Safe Harbors for Treatment of Workers as Independent Contractors Rather Than Employees. Section 530 of the Revenue Act of 1978 was enacted to provide employers with relief from significant employment tax liability that resulted from certain workers improperly being treated as independent contractors rather than employees. However, given the IRS's restrictive interpretation of this Section, businesses have had difficulty getting relief here. Effective in 1997, Section 530 is amended to clarify the standards applied in determining whether independent contractor status will be respected. The new standards should provide taxpayers with a more reasonable opportunity to prove independent contractor status in appropriate cases.
Employers are provided relief from employment taxes under Section 530 only upon satisfaction of a number of conditions. The condition that is most often subject to dispute is whether the employer had a reasonable basis for treating a worker as an independent contractor as opposed to an employee. The new legislation lessens the burden on the employer to establish independent contractor status.
Small Employers Eligible for Savings Incentive Match Plans for Employees (SIMPLE Plans). Small employers who do not currently maintain a qualified plan may now adopt a simplified retirement plan: Savings Incentive Match Plans for Employees (SIMPLE), which may be structured as either an IRA or a 401(k) plan. To qualify as a small employer, you must have 100 or fewer employees who received at least $5,000 in compensation in the year prior to adoption of the plan. SIMPLE plans permit an employee to contribute up to $6,000 annually. Employers must match contributions under one of two formulas. Under the matching formula, employers must match up to 3% of an employee's compensation. However, in an IRA type plan, an employer can elect to match less than 3% for a given year but the matching percentage cannot drop below 3% in more than two out of the five years preceding the election.
Under that alternative formula, the employer may make a non-elective 2% contribution for each eligible employee up to $3,00 per employee. Like other qualified plans, employers will receive a current deduction for contributions, while employee/participants will not be taxed until the money is withdrawn from the plan. A significant benefit of SIMPLE plans is that they are not subject to nondiscrimination rules and may be top-heavy.
Employer Provided Educational Assistance. Prior to January 1, 1995, employer-provided educational assistance payments of up to $5,250 per individual were excluded from the employee's taxable income. This program expired, however, on January 1, 1995. Under the new legislation, this program has been reinstated retroactively for tax years beginning after December 31, 1994. However, the new law does not exclude from income, assistance payments for graduate-level courses beginning after June 30, 1996. Unfortunately, this program is scheduled to lapse again for courses beginning after June 30, 1997.
Phased-in Increase in Expense Limitation. Under Section 179, eligible taxpayers may currently deduct, rather than depreciate, up to $17,500 of qualified business property placed in service during the year. Under the new legislation, this amount will increase to $25,000 by the year 2003 over a scheduled phase-in period.
