What are the Laws?

by on Jul.27, 2012, under Fitness

Unfortunately, laws covering the difference between an employee and an independent contractor are man-made. Unlike the speed of light and the number of feet in a mile, there can be a great deal of disagreement on the status of a worker or group of workers. If a state or federal auditor disagrees with any fitness facility’s labeling of a worker as an independent contractor, the results can be disastrous.

If, for example, any worker is reclassified from independent contractor to employee: * The employer FICA that should have been paid to the IRS will be assessed against the employer.

* As a general rule, state unemployment compensation rates averaging between 2 and 4 percent of wages up to the taxable limit (usually the first $7,000 in wages that should have been paid) will suddenly become due.

* The Internal Revenue Service will prepare to assess 6.2 percent and not the 0.8 percent federal unemployment tax most fitness facilities pay for employees. This is because the offset or credit from 6.2 percent down to 0.8 percent is not available to employers that treat the worker as an independent contractor for state unemployment compensation purposes. If no state unemployment compensation is paid, no credit or offset is available.

Don’t forget that, in most cases, interest as well as penalties will be added to any reclassification assessment. The typical penalty is 10 percent of the tax.

Fortunately, a fitness business that successfully argues that the misclassification as independent contractor was inadvertent or a mistake caused by the complexities of our tax laws, may see the penalty waived — but not the overlooked employment taxes.

Although many workers call themselves “independent contractors” and go to great lengths to convince themselves and everyone around them that they are independent contractors, it is usually the fitness operation that becomes an audit target.

After all, in a tax audit of a physical fitness facility or business, full state and federal employment taxes are at issue for the entire group of workers categorized as independent contractors by the business.

With a tax audit of a worker, on the other hand, recoverable taxes are usually minimal, although the worker stands to lose the right to business expense deductions.

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