NAMM monitors tax reform issues and provides periodic updates on advocacy efforts and pending legislation. For up-to-date information on this issue, please visit this page regularly.
Update, 8/31/20: Payroll Tax Deferral Guidelines Issued - Questions Remain
The U.S. Department of Treasury and Internal Revenue Service (IRS) issued guidelines to President Trump’s recent payroll tax deferral executive order calling for a deferral of employees’ portion of the Social Security payroll tax from September 1 through December 31, 2020.
The executive order applies to the 6.2% Social Security payroll tax normally deducted from an employee’s pay and would affect workers whose biweekly pay is less than $4,000 on a pretax basis. Employers are responsible for withholding and paying any deferred taxes. Specifically, employers “must withhold and pay the total Applicable Taxes that the [employer] deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.”
The guidelines are available at: https://www.irs.gov/pub/irs-drop/n-20-65.pdf
According to the U.S. Chamber of Commerce, the guidance leaves several questions unanswered, such as:
Is the payroll tax deferral voluntary for the employer or employee? The notice makes clear that the employer is the affected taxpayer. While the notice does not explicitly say it is voluntary for the employer, it also does not make it mandatory. The notice makes no mention of nor seems to contemplate the employee making the election to defer. Therefore, this would appear to be a decision left to the employer. What happens if an employee no longer works for an employer once the deferral is over?
Is the employer responsible for the unpaid taxes? The notice implies that the employer is responsible for the deferred taxes but provides that the deferred taxes are to be withheld from employees beginning in January. The notice goes on to state, “If necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” But the notice provides no further guidance as to what this might mean. It also provides no guidance on what happens if the person is no longer an employee and the employer is unable to collect the unpaid taxes.
Must an employer decide by September 1 whether to defer withholding or not? The notice is silent on whether an employer must defer the withholding for the entire deferral period (September 1 to December 31) or whether an employer can start deferring at any point during the deferral period.
NAMM will continue to monitor this important issue and will provide updates as they are available. Please visit this page regularly.
- Update, 9/2/20: AB 2257 Amends AB 5; Impacts Freelance Musicians
AB 2257 Amends AB 5; Impacts Freelance Musicians
The primary legislative vehicle for amendments to Assembly Bill 5 (AB 5), Assembly Bill 2257 authored by Assembly member Lorena Gonzalez (D-San Diego), cleared the California State Legislature on August 31 – the last day of the legislative session. The bill now moves to the Governor’s desk. Gov. Newsom is expected to sign the measure, and once signed, the bill’s provisions will be effective immediately.
The legislation is a “clean up” bill for AB 5, the law enacted on January 1, 2020, that is intended to address the misclassification of workers as independent contractors. The criteria under AB 5 imposes a new, stringent three-part test (the “ABC” test) to determine whether a worker is to be treated as an independent contractor or employee. Because of the sweeping nature of the AB 5, many freelancers, consultants, and others unexpectedly fell under the new law’s requirements and faced the possibility that they could be classified as employees. As a result, many freelancers and others have lost income because many employers were unwilling to take the risk due to AB 5’s penalties or were financially unable to shoulder the costs of an additional employee for project-based work.
AB 2257 is intended to address some of those issues. Among other things, the bill establishes exemptions from the ABC test for various professions and occupations. For example, under AB 2257, the “ABC test” will not apply to musicians, recording artists, songwriters and other specified occupations “in connection with the marketing, promoting, or distributing sound recordings or musical compositions.” These exemptions are not across-the-board; the bill details several circumstances in which musicians, vocalists, and others involved in the music industry or performance arts would likely be treated as employees.
The measure also removes the current 35 project limitation for services provided by freelance photographers, journalists, writers, and others. As a result, these freelancers no longer have to be hired as employees or lose project-based work after 35 submissions provided that other requirements are satisfied, such as making sure there is a contract with specified terms, their own equipment is used and work is performed offsite.
