What's the Big Deal About Employees?

 A rose is a rose is a rose; and an employee is an employee is an employee. You may recognize the first part, as an Elizabethan sonnet, the second may not be as familiar. Why do employers go to extremes to avoid having workers called employees? The answer is straightforward. It is simply a lot cheaper. The employer is not only relieved of the burden of having to withhold taxes from the employee’s wages but gone is his responsibility to pay his portion of the Social Security and Medicare tax, which many view as making payments into the abyss. Additionally, savings may be had by keeping these workers out of pension plans, medical benefits and other perks available to employees. The case of the law firm of Donald Cave is illustrative. In that case, a law firm treated its associates and law clerks as independent contractors. The firm sent these workers forms 1099 -MISC. The firm of course claimed that it did not have sufficient control over their work to have these workers called employees. The Fifth Circuit affirmed the Tax Court holding that the law firm exercised sufficient control over the attorneys to show an employer-employee relationship because of the firms ability to affect the course of litigation by its decisions regarding the funding of litigation, work assessments, and working conditions. The firm provided offices, office equipment, secretarial support, business cards, letterhead, access to its law library and legal research services. As to the law clerk involved, the court found that Cave exercised complete control over the assignment of his work for the firm. The law clerk did work for other lawyers and other law firms. However, the Fifth Circuit said that providing services to multiple employers does not necessitate treatment as an independent contractor. When all was said and done, the firm was liable for employment taxes and penalties.Walking the tightrope between employee and independent contractor status is not easy. It helps to have a formal contract setting forth the worker's status but the ultimate test will be to what extent is the worker controlled by the employer. The IRS is on to this issue and will not hesitate to seek taxes and penalties from employers caught in the game of mischaracterizing employees.

Lincoln, States' Rights and Taxation

Go see the movie “Lincoln”. The characters bring to life the dispute over slavery as a state’s right to defy the federal government which eventually led to the Civil War. With that dispute in mind, keep an eye on Windsor 110AFTR2d 2012-6370 which is brewing another state's right issue. Cert was granted on December 7, 2012 for the US Supreme Court to review this decision of the Court of Appeals for the Second Circuit which upheld a challenge to section 3 of the Defense of Marriage Act ( DOMA). That federal law denies recognition of same-sex marriages for purposes of administering federal law. Federal tax law now prohibits and limits access to many allowances, deductions and credits based on marital status. Marital status has been traditionally a determination made under a state's own laws. The Second Circuit allowed a marital deduction to the estate of the deceased same sex spouse in an amount allowable to a surviving spouse. In 1996, when DOMA was passed, the House Judiciary Committee's report stated that it was: necessary to defend and nurture the institution of traditional heterosexual marriage, defend traditional notions of morality, protect state sovereignty and democratic self-governance and preserve scarce government resources. You have to wonder what Honest Abe, The Great Emancipator, would have to say about that logic. It would seem that DOMA's days may be numbered.

Is the Law School Race Too Long?

 I hope you feel sorry for Lance Armstrong. I do. The public humiliation, as well as the loss of seven victories in the Tour de France bicycle race must indeed be difficult to bear. His cancer come back to become a world cycle hero has been tarnished by his admitting to drug use. We Americans hate to see any of our superheroes have any human frailty. I have harbored doubts about the Tour de France once I learned that it covers more than 2200 miles in 23 days. Who in their right mind would ride a bike that distance? The race is divided into 21 day long segments. The longest race was in 1926 when 3570 miles were covered. The race started in 1903 and has been running continuously since then except for the period of the two world wars. In 1904 night riding was banned because of cheating. Apparently the judges were not able to keep track of the riders in the dark and they just could not be trusted. (Watch the movie “Breaking Away “for more of that sort of stuff) This is a very long race. Way too long if you ask me. Is it any wonder that Lance and many others resort to drugs to get through? When the race is too long people either get discouraged and give up or find a way to worm through it. These days, the race that is being spoken about is the law school experience. Without much effort, law school candidates will find themselves in debt to the tune of $120,000 at private law schools obtaining their three-year law school education. This race may in fact be too long. Members of the New York bar, judges and law school faculty members have been meeting to discuss a proposed rule change which would permit students to take the New York state bar exam after two years of law school instead of the three as is now required. Law schools would provide a third year for those so inclined. But students who opt out will be able to sit the exam and begin their legal careers one year earlier. It is hoped, if the amendment to the rules is adopted, that it would make law school more accessible to low income students, as well as lift the debt burden that many new lawyers may face made all the more heavy by a dwindling job market.

