DU tax gurus I have a question

[Coyote_Bandit]

Purely hypothetical of course.

Independent contracotr consults with a business on an on-going basis over a period of time. Receives monwetary compensation. Is allowed to purchase goods from business at cost. Receives training in the technical aspects of the business. Such knowledge is not necessary to job performance. Training will enable contractor to start his own business. Training is otherwise commercially available.

Obviously, monetary compensation is taxable.

Is the discount on goods taxable?

Is the value of the training taxable?

[Sen. Walter Sobchak]

1. yeah,

The training is taxable - especially if it was received in lieu of payment, if it was not in lieu of payment you could probably call it a fringe benefit. Even though you are a contractor.

Discounts are not taxable, but were you to be audited and they found out you bought a brand new car for $5000, they might make an issue of it.

[Coyote_Bandit]

2. What if

the training was very informal.

Say the business was in one of the building trades. Contractor was paid for his business services. Contractor was allowed to purchase goods at a discounted price. Contractor was allowed to maintain a small work area at the business where he worked on developing his building skills. "Training" occurred as business observed contractor.

Thanks!

edit to add that business makes workspace available to members of the public

[Sen. Walter Sobchak]

7. that is different,

Were you an apprentice?

That is pretty intangible, I wouldn't worry about it.

But an example I have seen is a company allowed a non-technical employee to participate in a Microsoft training program that resulted in a certification. It is pretty easy to put a dollar value on that training for tax purposes. Just call training centers and get a quote on a program for the same certification.

[Coyote_Bandit]

10. Sooooo

Monetary compensation is taxable as usual.

Discount is not taxed if not reported and relatively insubstantial. Assuming there is no bartering issue raised.

Contractor provided financial and strategic planning skills but received training in technical areas of the business (e.g., building skills). Training was informal and unstructured. Contractor had previously paid and completed basic training course relatig to the same building skill. So training is unrelated to work performed, it is unstructured and unreported. Again, untaxable unless the bartering issue is raised.

I assume the question of bartering would likely not be raised if compensation levels were consistent with work performed.

[boomboom]

13. agreed, unless training were considered additional payment for services

but the ultimate burden is on the business

[Coyote_Bandit]

16. Thanks! n/t

[Sen. Walter Sobchak]

22. yeah,

I would say your in the clear, don't worry the IRS has much smaller fish to fry, like single mother waitresses not declaring all their tips.

The worst situation I could see for you is the IRS deciding your a defacto employee if they take a closer look at your situation. That could lead to the IRS going after your "client" for payroll taxes and your client trying to put a million miles between them and you.

[Coyote_Bandit]

24. Good point

Thanks for the reminder. Contractor will keep own hours, use own software, computer and other equipment, and maintain other clients.

[boomboom]

26. yep, you're contract labor. the burden of proof is on the business

[boomboom]

25. the irs would go after the business, because they had a defacto employee, not a contract labor perso

there would be no liability for coyote. just the business

[Sen. Walter Sobchak]

30. liability no...

but his working conditions would take a turn for the worse, if he isn't fired outright should the "client" fight it and goes out of their way to prove he isn't an employee.

I have seen it happen, they said this woman was a defacto employee, so they took her computer, they took office, they even took her email address and wouldn't even let her use the office fridge or attend company social functions.

[boomboom]

31. the burden of proof is not on the contractor.

There is nothing for the contractor to do. The IRS says the relationship was an employer/employee relationship and as such they should have been paying their share of FICA and medicare...payroll trust taxes.

[Sen. Walter Sobchak]

33. This isn't about liability or burden of truth,

If the IRS goes after your "client" and your "client" thinks throwing you to the wolves will help their case - your situation can become very unpleasant. While that situation, being recognized as a defacto employee, would generate some legal options, wrongful termination, constructive dismissal etc. there is really no positive outcome for the individual in the middle of it.