Although AB 2257 addresses some of the problems with AB 5, it still does not go far enough. Importantly, the bill does not clarify that music and performing arts instructors providing independent music and/or arts education lessons should be specifically exempted from the ABC test requirements. In the coming months, and in preparation for the next California legislative session, NAMM will be working in partnership with like-minded organizations to bring this important and timely issue to the attention of key decision makers in the California State Assembly and Senate.
- Update, 1/1/20: California’s AB-5 Worker Status: Employees and Independent Contractors
California lawmakers have passed a landmark bill that reshapes how some companies do business. The legislation, known as Assembly Bill 5 (AB5), was passed into law and will go into effect on January 1, 2020.
Many businesses across the U.S. have shifted to independent contractors to reduce labor costs, but labor experts say they often misclassify workers to avoid offering costly benefits like health care, paid vacation and sick time, and retirement plans. As defined in AB5, an independent contractor is a person who runs an independent business; who is hired by a company to do something outside of that company's usual course of business; and who has full say over how, where and when they complete that job. The bill exempts dozens of occupations, including some artists, doctors, lawyers, architects, accountants, private investigators, commercial fishermen, manicurists, and estheticians, but leaves many industries affected that have come to rely on contract labor.
Other states' lawmakers are watching California's AB5 issue closely as they draft regulations to address the challenge of worker classification and the 'gig' economy. Read Politico's "CA narrative casts a pall over East Coast efforts to elevate gig economy workers."
MI industry experts Alan Friedman, and Daniel Jobe of Friedman, Kannenberg & Co. have penned articles and hosted special education sessions on the topic – linked below. NAMM will continue to post updates on this and related issues. Please visit this page regularly. Questions? Download the California Chamber of Commerce "Roadmap for AB5: California's New Law on Worker Classification" white paper.
- IRS Worker Classification: Employee or Independent Contractor?
People who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer (business) has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
A worker is not an independent contractor if they perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if they are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If an employer-employee relationship exists (regardless of what the relationship is called), the worker is not an independent contractor and their earnings are generally not subject to Self-Employment Tax. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.
For more information on determining whether to classify a worker as an independent contractor or an employee, refer to IRS website on Independent Contractors or Employees.
- Update, 1/30/19: NAMM U Session Recording “New Tax and Labor Laws”
2019 NAMM U Session “New Tax and Labor Laws”
Internet sales tax collection, new labor laws, the Tax Cuts & Jobs Act … what do they have to do with your music retail business? Everything, in fact. And now they’re likely to impact you—big time. So, at The 2019 NAMM Show, music retail financial gurus Alan Friedman, CPA, and Daniel Jobe of Friedman, Kannenberg & Co. hosted a special educational session on these new laws to help you navigate 2019.
As Friedman and Jobe pointed out, these federal and state laws can be complicated and confusing, and ignorance and non-compliance could put your business in financial peril. Fortunately, these potentially disruptive events can be prevented with a little proactive financial management. In this three-part session, the always-entertaining Friedman and Jobe provide a rundown on these new laws and must-know information.
The session offered industry-relevant summaries of: Tax Cuts & Jobs Act, Worker Classification, and Online Sales Tax
- Update, 9/1/18: "New Worker Status Laws" By Alan Friedman, Music Inc.
The Cost of New Worker Status Laws
By Alan Friedman
Source: Music Inc. Sept. 2018
Like many others, the music retailing industry has long favored the treatment of certain workers as independent contractors. Years ago, music store operators saw the wisdom of integrating music education and repair services into their revenue-earning activities, yielding value-added and profitable revenues to the bottom line. Some of that profitability came from treating teachers and/or repair technicians as independent contractors instead of as employees. This classification allowed retailers to pay workers a gross compensation, and escape the payroll tax, reporting and employment benefits trappings associated with classifying workers as employees.
But over the years, both federal and state tax authorities have gotten wise to the billions of lost revenue dollars from not collecting employer-matched social security & Medicare tax, unemployment tax, and income tax on profits aggressively lowered by business deductions or not reported at all. The IRS responded by replacing their longstanding “20-factor” test with more stringent rules on worker classification, with the states implementing their own tougher rules on worker classification followed by an unprecedented increase in labor audits.
