as independent contractors certain people who should have been deemed
employees.

The IRS then proceeds to collect back Social Security, Medicare and Unemployment
taxes. Not only do they collect the employer's portion of those taxes, but since the
employee's portion was not withheld, the IRS holds the employer responsible for those
taxes as well, plus interest and penalties on both portions. The amounts become large
very quickly, which is another reason this type of audit is so popular with the IRS. There
are very few opportunities for a successful appeal of this particular type of IRS exam.

Although few chapters have employees, from time to time, many will use temporary help
in some form. Even temporaries can be reclassified as employees, if they lasted for a
period of a number of months, and you paid them directly rather than through an
agency, and you essentially provided them the space and the tools to do their work and
supervised the way they did it.

Before you decide to classify someone as an independent contractor rather than an
employee, the safe thing to do is draw up a written contract with a set duration and/or a
specific product or result to be delivered. If the work arrangement is "at will," meaning
you as an employer have retained the right to discharge them at any time, or to re-direct
the nature of their work verbally, then the IRS is very likely to find they should be
classified as employees.

The IRS has a famous list of twenty factors to help determine whether someone is an
employee or an independent contractor, but fundamentally they boil down to what was
just discussed. The general rule of thumb is "if in doubt, treat them as an employee,"
because that's just the way the IRS will view it if they come in on examination.

If, in the final analysis, you feel safe in saying that someone is an independent
contractor, it is absolutely essential, if you paid them more than $600 in the year, that
you issue them a Form 1099-MISC with their correct Social Security number on it, and
forward the IRS its copy. Those requirements are discussed under a separate heading
below.


B.     Forms W-4, I-9, W-2, 941, 940 and state equivalents

If you do determine that you have employees, you must get them to complete a Form
W-4 in which they are to tell you their correct name, address, and Social Security
Number, and how many withholding exemptions they believe they are entitled to. You
do not need to send a copy to the IRS unless they claim more than 10 exemptions, or


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the dollar equivalent. What you do need to do is keep the original on file as your
protection that you acted in good faith on what the employee told you.

Another requirement you must meet is to have all employees fill out the U.S.
Immigration and Naturalization Service's Form I-9, as soon as you hire them, even for
casual labor of very short duration. You must have them show you proper proof of
citizenship or residency. Again, by all means you need to retain the original of the
completed form for your protection. You don't need to send a copy to the INS.

You are no doubt familiar with the requirement to give a W-2 to every employee who
worked for you during the year. You must do so before January 31 each year. Then,
before February 28, you must send the federal government its copies of the W-2s, with
a Form W-3 covering transmittal for your batch of W-2s.

On a quarterly basis, 30 days after the end of each quarter, you need to file a Form 941
reconciling the income tax withholding, Social Security and Medicare taxes you have
withheld (and already deposited) on behalf of employees, as well as the employer
portion of social security and Medicare. The instructions to the form tell you how and
when to make deposits. Deposits can be made electronically, or with a Form 8109
deposit coupon you take to the bank with your payment.

There are also Federal Unemployment taxes and filings. Although much lower than
Social Security taxes, you are equally liable for making these deposits, and for
reconciling them either quarterly or annually (depending on amounts) by filing a Form
940 or 940-EZ. You should be aware that 501(c)(3) charitable, educational, scientific,
etc. organizations (those that are eligible for deductible charitable contributions) are
exempt from Federal Unemployment tax, other categories of income-tax-exempt
organizations such as SNM are not exempt.

The states all have their equivalents of the 941 and 940 forms, as well as their
equivalent requirement to send copies of W-2s.      See your state income and
employment tax bureaus for forms and instructions.

For those of you who are located near state boundaries, keep in mind the following
general rules. You are liable for withholding and remitting state income taxes for the
state in which your employees physically reside while they are working for you (not
where they are "domiciled"), but you are liable to pay state unemployment taxes to the
state in which you as employer are located.

What forms of compensation are taxable? The general rule is if in doubt, it's taxable,
unless you have a qualified deferred compensation arrangement in place. The
instructions to the W-2 discuss how to report all the different forms of fringe benefits,
such as insurance, moving expenses, transportation allowances, and many other items.
Generally speaking, there is no such thing as a gift to an employee. It's all taxable
whether given in money or goods, with only a few specific exceptions. Notable
exceptions are for a turkey or ham (or equivalent) at holiday time, and longevity and
safety awards.

Car allowances are a frequent form of fringe benefit. Car allowances are taxable and
need to be reported on the W-2 unless it's a direct reimbursement for mileage at a rate



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not in excess of the federal standard mileage rate (32.5 cents per mile for 2000).
Reimbursement for mileage needs to be requested on a standard expense
reimbursement form that the employer keeps on file.

(See Chapter 3 appendix for forms and instructions)


C.     Form 1099-MISC and use of Form W-9

A filing requirement you are much more likely to run into as a Chapter leader is the Form
1099.      That is because every unincorporated business or individual who is not an
employee, and to whom you pay more than $600, cumulatively, during the year, for
anything (including most prizes and awards) must receive a Form 1099 from you by
January 31 each year. Again, a copy needs to be sent to the Federal government by
February 28 with a transmittal, Form 1096.

How do you know if a business is incorporated, and how do you find out the correct
taxpayer I.D. number to put on the 1099's for those who aren't incorporated? By
sending them a blank Form W-9 and getting them to complete it and send it back to
you. Again, you don't need to send a copy to the IRS, but you do need to keep the
completed forms for your protection.

There are penalties of $50 each for every instance of failure to file a fully completed
1099 when required. "Fully completed" means you are held responsible for finding out
the correct Social Security or other Taxpayer I.D. number. Also, by failing to provide
1099s when required, you are inviting tax trouble for the people you pay, since once the
IRS finds out who they are, it will routinely check their tax returns to see if they reported
the income.

W-2s are for employees, and 1099's are for non-employees. It is not correct to issue a
1099 to an employee, except for work they might perform after they cease to be
employees.

(See Chapter 3 appendix for forms & instructions)


D.     Reporting Compensation and Fringe Benefits to Board Members and Other
       Volunteers

If Board members or other volunteers (by which we mean anyone who is not paid a
salary or independent contractor fee) receive other forms of compensation such as
expense allowances, director's fees, honoraria, complimentary tickets or hotel rooms, or
free travel and expenses for their family members, then important reporting tax issues
arise.

1099 Forms must be provided to any Board member or other volunteer who receives
cash or items of value in excess of $600 during the year, excluding amounts they are
reimbursed, dollar for dollar, for legitimate chapter-related business expenses they
incur. Those legitimate business expenses, including mileage and per diem allowances
(not to exceed the standard federal rate) must be listed and reported to the chapter,



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using a standard expense reimbursement form otherwise used by employees, with proof
of the expenses attached.

If no expense reimbursement form is submitted, then the payment must be reported on
a 1099 (if the annual overall total exceeds $600). It is also reportable on the recipient's
own tax return, and the recipient is left with having to report offsetting business expense
deduction on that same return.

If a fully documented expense reimbursement form is submitted timely to the chapter,
then all of that tax reporting is avoided. The chapter must simply keep those expense
reimbursement forms on file, because the IRS will definitely want to see them if they
come calling.

What kinds of payments can be classified as legitimate business expenses, and which
cannot? If it's not an "ordinary and necessary" business expense under the tax laws,
then it's taxable income whether submitted on an expense reimbursement form or not.
Generally speaking, the travel, lodging and meals expenses of a spouse or other family
member who accompanies the board member on chapter business are not ordinary and
necessary business expenses unless the spouse or family member performs some
substantial services related to chapter business. It is well established by case law that
merely serving as a gracious companion or hostess (or host) at social functions does
not qualify as substantial services related to chapter business.

Under most circumstances, therefore, payment of spouse travel, or providing free travel
or entertainment not directly connected with the meeting, will have to be reported on a
1099 issued to the Board member (not the spouse).

Who bears the risk if no 1099 is issued? The chapter risks a $50 fine, but the Board
member risks a much larger fine if they fail to report the income on their own 1040. It
isn't sufficient excuse for them to say that they never got a 1099, and therefore didn't
report it.


E.     Reimbursing Expenses to Employees, Board Members and Other Volunteers

As discussed in the preceding section, if a fully documented expense reimbursement
form is submitted timely to the chapter, using the chapter's standard forms and showing
receipts or other substantiation of the business nature of the expense, then all tax
reporting is avoided. The chapter must simply keep those expense reimbursement
forms on file.

The Board member or volunteer must substantiate the amount, date, place, and
character of each business expense or group of expenses.                For meals and
entertainment, those in attendance and their business relationship to you should be
listed (this is best done on the back of a charge slip). Separate categories of expense,
such as lodging, meals, telephone, etc., must be shown separately either on the
expense reimbursement form or on the attached receipts.

There are a few types of expenses for which receipts are not required. First, mileage
reimbursed at or below the standard federal mileage rate requires no receipts – only a



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listing of the date and location of the trip, and the mileage between points. Similarly, if
the chapter has a per diem policy of paying a standard daily amount either for meals
and lodging, or just for meals and incidentals, then no receipts are required – just a
listing of the days and proof that you were in fact away from home on those days (such
as by attaching the airline ticket receipt).

The per diem amounts paid must be at or below the federal standard rates for the city in
question. Since there are different federal rates for every city every year, there is a
simple two-level option – one rate for a list of "high cost cities" and a second, lower rate
for all others.

Another category of expenses for which receipts are not required are meals, incidentals,
and local transportation expenses totalling no more than $75 per day. Lodging is a
separate category for which receipts are always required, unless the per diem method is
used. Items of transportation costing more than $75 normally need receipts, but not if
one has used a "paperless" airline ticket system. In those cases, you can simply list the
airfare, date and points of departure and arrival on your expense report, with the cost
and a notation that no receipt was available. The IRS presumably can find the rates in
standard fare schedules.

Absent receipts, one can also use "an account book, diary, statement of expense or
similar record" to substantiate expenses, say the IRS rules. The record must be kept
"contemporaneously," not reconstructed months after the fact.

(See Chapter 3 appendix for sample expense reimbursement form)




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