Proprietors and Employees

1
Proprietors and Employees

• Accountancy 312
• Jon Davis

2
Individual Tax Review

• The Individual Tax Formula
• AGI
• Itemized deductions and deductions for AGI
• Standard deduction and Personal exemptions

3
Learning Objectives

• Be able to distinguish between an employee and
  independent contractor (IC)
• Understand the tax consequences of classification
  as employee or IC
• Be able to apply the tax rules related to fringe
  benefits

4
Employer vs. Employee

• What are the consequences for employer and
  employee?
• Classification by the courts
• Right to specify end result and ways and means by
  which result is attained.
• Can fire person performing service
• Furnishes tools or a place to work
• Payment based on time spent rather than taks
  performed
• Worker bears substantial business risk (loss
  potential).

5
Special Classification Rules

• Statutory Employees
• File Schedule C and Deduct XP for AGI
• FICA due, but no FIT withholding
• Statutory Owners
• Corporate officers are employees per the Code.
• Real Estate Agents and Direct Sellers (Sec. 3508)

6
Employee Compensation

• How many of you have received non-salaried
  benefits in the course of your employment? What
  kind?
• Qualified fringe benefits are highly tax-favored
• Deductible by employer
• Excluded by employee

7
Kinds of Compensation

• Qualified fringe benefits
• Never taxed
• Pensions
• Deferred tax with tax exemption on investment
  returns
• ISOs
• Deferred tax at capital gains rates
• Deferred Comp and NQSOs
• Deferred tax at ordinary rates
• Salary and nonqualified fringes
• Taxed now

8
Designing Compensation Plans

• Equilibrium Tax Planning
• When designing compensation arrangements, one
  needs to account for both the employer and the
  employee.
• Consider the case of deferred compensation
• Question should we pay 1 of cash compensation
  now or enter into a deferred comp contract paying
  a bonus at time period n?

9
Qualified Benefits

• Premiums on health plans, disability and
  long-term care.
• Medical reimbursement plans
• Meals and lodging
• Group term life insurance
• Qualified tuition reduction plans

• Child and dependent care services
• Athletic facilities
• Educational assistance
• Adoption expenses
• Cafeteria plans and flex plans
• General Fringe benefits (e.g., discounts, working
  condition fringes, etc.)