MEET THE NEW BOSS…SAME AS THE OLD BOSS
According to recent studies, the U.S. is made up of approximately 12.5 million independent contractors, who are typically defined as individuals who work with an organization but are not counted as employees. This classification prevents them from enjoying various employment benefits that permanent employees get, as well as protective employment laws for minimum wages, overtime, vacation and other benefits.
While most businesses do their best to be fair with all workers, business owners are keenly aware of the cost-saving exploitations they derive when working with independent contractors. But as many businesses are starting to find out, that cost savings could pale in comparison to a surprise labor audit assessment of back taxes, unpaid employment perquisites (like health insurance and 401(k) contributions), punitive interest and heinous penalties if the audit reveals worker misclassification.
Accordingly, it is critical for business owners to correctly determine whether individuals providing them services are contractors or employees. Any worker deemed an employee should have all Social Security, Medicare and federal, state and city income taxes withheld from their paycheck and remitted to corresponding tax authorities by their employer. Additionally, employers need to pay all applicable federal and state unemployment tax, non-discriminating employment benefits and operate in compliance with all federal and state labor laws, including the U.S. Fair Labor Standards Act that establishes minimum wage, overtime pay, recordkeeping and youth employment standards for all employees.
While many business owners have grown tired of hearing about these ever-increasing stringent labor laws and audits, a recent edict on worker classification from the California State Supreme Court should have all business owners, whether California based or not, shaking in their boots…and wallets.
CALFORNIA DREAMING (of New Revenue)
Recently, the State of California made headlines when it stated it was making changes in their laws governing independent contractors. In a unanimous decision, hailed as a landmark move that will significantly change the California workplace, the California Supreme Court ruling now makes it much harder for employers to classify their workers as independent contractors.
On one hand, the new ruling means independent contractors now have a safeguard against exploitation with their employment rights protected by this new law. While there’s still speculation regarding the overall application of the ruling, there’s a renewed sense of stability in terms of pay scale, breaks and benefits an individual can expect when working with any given business. But the increased payroll cost of abiding by this new ruling may impair an employer’s ability to hire and/or retain its workforce causing an unexpected decrease in employment.
ABC MAY MEAN IOU
The new California ruling addressed and revised the criteria for classifying a worker as an independent contractor. A new "ABC test” relies on the following points to successfully identify and classify a worker as an independent contractor:
A. If the employer can prove, without any doubt, they do not exercise control over the worker’s ability to perform a certain task.
B. If the worker is performing a task or job that is outside the functions of the business in question.
C. If the worker has an established trade or a business they customarily engage in.
For example, if a music store engages a plumber to fix the store’s toilet, the plumber will most likely meet all of the ABC test criteria and be considered an independent contractor. On the other hand, if a music store offers music lessons and engages dedicated music teachers, that music teacher will probably be deemed an employee by failing Test Item B above. Under these new guidelines, employers need to pay close attention to ensure any worker classified as a contractor meets ALL three ABC requirements. Otherwise, these workers are eligible to be reclassified as permanent employees in audit with all associated costs.
Interestingly, the new ruling gives rise to difficult decisions for businesses such as Uber and Lyft who usually classify their drivers as independent contractors. In fact, their business models are dependent on the use of independent contractors in order to enjoy low labor costs, minimal benefits and other legal loopholes associated with working with contractors.
But these drivers are working primarily for a company by following its rules and regulations and upholding the company’s standards. Under the new ruling, they arguably should be reclassified as employees and receive regular compensation and be eligible for overtime, medical benefits and more. It’s now speculated these kinds of businesses may have to completely overhaul their business model as the labor cost associated with changing from contractor to employees could be up 20% to 30% higher, with little leniency from taxing authorities who stand to collect substantial interest, penalties and fines for non-compliance. FYI, misclassifying workers is a punishable offense and gives rise to potential claims of tax fraud by taxing authorities.