Tax Cliff Winners and Losers

We didn't go over the fiscal cliff. I don't think anyone really thought we would. Right now, Congress is debating raising the debt ceiling. There are arguments on both sides, but somehow a negotiated settlement will result in our children and grandchildren owing a great deal more. It will be up to them to figure out how and if such a debt should be paid. In the short term, the tax deal that was struck contains good news and bad news in most cases depending upon your income level. Many taxpayers enjoyed what was called the “payroll tax holiday”. This resulted in a 2% reduction in the social security tax withheld. This sweet arrangement was not continued as part of the tax deal for 2013. What this means is workers receiving a paycheck will see a smaller net amount. Self-employed individuals should anticipate a higher, that is normal, self-employment tax rate and increase their estimated tax payments accordingly.

The estate and gift tax exemption for 2013 increases to $5,250,000, while the top tax rate jumps to 40%. The annual gift tax exclusion rises to $14,000 per donee. Congress has also approved the portability of the estate tax exemption between spouses.

 Now this business of the income tax rates: The Congressional Research Service, which at its website states “The CRS works exclusively for the United States Congress providing policy and legal analysis to committees and members of both the House and Senate regardless of party affiliation” found in its report called “Taxes and the Economy: An Economic Analysis of the Top Tax Rate since 1945” that the reduction in the top tax rates has had little association with saving, investment or productivity growth. The report concluded that it would be reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on economic growth. What does this mean in English? In other words the folks euphemistically called the “rich” would not all of a sudden decide to withdraw from their pursuits if their tax brackets went up a bit. Democrats have typically advocated raising these taxes to increase revenue. Republicans on the other hand stress that reducing tax rates would increase economic growth. Tax rates in the United States are still a bargain considering the service, protections and lifestyle we enjoy. So how do the tax rates come out? The witching number is $400,000 and it appears at several places. For example, the 39.6 tax rate will now apply to taxable income for single individuals over $400,000 and 450,000 for married couples filing joint returns. The top tax rate on capital gains and dividends will rise to 20% for those same individuals. For others the 15% rate will continue to apply. So for 2013, there will be seven potential tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. All of which are simply way too low. Itemized deductions for 2013 will be reduced by 3% of the excess of adjusted gross income over $250,000 for singles and $300,000 for married taxpayers. The total reduction cannot exceed 80%. Medical expenses, investment interest, casualty losses and gambling losses, which are allowed only to the extent of winnings, are exempted from the cutback. There is a great deal more to come from our beloved Congress in the name of Tax Reform.

How's the Now?

    You don't have to hide out in an Indian ashram eating veggies and sleeping on the floor to find inner peace and happiness. It's a lot simpler than that whether you are a lawyer or not. You see science is certain that the mind controls everything we humans do and that of course includes our lives. It makes us happy and miserable. It can do that almost at the same time. It can drive you crazy. Especially when we humans unlike other animal life forms are convinced our happiness lies up ahead in the future or buried somewhere in our past. A future and past that doesn't really exist except between our ears. Yet though we recognize this fact, we find that little voice in our heads reciting over and over the same future predictions or past recollections of our dire fate, ill health or worse our mortality.

    How to get this mind stuff under control? The self-help books tell you to live in the "Now", but don't give a simple suggestion for making our minds come back to the present. Here's the thing. When you catch yourself dwelling on the inevitable future misery up ahead or the nasty past you have lived through, ask but one question: How's the Now? And answer that question honestly. If the now in that exact moment is good, enjoy it, dwell on it and be grateful for it. Most anxiety is about something other than the Now. If the Now stinks then it is time to make a change. Time for action and not worry. Most times the Now will be fine, maybe good, or even glorious!

   We have become accustomed to hearing "How are you doing?" or "How you DO-ing?" as Wendy Williams would say. It's the wrong question and forces us to again assess our past and our envisioned future. Better to ask: How's the Now? Stop this second reading this blog and ask and answer that question. See what I mean? You can use the "How's the Now" as your own private mantra. Ask it dozens of times a day; more if you need it.

   The joy of living is too often missed when we neglect the Now. How many times do people on vacation make an anxious time of it? Reservations and planning every moment of the time they have. They return as exhausted as when they left. They have missed the Now of the vacation.

  Whether it's work or play the Now is all there is ...really.