When a worker performs services and receives some form of remuneration, an important question is whether the remuneration is subject to employment taxes. The answer depends on whether the worker is an employee or an independent contractor. This determination of the worker's status depends on the facts . . . facts which define the business and the relationship of the parties, at the time the services are rendered.

Generally, a common law EMPLOYEE works for and performs services under the control of the party which pays for the services. On the other hand, an INDEPENDENT CONTRACTOR is an individual in business for himself or herself, and performs the services free of control from the party which pays for the services.

Employment taxes apply solely to the remuneration paid to workers classified as EMPLOYEES. The employer's obligation is to deduct Federal income tax withholding (FITW), to deduct as well as "match" Social Security and Medicare taxes (FICA), and to pay Federal unemployment tax (FUTA). Also, there may be state income tax to be withheld and the employer or employee may have to pay state unemployment compensation contributions and state disability insurance. A business normally is not required to withhold taxes from payments made to independent contractors.

In addition, certain Federal and state laws governing benefit-plan participation, wage payment, working conditions and workers' compensation, apply ONLY to employees and not to independent contractors. For example, only employees may participate in a Section 401(k) pension plan, and only employees are protected by minimum wage and overtime pay laws.

I.R.S. Guidance

When determining under common law whether an individual is an employee or an independent contractor, the I.R.S. stresses that ALL evidence of the degree of control and degree of independence must be considered. Formerly, the I.R.S. used a list of 20 factors (the "20-Factors Test") to evaluate a specific worker's situation. The current I.R.S. official guidance, however, in Publication 15-A, Employer's Supplemental Tax Guide – Supplement to Circular E, indicates that facts which provide evidence of the degree of control and independence fall into three major categories: behavioral control, financial control, and the type of relationship between the parties, as follows:

a.) BEHAVIORAL CONTROL

Facts that show whether the business has the right to direct and control how the worker does the task for which the worker is hired, include the type and degree of:

• instructions the business gives the worker. An employee is generally subject to the business' instructions about when, where and how to work. Even if no instructions are given, sufficient behavioral control may exist if the employer has the RIGHT to control how the work is done.

• training the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors, however, ordinarily use their own methods.

b.) FINANCIAL CONTROL

Facts that show whether the business has a right to control the business aspects of the worker's job, include:

• the extent to which the worker has un-reimbursed business expenses. Independent contractors are more likely to have un-reimbursed expenses than employees.

• the extent of the worker's investment. An independent contractor often has a significant investment in the "facilities" used to perform services for someone else, but this is not mandatory.

• the extent to which the worker makes services available to the relevant market. Employees tend to work for a single business.

• how the business pays the worker. An employee generally is paid by the hour, week or month. An independent contractor usually is paid by the job. However, it is common in some professions, such as law, to pay independent contractors at an hourly rate.

• the extent to which the worker can realize a profit or incur a loss. An independent contractor can make a profit or loss.

c.) TYPE OF RELATIONSHIP

Facts that show the type of relationship between the parties, include:

• written contracts describing the type of relationship the parties intended to create

• whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.

• the permanency of the relationship. If one engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence the intent was to create an employer-employee relationship.

• the extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company’s business activity, it is more likely that the company will have the right to direct and control his or her activities. This would indicate an employer-employee relationship.

Upon request, the I.R.S. will determine whether a worker is an employee. File Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding). Note that some special rules apply when determining whether salespersons are common law employees. Also, some state unemployment compensation programs define “independent contractor” more narrowly than the I.R.S.

Source: ADP Tax Researcher Volume XXIV - Issue 4 - April 2007

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The consensus alternative minimum tax proposal reached by House Ways and Means Committee Democrats will be indexed for inflation beginning in 2008, Ways and Means Subcommittee on Select Revenue Measures Chairman Richard Neal (D-Mass.) said April 26.

In an effort to permanently quash the AMT burden on the middle class, Democrats have agreed to repeal the tax for couples earning less than $250,000 annually and individuals earning less than $125,000. "They will never pay it again under our plan," he said. It is widely acknowledged that part of the reason for the tax's creep into the middle class was that it was not indexed to begin with.

