The Other Side of Independent Contractors

               It is no secret that the IRS has declared war on employers who treat their employees as independent contractors. Needless to say the states have the very same interest. Not only are employers relieved of the task of withholding, but they also avoid payment of employment taxes, medical and pension benefits. The obligation to file and pay taxes falls on the shoulders of the employee as an independent contractor. Those independent contractors however do have a field day with regard to the deductions they can claim on their own personal schedule C business. See#2 above. Every then and again the tables are switched. In Derolf v. Risinger Bros Transfer, District Ct, Ill, truckers who were employed to haul freight claimed that they were in fact employees and not independent contractors. They claimed their employer intentionally misclassified them. The District Court examined the facts and determined that the truckers controlled the work they did, set their own hours, and decided the routes they would drive. They were paid by the mile and most importantly they could haul freight for other carriers and could make a profit like any real business. With that the court decided they were not misclassified and were in fact independents.

What's Wrong with a Low Business Tax Rate?

Now, it comes as no news to tax practitioners, lawyers and accountants alike, that running one’s own business offers the potential for many tax deductions denied to the typical wage earner. One only has to take a look at the infamous 1040 Schedule C filed by business owners versus the Schedule A that most employed individuals file. On that schedule A, a paltry number of deductions are available: medical, charitable, state and local taxes, real estate mortgage interest to name the few. But the Schedule C for taxpayers who claim to be in a business has line after line of tempting potential deductions. It’s been that way for a long time. But with Trump’s idea of creating a 15% maximum tax for business income which would include sole proprietorships and other pass-through entities, the temptation may be too great for many taxpayers to resist. By claiming to be in a business the many deductions available on a schedule C can result in substantially lower taxable income which would then be taxed at the maximum 15% rate. This same income if taxed on the ordinary form 1040 could be taxed as high as 35%. Can anyone blame taxpayers if they attempt to squeeze into this notion? How could the enfeebled Internal Revenue Service deal with detecting and correcting these problems? At the moment being underfunded has resulted in the IRS being paralyzed in many of the areas necessary for current tax administration. How could the agency take on another role of policing the genuineness of business filings? Over the years, the IRS has challenged many taxpayers who have claimed that their hobbies are in fact business filings. But even in that area, the factual nature of the circumstances surrounding the “business” are difficult to detect and to prove. As a practical matter taxpayers who claim a profit from their schedule C business are not the most likely to be audited in the first place. That would be the case for individuals inventing businesses to place their otherwise non- business income. Whether tax legislators will be able to so restrict the application of this 15% pass through business tax idea as to make it workable remains to be seen, but it seems unlikely, if not impossible. Create another loophole and the tax paying public will find a way in. It’s only natural.