[boomboom]

35. I'm sorry. What is you think the client did wrong here? I think you're confusing

taxable income, deductible expenses and employee vs. contract labor issues. Are you a tax accountant or an attorney? Because if the employee/contract laborer has reported all his income as it's been reported to him, he's not an issue in this situation. Wrongful termination and legal termination is a legal issue, not a tax issue.

[Sen. Walter Sobchak]

37. I am not confusing anything,

I am telling him the greatest concern I would have in his situation. There is more to life than taxes - and a look at his tax situation might lead to questions of his employment situation that can lead to a pretty nasty work situation as the employer defends the tax situation.

[boomboom]

39. i hear that

there are very many more important issues for any business relationship than tax advantage. However, if anyone concerned that being self employed might lead to a problem if their customers got audited..........then they wouldn't be self employed given the opportunity. The IRS is concerned about self employed people reporting all their income and only taking deductible expenses. The IRS is concerned about businesses claiming their "employees" are contract labor so they don't need to pay payroll taxes, offer them 401k or health benefits, etc. The IRS burden is NOT on the laborer in this case. I'm sorry if your client got screwed out of a contract labor position they were enjoying. But the nasty work situation is the fault of the employer, not the contractor. Either hire them or not.

[boomboom]

32. Then she was obviously not an employee of the company.

[Sen. Walter Sobchak]

34. no, but they made her situation very nasty to make that point,

would you just roll with the punches as your shit on to make a point to the IRS?

"Hey boomboom, were having some problems with the government, so were just going to make a point of treating you like an animal till they back off, cool?"

Or more likely "Hey boomboom, were having some problems with the government, so were just going to get rid of you whatever you are"

[boomboom]

36. sounds to me like the company sucks. And if that one contract employee

is the only issue that caused an IRS audit, that's totally messed up. Granted, the contractor got screwed. But only because she was working for a shitty place to begin with. Thank goodness she was only a contractor.

[Sen. Walter Sobchak]

38. Contractors with only one client over an extended period of time are red flags,

when the IRS goes looking for payroll taxes they feel entitled to. That is why many companies insist that contractors create an incorporated company before working for them. I encountered a woman who is a contractor for a major airline, she runs a little gift basket business on the side for no other reason than having multiple sources of income to claim.

[boomboom]

40. yep. And even that doesn't always work out

[boomboom]

42. they are red flags for the company, not the contractor.

Why would a contractor want to pay both employee and employer share of payroll taxes unless they were truly self employed?

[Sen. Walter Sobchak]

44. the point is...

there is MORE to being a contractor than the tax implications. That is the absolute only thing I am getting at.

It doesn't matter if the company got audited because somebody overheard the drunk CEO bragging about his tax shelter in a bar. There are implications for YOU the contractor should YOUR employment situation be disputed and they can be bad.

That is all I am saying, there is more to being a contractor than not having health insurance.

[boomboom]

46. agreed. but if you're self employed, it's really up to you.

[Sen. Walter Sobchak]

48. lets be serious here...

How many of these people are really self-employed or contractors for anything other than their "clients" fiscal convenience. I have seen very few cases where the status of a worker was disputed and the government wasn't 100% correct.

But the principle of the matter doesn't come into it when your kids are hungry and you believe that you have no recourse because you were a contractor. Most people in that situation don't even know that having been deemed an employee they can apply for unemployment.

[boomboom]

49. I agree

[boomboom]

41. you know, it doesn't matter to the irs or not

if the company terminates the relationship with the contractor. If they determine the contractor should have been an employee they require the company pay the required payroll taxes for that contractor.

[Sen. Walter Sobchak]

43. that doesn't matter to them at the time,

their only concern is putting as much visible distance between them and the contractor/employee/whatever as possible. Firing a disputed whatever is just about the worst thing you can do in the long run. Unfortunately treating them like garbage and hoping they don't quit from a legal perspective is the best. But at the time getting as far away from the person seems to be the best alternative. If the fired whatever understands their situation they have alot of options. But they usually don't.

[boomboom]

45. They're unemployed if they were an employee. If they weren't they need to get a new client

regardless, if the irs considers them an employee, then the employer will need to pay their 7.65% share into their FICA/medicare account. And that's a good thing.

[boomboom]

3. there's a bartering issue here

but a lot depends on whether the business considered the training a deductible expense. If one deducts, the other must pay tax. Another factor is whether the value of the training is added to the Form 1099 issued to the contractor by the business. The business would need to do so to take the deduction. The discount, as long as not a related party, is probably ok. Employee discounts at retail stores isn't taxable. Just a perk.

[Coyote_Bandit]

6. The discount is given to a contractor

not an employee. The only thing reported is the monetary payment. There is no accounting for the discount or the training. The training is informal.

Assume business is building related. Contractor provides business services. Business provides small workspace to contractor which contractor uses to develop his building skills. Business observes and assists contractor. Business also makes space available to the public without charge to work on building projects.

[boomboom]

Sounds like you can't report the value of the training or discount received

Unless you are told the value by the business. IF they value either enough to report on your 1099, then you will pay tax on it.

[Kali]

4. Is the business claiming the training or reporting it in any way?

[Coyote_Bandit]

5. The business

is reporting only the monetary payments.

[Kali]

9. That is what I would go by.

If something comes up and it looks like you need to do something else you can always file an amended return.

[sandnsea]

8. What kind of income are we talking about here?

Tens of thousands? In other words, why would anybody care???

[Coyote_Bandit]

11. We are looking at

a hypothetical situation which has not occurred.

Small business wants to contract and pay for business services. Contractor wants to learn technical aspects of the small business and acquire necessary skills in order to replicate it in another state.

Looking at how best to structure arrangement.

[boomboom]

12. the best way to structure the agreement

is to decide upfront the value of the training and whether or not is considered additional payment for services. the discount, unless below the business' cost, is up to them. As long as you pay what they value, you're probably fine.

[Coyote_Bandit]

14. Great

Thanks!

I am a self-professed tax idiot. Not proud of it. Just can't seem to work my way through the fog....

[boomboom]

18. that's what cpa's are for. and they too are a deductible expense

[Coyote_Bandit]

21. CPA's amaze me

and I have always benefitted from their services. After the negotiations are done, I am sure this will be reviewed by a CPA.

[boomboom]

27. it takes a long long time to learn tax law. even for those who make a career of it.

get one involved now if you think it would help

[sandnsea]

15. The tax aspect

I don't understand where the tax aspect figures in, unless one party wants to deduct the consulting services as an expense and the other doesn't want to claim them as income.

[boomboom]

17. i think that was the point of the original question n/t

[Coyote_Bandit]

19. Question was

regarding the tax implications with respect to the discount and the training. Sorry if I was not clear. Obviously, the monetary exchange has tax implicaitons.

[sandnsea]

20. I understood that

My point was that, unless you're talking significant incomes on either side, these small considerations probably aren't going to draw the attention of any IRS agent and consequently aren't worth serious anxiety. Unless there's a difference of opinion on the monetary value. That's all.

[Coyote_Bandit]

23. Sorry I misunderstood

There would be a real question as to how to value the training.

The amount of the discount could easily be 25% or more of the monetary compensation.

[boomboom]

29. It's up to them to value the training. Not you

[boomboom]

28. true. except the irs does tend to focus on self employed people

regardless of their income. I've had a client who was a courier....made gross about 20K a year, after perfectly legal expenses he actually operated at a loss. Been audited THREE times. Each year, no change. So they do focus on the little issues. At least in random audits

[sandnsea]

47. Anybody go to jail?

No? That's my point. If a low income person makes a mistake on their taxes, nobody is going to put them in jail. They'll just have to pay the mistake, and mistakes can happen no matter how hard you try to do everything right. Just ask Willie Nelson.