Three tax takeaways

1. South Dakota v. Wayfair

On-line sellers no longer have to have a physical presence within a state to be required to pay sales taxes for on-line sales within those states. On June 21, 2018 the Supreme Court overturned the physical presence standards used in the past as an “unsound and incorrect,” interpretation of the Commerce Clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of sales tax revenue.

Larger on-line sellers have mostly started charging sales taxes on their sales but it remains to be seen how the smaller retailers will comply with the changes. If you buy items over the internet and are not charged sales tax you are supposed to claim those purchases and pay a Use Tax, but most buyers are either not aware of what a Use Tax is, or simply ignore the law. This ruling gives the states more leverage in going after end users who fail to pay over Use Tax.

2. The 2018 draft of Form 1040 might be postcard size, but it will require more schedules

In our business we like to say, “Uncle Sam giveth with one hand and taketh away with the other.” Save money yes, as far as simplicity though – not so much. The TCJA reminds me of a certain bookkeeping program that sells basically the same product every year, but moves the bells and whistles around so you think you’re getting something new.

Every client I have run a projection for is going to pay a lower income tax but there are bound to be exceptions. For the simplest filers; a single person with a W-2 and nothing else, the new filing system will definitely result in lower taxes and be as simple and easy to file as we can imagine. Those with complex tax structures can expect the same amount of effort, and folks who have pass-through income have some additional work if they want to take advantage of the §199A deduction (up to 20%).

3. The Tax Court recently ruled that the property manager of an apartment complex was an employee and not an independent contractor

The Tax Court has enumerated the following factors in determining whether and employee-employer relationship exists (abridged):

  1. The degree of control exercised by the principal over the details of the work.
  2. Which party invests in the facilities used in the work.
  3. The opportunity of the taxpayer for profit or loss.
  4. Whether the principal has the right to discharge the taxpayer.
  5. Whether the work is part of the principal’s regular business.
  6. The permanency of the relationship.
  7. The relationship the parties believe they are creating.
  8. Whether the principal provided the worker employee benefits.

The Manager was the only person who preformed work regularly at he apartment complex. The Manager performed the usual routine duties of any property manager.

The Court’s conclusion ruled in favor of the IRS:

While it did not issue the Manager a Form 1099-MISC or any other Form 1099, the Apartment Complex treated the Manager as an independent contractor and neither withheld or paid employment taxes with respect to his services.

On audit, the IRS determined that the Manager should have been classified as an employee. The IRS also assessed additions to tax, and penalties for the Apartment Complex for failure to file a return (payroll tax forms 941 and 940), and related penalties for failure to pay payroll taxes.

Our conclusion:

If your business pays any individual (has an SSN only) for services, they need to receive either a W-2 or form 1099-MISC. If you simply pay them, then you are paying a worker under the table. The only payees you do not need to issue a 1099 to are corporations (has an EIN and not a SSN).

Although all worldwide income is required to be reported, this payment arrangement leaves the reporting up to the discretion of the payee. The employer also gives the impression that they were attempting to escape paying the employer portion of Social Security and Medicare taxes. Under-funding the Social Security and Medicare funds is a big problem in this country and a side of the equation the powers-that-be seem willing to ignore.

It will be interesting to see the reaction of Black Market Operators when they reach the age of collecting Social Security benefits and they scream bloody murder because their checks are so small. A number of them probably do not even realize that the size of their payments relies on the amounts they have invested into those funds.

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