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Unformatted text preview: CHAPTER 9 DEDUCTIONS: EMPLOYEE AND SELF-EMPLOYED-RELATED EXPENSES LECTURE NOTES INTRODUCTION 1. Overview . To summarize what is coming up, pose the following questions: a. Is the taxpayer an employee or self-employed (i.e., independent contractor)? b. If an employee, what expenses qualify as deductions? (see Exhibit 9-1 at the end of the Lecture Notes ) c. How are the expenses that qualify classified for tax purposes? d. What limitations are placed on these expenses? EMPLOYEE VERSUS SELF-EMPLOYED 2. Controversy . Always controversial, the issue of employee vs. self-employed status is likely to become more prominent in the future. 3. Motivation for Independent Contractor Status . Businesses are motivated to treat service providers as independent contractors for any of several reasons. a. It reduces the cost of employee fringe benefits (e.g., health insurance, retirement plans). Because many of these benefits must be provided on a nondiscriminatory basis, they can be quite costly. b. It reduces the amount of payroll taxes (e.g., FICA, FUTA). 4. Effect of Independent Contractor Status on Service Provider . In terms of the service provider, there are both advantages and disadvantages to being an independent contractor . 9-1 9-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes a. The major advantage is that job-related expenses are classified as deductions for AGI rather than as deductions from AGI. Thus, they are reported on Schedule C rather than on Schedule A. b. In terms of disadvantages , there are several . (1) One is that the independent contractor has to absorb the cost of the fringe benefit equivalents (e.g., health insurance, retirement plans). (2) Another important factor is the imposition of the self-employment tax . ADDITIONAL LECTURE RESOURCE A portion of the “tax gap” (i.e., the difference between the taxes that should be collected and those that are collected) is attributable to nonpayment and underpayment of payroll taxes. Either Social Security taxes are not considered or the service-provider is erroneously classified as an independent contractor. Both the IRS and Congress are becoming increasingly concerned over this aspect of taxpayer noncompliance. On the part of the IRS, it plans to increase audits of S corporations where the owner-employees are not paying themselves adequate salaries and, instead, are withdrawing profits in the form of dividends (which are not subject to self-employment tax). Also, the IRS is encouraging the use of Form 8919 (Uncollected Social Security and Medicare Tax on Wages). This form is to be filed by workers who feel that they are employees and not independent contractors. Its filing will undoubtedly lead to an audit of the payer and the possible collection of employment taxes....
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- Spring '08
- Expenses, Taxation in the United States, employee business expenses