Employees vs. Contractors; Foreign Consultants; Moving Expenses and IRS Collection Limits

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, September 20, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

Question: I worked full-time on commission and provided my employer with a completed W-4 form (employee withholding allowance certificate). However, he sent Form 1099 (independent contractor) and failed to withhold any taxes. Am I liable for the taxes?

Answer: Usually not. If you were an employee, but your employer treated you as an independent contractor, then the employer is responsible for taxes. Complete Form SS-8 (available at www.irs.ustreas.gov/prod/forms_pubs/) and submit it to IRS for a determination of whether or not you were an employee or independent contractor. This situation occurs frequently and the proper classification of workers can be confusing. Unfortunately, some employers purposefully misclassify workers to save on taxes.

Question: I am a foreign citizen working in my native country as a consultant for a U.S.-based company. Must I pay U.S. tax on my income?

Answer: No. Because you are performing services outside the U.S. and are not a U.S. resident or citizen, your income is foreign sourced and is not subject to U.S. tax. If you work part-time in the U.S., your income is allocated between U.S. and foreign sources; you are taxed on your U.S. source income, even though you are not a resident. Note: There could be an applicable treaty that modifies this general rule.

Note: There are strict reporting requirements if you own, directly or indirectly, 25% or more of the U.S. company that uses your services (Form 5472). In addition, unless you are actually consulting, the payments could be recharacterized as dividend payments. If this occurs, the U.S. company cannot deduct the payments and you'll pay a 30% tax (unless a lower treaty rate applies). The company withholds the your tax and pays it directly to IRS.

Question: My company gave me $5,000 to move to California. Am I taxed on this amount?

Answer: No, provided you use the money for your move. Moving expenses paid by an employer (or paid by you and reimbursed by your employer) are excludible from your gross income as a non-taxable fringe benefit, provided these expenses would have been deductible moving expenses to you. For example: if you receive $5,000, but spent only $3,000 in deductible expenses on the move, $2,000 becomes gross income.

Question: I am considering canceling my life insurance policy to obtain the cash value. Am I taxed?

Answer: Yes. You are taxed when you surrender your policy. Whole life insurance policies often have a cash-surrender value that accumulates like a savings account. If the policy is held until death, the cash-surrender portion is received tax-free by the beneficiary. To avoid taxation, people may borrow against the cash value, rather than cash in their policies. This allows the policy holder to keep the policy in force while accessing the cash as a loan (a tax-free transaction to the borrower).

Question: How long does IRS have to collect taxes?

Answer: Generally, 10 years from the date of assessment. IRS usually has three years from the date a return is filed to make an assessment. Both the assessment and collection periods may be extended by mutual agreement. Also, these periods may be extended: (1) if assets are in the control of a federal or state court; (2) during the period a taxpayer may file a tax court petition; (3) while a tax court action is pending and 60 days after a final decision, or (4) if the taxpayer is absent from the U.S. for a continuous period of six months or more.

Question: I recently read that IRS will accept credit card payments. May I pay my third quarter estimated tax by credit card?

Answer: No. Credit card payment will apply to Form 1040 filers as of 1999. Taxpayers will be able to charge any balance due, whether or not the return was filed electronically, by calling a special IRS toll-free number. Thus far, Mastercard and American Express have agreed to the program. IRS states that credit card payments of estimated taxes might follow.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**