Echoing earlier comments from full Ways and Means Chairman Charles Rangel (D-N.Y.), Neal said the proposal is "going to be more encompassing than just addressing the issue of the AMT; it will be a bit more ambitious." Rangel has said an expansion of the Earned Income Tax Credit and child tax credit are among proposals that would be included.

No Cost Estimate Yet

Neal could not give a dollar figure for the plan, saying that was still being sorted out. 'I don't want to give you a number that I might have to back away from," he said.

Meanwhile, House Minority Leader John Boehner (R-Ohio) told reporters that Republicans are open to examining Democratic AMT solutions.

"I think we're willing to look at any proposal that would solve the problem of the alternative minimum tax. It's an unfair tax," he said. "It should have been dealt with in the 1986 tax reform bill. Here we are 21 years later paying the price for having not dealt with it sooner."

Boehner did say Republicans have concerns about where the offsets should come from. "It's like a lot of proposals on Capitol Hill. While I'm for AMT reform, the devil's in the details," he said.

Source: BNA Daily News Update No. 81, Friday, April 27, 2007

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The American Association of State Highway and Transportation Officials and other transportation groups will likely push Congress for a 3 cent increase in the federal fuel tax in late 2008 to offset looming highway fund deficits, AASHTO Executive Director John Horsley told BNA April 20.

The federal highway program faces a funding crisis beginning in fiscal year 2009 and accelerating in FY 2010, according to AASHTO. Current highway account revenue projections for fiscal 2009 show a shortfall of $200 million in revenue.

That shortfall will require an obligation reduction in the highway program of just under $800 million, AASHTO said. In 2010, the deficit is projected to increase to $5.7 billion and would require an obligation limit reduction of $18.2 billion from the 2009 obligation level, a 42 percent reduction. "The closer we get to the $18 billion crunch, that's going to get people's attention, " Horsley said. He added that his top staff members have been meeting with congressional leaders to discuss the issue as part of what he called "an education year." The real push for a gas tax increase would not occur until after the 2008 presidential election, he said.

Source: BNA Daily News Update, April 20, 2007

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May 2007
	Short Term	Mid Term	Long Term
Annual	4.85%	4.62%	4.90%
Semi annual	4.79%	4.57%	4.84%
Quarterly	4.76%	4.54%	4.81%
Monthly	4.74%	4.53%	4.79%
Adjusted AFR for Original Issue Discount (Code Sec. 1288(b))	3.47%	3.61%	4.11%
Code Sec. 382 Adjusted Federal Long Term Rate			4.11%
Long Term Tax exempt rate			4.18%
Low income Housing Credit (Code Sec. 42(b)(2))
70% present value			8.11%
30% present value			3.47%
Valuation Tables (Code Sec. 7520)			5.60%
Deemed Rate of Return for Transfers to Pooled Income Funds (Code Sec. 642(c)(5))			4.80%

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The 2007 Social Security trustees report again demonstrates that the program is "financially unsustainable and requires reform," Treasury Secretary Henry M. Paulson said April 23 during a Washington, D.C., news conference.

"In just 10 years [2017], cash flows are projected to turn negative, and the trust funds are projected to be exhausted in 2041," Paulson said in reference to this year's report, The 2007 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

Last year's report projected negative cash flows by 2017 as well but trust fund exhaustion by 2040.

Meanwhile, Medicare's Part A Trust Fund will be out of money by 2019, one year later than estimated in 2006, according to the program's trustees, who April 23 nevertheless issued a controversial "funding warning" mandating a proposal from President Bush in early 2008 to reduce program spending. The trustees reported that for the second consecutive year projected general revenue funding is expected to exceed 45 percent of Medicare financing within the next seven years, mandating a spending proposal from Bush.

The Social Security report is available at http://www.socialsecurity.gov/OACT/TR/TR07/. The Medicare report is available at http://www.treas.gov/offices/economic-policy/reports/medicare-report-2007.pdf.

Source: BNA Tax Real Time, April 23, 2007

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