MORE STATES TO FOLLOW
But the most notable is element of the ruling is the California Supreme Court is considered the highest authority court in the state and most influential court across the U.S. With California’s ruling following on the heels of a similar ruling made by the New Jersey Supreme Court as well as tough rulings already in force in Massachusetts and Illinois, more states are sure to follow.
The California ruling will undoubtedly motivate other states to start reevaluating their current tests and introduce better (or more stringent revenue-generating) ones. The California decision brings some long-awaited clarity, as hundreds of previously filed labor cases relating to employee misclassification can finally be addressed and handled in a judicious manner. But the great unknown is the ultimate financial cost to employers for future labor law compliance, and worse, the cost for not having adhered to prevailing rules of the recent past discovered in future audits.
Suffice it to say, music retailers are now highly advised to routinely self-audit and reexamine their employment practices to avoid ignorance of these labor laws that can seriously injure or destroy your business for noncompliance. Next month’s Part 2 will deal with the current federal rules on worker classification and what to do in the event of a state labor audit…stay tuned.
Alan Friedman, CPA, provides accounting and financial services to music industry clients. He is a frequent speaker at NAMM-U seminars and can be reached at 860-677-9191 or firstname.lastname@example.org. Visit his website fkco.com
- Update, 3/8/19: "White Collar" Exemptions
The Department of Labor has published for public comment, its long-awaited rulemaking changes in the so-called "white collar" exemptions from overtime pay requirements.
Under the proposal, an employee classified as a professional, executive or administrative worker would not have to be paid overtime if he or she earned $679 per week ($35,308 annually), up from the current $555 per week.
The definition of a "high compensated" employee would increase from the current $100,000 per year to $147,414. Non-discretionary bonuses and incentive pay (including commissions) can satisfy up to 10% of the standard salary level if made on an annual or more frequent basis.
The new proposal replaces a final rule issued by the Obama Administration in May 2016 which was later ruled invalid by a federal trial court. Comments will be accepted through early June, with the publication of a final rule projected for 2020.
- Update, 8/23/18: New Regulations on Charitable Contributions and State and Local Tax Credits
New Regulations on Charitable Contributions and State and Local Tax Credits
On Aug. 23, 2018, the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit.
The proposed regulations are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register. Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax-deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.
Updates can be found on the Tax Reform page of IRS.gov.
- Update, 11/14/16: New Version of Employment Verification Form I-9 Issued, Becomes Mandatory January 2017
The United States Citizenship and Immigration Services, a division of the Department of Homeland Security, has published a new version of Form I-9, which must be used by all employers to verify a new employee’s identity and eligibility to work in the U.S. The new form, dated November 14, 2016, becomes mandatory for use beginning January 22, 2017.
The USCIS said the revised three-page form will be easier to complete on a computer. It also is designed to reduce confusion and will help employers avoid technical errors that could result in hefty fines. The changes include:
- Prompts to ensure information is entered correctly. It will notify the user of any missing fields, dates inputted incorrectly and social security numbers that are missing a digit.
- Improved naming convention. Employees now only need to provide "other last names used" rather than "all other names" used. This is expected to avoid possible discrimination issues and protect privacy of transgender and other individuals who have changed their first names.
- A dedicated area for additional information. Employers currently provide this in the margins of the form.
The USCIS said employers must remember that the revised I-9 form must still be printed out so employees and/or their preparers can sign them. They can be stored on- or off-site in a single format or combination of formats, such as paper, microfilm or microfiche, or electronically.
More information and copies of the new form are available at www.uscis.gov/i-9.
- IRS - Independent Contractor Regulations and Resources
IRS Independent Contractor Defined: People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer (business) has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
A worker is not an independent contractor if they perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if they are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If an employer-employee relationship exists (regardless of what the relationship is called), the worker is not an independent contractor and their earnings are generally not subject to Self-Employment Tax.
- IRS Website
- Independent Contractor (Self-Employed) or Employee?
- Understanding Employee vs Contractor Designation
- Small Business Workshops and Seminars listed by State
- Worker Classification Guidelines. Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be: