The Expert in Tax Education

Taxation of Virtual Workers

The Expert in Tax Education

Taxation of Virtual Workers

Developed byWilliam E. Rogers, MBA, CFP, EA

Summer 2014

Presented by Kerry Freeman EA

The Expert in Tax Education

Part I

Types of Virtual Workers

The Emergence of Telecommuting

Source: Telework Research Network

Types of Virtual Workers

• Telecommuters• Service Providers• Outsourcing Providers

What are Telecommuters?

Telecommuters are workers who perform a portion of their duties from home.

Are TelecommutersReally Employees or

Independent Contractors?

IRS 20 Factor Test

• Rev Rule 87-41 establishes a 20 factor in determining a worker’s status

• The test is not a simple yes / no questionnaire• It focuses on three issues to determine the

degree of control and independence in the relationship:o Behavioral Controlo Financial Control o Type of Relationship

What is a Service Provider?

A service provider is a worker that attempts to work with more than one employer at a time.

Service Providers as Independent Contractors

• Construction workers, salespeople and consultants are frequently misclassified as independent contractors

• For a consultant to be considered an independent contractor:o Possess a specialized skillo Provide a resourceo Dictate, how, when, and what is used on the jobo Offer his or her services to more than one client

Practitioners Beware!

• A growing number of employers are requiring employees to set up their own corporation or LLC

• The purpose is to re-hire the employee as an independent contractor in order to avoid paying on behalf of the employee any:o Benefitso Insuranceo Payroll taxeso Worker’s comp

What are Outsourcing Providers?

A business that takes over an entire process or function on behalf of another company.

Part II

Out of State & Overseas Worker Issues

What are Telecommuting Taxes?

• Some states use the “convenience of the employer” rule when taxing a worker

• This rule states that a worker is subject to tax on his or her income in the home state of the employer

• Currently, Delaware, Nebraska, New York, and Pennsylvania, use the convenience of the employer ruleo So far, New York is the only state to attempt to enforce it

aggressively

Employer Multi-State Tax Issues

• Maintaining an employee in another state also establishes a nexus for state tax purposes to that state

• This means that the employer will now be subject to all applicable state and local taxes:o Incomeo Sales & Useo Payrollo Property

Workers From Around the Globe

Types of Overseas Virtual Workers

• Expatriateso U.S. citizens who live and work abroad

• Foreign nationalso Treated as nonresident alien for U.S. tax

purposes

When is a Foreign National’s Income Subject to Backup

Withholding?• When it is effectively connected to the U.S.• It is deemed effectively connected to the U.S.

when the services are performed in the U.S.• See IRS Pubs 515 & 519 for more information

QUESTIONS???

Presentation developed byWilliam E. Rogers, MBA, CFP, EA

William E. Rogers, MBA, CFP, EA is the founder of Ascend Business Advisory, a boutique tax and financial advisory firm in San Diego, California. He holds a BS in Business Management from the University of Redlands, an MBA from the University of Southern California, and an MS in Finance from Golden Gate University. His practice specializes in the needs of entrepreneurial start-up companies.

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