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Government Forcing Small Business to convert independent contractors to employees

by | Mar 29, 2012 | Uncategorized

Government Forcing Small Business to convert independent contractors to employees

The federal government is doing everything possible to convert true independent contractors and independent business owners into employees. Because there are significant tax and business advantages to both the small business and independent contractors to avoiding employee status, it makes good business sense. Nevertheless, the IRS and federal government wants mandatory withholding and all of the limitations that come with W–2 employee status. the government wants to collect more tax!

In the disguise as a Bill to help small business, on March 28, the House Ways and Means Committee by a vote of 21 to 14 approved the Chairman’s Mark in the Nature of a Substitute to H.R.9, the “Small Business Tax Cut Act.” There were no amendments adopted during the committee process.
H.R. 9, which was introduced by House Majority Leader Eric Cantor (R-VA), would allow qualified small businesses (those with fewer than 500 employees) to claim a new 20% deduction. In general, the deduction, which would be similar to the Code Sec. 199 domestic production activities deduction (and would be coordinated with that deduction), would be equal to 20% of the lesser of:

  1. qualified domestic business income (generally, domestic business gross receipts less cost of goods sold allocable to such receipts, less other expenses, losses or deductions allocable to such receipts); or
  2. taxable income (without regard to the new deduction) for the tax year.

The new small business deduction couldn’t exceed 50% of the greater of: (a) W-2 wages paid to non-owners of the business; or (2) W-2 wages paid to non-owner family members of direct owners, plus W-2 wages paid to 10%-or-less direct owners. Certain partners’ distributive shares of partnership items could be treated as W-2 wages for purposes of the new deduction.this is the trick by the government to force W-2 employees and effectively hurt many small businesses.

In addition, the limitation on domestic business income is a further attempt at limiting US companies from opening branches in other countries. This very shortsighted move will hurt the competitiveness of US businesses in the long run.
For a qualified small business that is a partnership and that so elects, the portion of the entity’s qualified domestic business taxable income for the tax year that is allocable to each qualified service-providing partner would be treated as W-2 wages paid during that tax year to an employee who is a 10%-or-less direct owner. The domestic business gross receipts of the partnership for the tax year would have to be reduced by any amount treated as W-2 wages under this rule. Under an amendment in the nature of a substitute to H.R. 9, a qualified service-providing partner would be any partner who is a 10%-or-less direct owner and who materially participates in the trade or business to which the income relates.
Gross receipts and W-2 wages taken into account under the new deduction could not be taken into account for Code Sec. 199 purposes. The bill, which would apply for the first tax year of the taxpayer beginning after Dec. 31, 2011, does not carry any offsets to pay for the small business deduction.
Thanks to Research Institute of America for portions of the information.