Tax Question: Are you a contractor or an employee?

During this time of labor transition, many Denver Technical Professionals are offered jobs as a "contractor" rather than an "employee". The tax consequences matter. So we asked a tax expert a few general questions. Here is a response from Daniel Lowenthal, who is an Enrolled Agent. What is an Enrolled Agent? See the text below:

"Enrolled Agent (EA): (is) a federally licensed tax practitioner who has technical expertise in the field of taxation and is empowered by the U.S. Department of the Treasury to represent taxpayers for audits,collections and appeals before all administrative levels of the Internal Revenue Service," according to his Linkedin Summary statement.

dhlowenthal@hotmail.com

QUICK QUESTIONS:

1. Are Contract Jobs Taxable? The employer may provide a (1099 form) vs (W2).
2. Are Educational expenses deductible?
3. What is the importance of record keeping? Can I use basic Quicken QuickBooks?
4. Do I need Tax advice?

Reply:

The answers to all these questions are general in nature and are no indication of specific advice that can be represented on a tax return or a tax position.

1. Contract labor is often considered self-employment income and one should receive from the person for which one is performing the contract a 1099MISC. As such contract labor is in most cases subject to both income tax and self-employment taxes i.e.( Social Security and Medicare taxes.) In contrast W2 one is considered an employee.

2. Educational expenses may be deductible but there are numerous considerations as such one should talk to a competent tax advisor. If one has a specific question with their individual circumstance I can address it in more details.

3. Record keeping is vital because one has to be able to demonstrate to the tax authorities, the method taxable income was determined. Under examination (Audit) the IRS and state and local tax agencies may want to see the records.

Please do your books or have me do them. You can use all the mentioned software. Getting tax advice is recommended because you may need tax planning. Remember these two quotes.

"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Sourced

Judge Learned Hand, Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).

“The difference between tax avoidance and tax evasion is the thickness of a prison wall.”

Unsourced

Denis Healey, former UK Chancellor of the Exchequer.

(Equivalent to the US Treasury Secretary)

Written Communication Disclaimer:

Pursuant to the requirements related to practice before the Internal Revenue Service., and tax advice contained in this communication (Including any attachments) is not intended to be used , and cannot be used, for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code (USC 26) or (ii) promoting or recommending to another person any tax related matter.

The Tax Man Cometh: IRS Tips for Choosing a Tax Preparer

As soon as the new year comes around, it is time to think about choosing a Tax Preparer. Here are a few Tips from the IRS for choosing a Tax Preparer. The following text is a quote from the IRS.GOV website. Listen to Audio link listed below to get a great overview.

Audio: Conversation with IRS Manager, Melaney J. Partner
Text Version of Audio

"If you pay someone to prepare your tax return, choose that preparer wisely. Taxpayers are legally responsible for what’s on their own tax returns even if prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare personal returns. Most return preparers are professional, honest and provide excellent service to their clients. Here are a few points to keep in mind when someone else prepares your return:"

• A Paid Preparer is required by law to sign the return and fill in the preparer areas of the form. The preparer should also include their appropriate identifying number on the return. Although the Preparer signs the return, you are responsible for the accuracy of every item on your return. In addition, the preparer must give you a copy of the return.
• Review the completed return to ensure all tax information, your name, address and Social Security number(s) are correct. Make sure that none of these spaces is left blank.
• Review and ensure you understand the entries and are comfortable with the accuracy of the return before you sign.
• Never sign a blank return, and never sign in pencil.
• If you have provided specific authorization in a power of attorney filed with the IRS, you may have copies of notices or refund checks mailed to your preparer or representative; but only you can sign and cash your refund check. For further information on Powers of Attorney, refer to Topic 311.
• A Third Party Authorization Check Box on Form 1040 allows you to designate your Paid Preparer to speak to the IRS concerning how your return was prepared, payment and refund issues and mathematical errors."