Acuity Advisors

Should you file Form SS-8 to ask the IRS to determine a worker’s status?

Classifying workers as independent contractors — rather than employees — can save businesses money and provide other benefits. But the IRS is on the lookout for businesses that do this improperly to avoid taxes and employee benefit obligations.

To find out how the IRS will classify a particular worker, businesses can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, the IRS has a history of reflexively classifying workers as employees, and filing this form may alert the IRS that your business has classification issues — and even inadvertently trigger an employment tax audit.

Contractor vs. employee status

A business enjoys several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws.

On the downside, if the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties. That’s why filing IRS Form SS-8 for an up-front determination may sound appealing.

But because of the risks involved, instead of filing the form, it can be better to simply properly treat independent contractors so they meet the tax code rules. Among other things, this generally includes not controlling how the worker performs his or her duties, ensuring you’re not the worker’s only client, providing Form 1099 and, overall, not treating the worker like an employee.

Be prepared for workers filing the form

Workers seeking determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to health, retirement and other employee benefits and want to eliminate self-employment tax liabilities.

After a worker files Form SS-8, the IRS sends a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return it to the IRS, which will render a classification decision. But the Form SS-8 determination process doesn’t constitute an official IRS audit.

Passing IRS muster

If your business properly classifies workers as independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that can pass muster with the IRS.

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Learn the warning signs of earnings “spin”

Management wants to paint the rosiest possible picture of a company’s financial performance. But aggressive earnings management, or “spin,” can mislead investors and lenders. Here are some ways U.S. Generally Accepted Accounting Principles (GAAP) can be manipulated to obscure the truth.

Creative accounting vs. cooking the books

Earnings management usually starts out small, but it can become increasingly aggressive and eventually cross the line into fraud if it goes unchecked. An external audit may help detect the red flags of earnings management, including:

Premature revenue recognition. Some companies recognize revenue early to make the income statement temporarily appear more attractive. This ploy is common when a company is applying for bank financing or up for sale.

Miscellaneous “cookie jar” reserves. Management can create a hidden reserve of funds during good times. Then the reserves can be tapped into to nourish earnings in lean times.

“Big bath” restructuring changes. Some companies overstate the costs associated with restructuring. This enables them to clean up their balance sheets and create reserves for a rainy day.

Immediate acquisition write-offs. Acquired companies may classify a portion of the purchase price as “in process research and development,” which they immediately write off. This reduces the amortization of the purchase price to future earnings.

Overreliance on EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) and other non-GAAP metrics have become popular ways to evaluate a company’s performance. But they aren’t usually audited, and they may be calculated differently from company to company.

EBITDA is generally intended to resemble cash flow. But this metric can obscure problems for start-up companies with major debt. Although their EBITDAs give these start-ups appeal, their debt service may mean they won’t be profitable for many years.

Too good to be true?

Pay attention when reviewing financial statements and corporate press releases — the opportunity and pressure to spin earnings is everywhere. Contact us for more information on how to identify when a business may have engaged in “creative” accounting practices to improve their financial picture.

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2018 Q2 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 17

If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.
If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.

April 30

Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)

May 10

Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.

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Corporate culture: Rotten apples could spoil your financials

Auditors often say that the tone at the top of an organization trickles down to every level of the business. Is your company’s work environment ethical and open? If not, corporate culture assessments can help prevent and detect unethical and criminal behaviors. But, to cover all the bases, your external auditors generally must work closely with people inside your organization. Here’s how you can facilitate this critical part of the audit process.

1. Identify a senior executive to act as liaison

Corporate culture is a key element of an auditor’s overall risk assessment — but auditing corporate culture is a new concept for most organizations. Assign a senior executive to act as liaison with the audit team to ensure that company insiders cooperate. This executive should understand how the audit process works and have the authority to resolve any issues that employees or executives may cause during audit fieldwork.

2. Verify the audit team’s expertise

Do audit team members have prior experience auditing corporate culture? Ask the engagement partner to provide biographies for audit team members, detailing their experience performing corporate culture audits and conducting investigative interviews of company insiders.

Interviews can help identify potential weak spots that require extra attention during audit fieldwork. For example, if management downplays the need to comply with government rules and regulations, the audit team is likely to dedicate extra resources toward the company’s compliance efforts.

3. Allow auditors to survey all employees and executives

Auditing corporate culture requires a companywide assessment of the prevailing mindset. Auditors must survey a broad sample of employees — not just people conveniently located at corporate headquarters or executives in the C-suite.

Before the auditor sends out surveys, it’s OK for your executive liaison to review the questions to minimize ambiguity, leading questions or offensive inquiries. He or she also can help the audit team identify key employees and executives to interview.

4. Provide access to human resource data

The audit team should have full access to personnel records. Examples of relevant data include:

Employee turnover rates,
Discipline records,
Annual performance reviews,
Merit-based bonus schedules, and
Exit interview findings.

In addition, if your organization has established a whistleblower hotline, the audit team should have access to data on the number, type and severity of tips the hotline has received over the last year.

5. Make improvement efforts based on previous findings

Previous internal and external audit reports can help identify cultural risks. In addition to reviewing prior reports for control failures, auditors will evaluate how your management team responded to prior findings. If no cultural improvements were made based on last year’s recommendations, it doesn’t bode well for the current year’s corporate culture assessment.

Healthy cultures promote honest reporting

Corporate culture audits are an emerging area of expertise, and reported findings come in a variety of lengths and formats. Our auditors understand how to help you use these findings to minimize cultural risks and enhance the reliability of your financial reporting.

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Defer tax with a Section 1031 exchange, but new limits apply this year

Normally when appreciated business assets such as real estate are sold, tax is owed on the appreciation. But there’s a way to defer this tax: a Section 1031 “like kind” exchange. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment.

What is a like-kind exchange?

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

This technique is especially flexible for real estate, because virtually any type of real estate will be considered to be of a like kind, as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Deferred and reverse exchanges

Although a like-kind exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

Changes under the TCJA

There had been some concern that tax reform would include the elimination of like-kind exchanges. The good news is that the TCJA still generally allows tax-deferred like-kind exchanges of business and investment real estate.

But there’s also some bad news: For 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property. However, prior-law rules that allow like-kind exchanges of personal property still apply if one leg of an exchange was completed by December 31, 2017, but one leg remained open on that date. Keep in mind that exchanged personal property must be of the same asset or product class.

Complex rules

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. If you’re exploring a like-kind exchange, contact us. We can help you ensure you’re in compliance with the rules.

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