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An article in Forbes this week highlighted a recent national poll which showed that 65% of all American’s don’t have a will.  More than 70% don’t have a living will to make known their views on end of life medical care.  The article notes the Big 4 of estate planning documents: a will, a living will, a medical power of attorney and a financial power of attorney and states that even among Americans over 55, only 3/4 had signed even one of the documents.

Most folks don’t get estate planning documents for financial reasons: either they think the documents are too expensive, or they think they don’t have time to prepare them right now because they’re so focused on keeping their job and paying their bills.  And we can understand those concerns, the current economic crisis has affected us all.  But, the fact is, they aren’t very good reasons compared to the costs of not preparing the right documents.  If something happens to you and you can’t make medical decisions for yourself, if you don’t have a valid power of attorney, someone in your family is going to pay thousands and thousands of dollars trying to convince a judge to appoint them as your representative.  And, worse, if two people in your family disagree about your care, well, you remember Terry Schiavo, right?

The fact is that we all need to face our end in whatever way we see fit (as the author of the New Jersey Estate Planning & Elder Law blog put it, that 65% of people don’t have a will is staggering considering 100% of them are going to die one day).  And we all have affairs to put in order.  From issues as innocent as ‘who should get my stamp collection’ to those as profound as ‘who should care for my children,’ your opinion matters.  Make sure it’s heard, especially when you’re gone.

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Following up on our earlier post about classifying workers as employees or independent contractors, various media outlets are reporting on a major government initiative to crack down on employees that wrongly characterize their employees as independent contractors.  According to a New York Times story, this year’s proposed budget contains a major investment for the I.R.S. and the Labor Department to enhance investigation and compliance procedures.  The budget anticipates a $7 billion windfall from the effort.

The article goes on to note that some states already have begun their own enforcement procedures (in addition to, not in place of, federal efforts).  California authorities won $13 million last year from a company that misclassified janitors, and is now seeking more than $4 million from a construction company.  The Illinois Labor Department fined a home improvement company more than $300,000.   The article notes that a Harvard study found that 4.5% of all workers in Massachusetts were misclassified, and a Cornell study found that 10% of New York workers were misclassified.

As we stated earlier and these reports make clear, the government is serious about this issue and can secure astronomical penalties against employers.  Be sure to protect yourself and classify your employees properly.

In an earlier post about IRS wage reporting requirements, we talked about the different requirements for your business’ employees and/or independent contractors.  In that post, we promised that we’d explore the differences between the two classifications.  Today, we’re making good on our word.

Your business may hire both employees and independent contractors.  You pay both classifications of workers and, in turn, both classifications provide you with labor.  So, who cares what you call them?  Well, your Uncle Sam cares.  For your employees, you almost always have to withhold income, Social Security and Medicare taxes, not to mention paying unemployment benefits.  For independent contractors, you don’t have to withhold any of those taxes.

So, why not just call everyone an independent contractor and forget about all the payroll headaches associated with withholding?  There are, of course, serious penalties for incorrect classifications.  If you classify a worker as an independent contractor and the IRS determines that the worker should have been classified as an employee, you will have to pay the government all of the taxes you should have withheld and, as a kicker, you have no right to recover those costs from the worker – effectively meaning you would have paid that worker’s taxes twice.  And that’s just if you make a mistake – if the IRS determines that you intentionally misclassified the worker, you will owe the government double what you should have paid (and you still can’t collect anything back from the worker, meaning you will have paid that worker’s tax liability three times).

Now that you know you don’t want to classify a worker incorrectly, either innocently or on purpose, how are you tell the difference?  Sadly, this is the hard part.  In 2001, the Rhode Island Supreme Court said: “the test as to whether a person is an independent contractor is based on the employer’s right or power to exercise control over the method and means of performing the work.”  If that sounds fuzzy to you, that’s because it is.  There is no hard and fast rule, except that your preferred label does not matter – just because you and a worker sign an independent contractor agreement does not make that worker an independent contractor.

What matters is how the relationship works in practice.  The IRS published an article with some helpful guidelines.  Three aspects of the employer’s “control” are examined:

  1. Behavioral control:  Does the employer instruct the worker to perform the work in a particular place or at a particular time?  Does the employer dictate the sequence of work?  Does the employer evaluate the worker based on the work process or just the result?  Does the employer provide training?
  2. Financial control: Does the employer or the worker pay for the worker’s business expenses?  Is the worker free to market services to other potential employers?
  3. Relationship control: Is the worker expected to perform a discrete task or to perform tasks as needed?  Is the worker expected to work for a specific period of time, or is the hiring open-ended?  Is the worker entitled to receive benefits from the employer?

This is not an exhaustive list of factors, and no one factor is determinative of the outcome.  To classify workers correctly, it’s important for businesses to assess the entire working relationship in light of the concept of control.  The more control the employer exerts over the worker, the more likely it is that the worker will be considered an employee, subject to withholding.

To the extent you’re still not sure (and who could blame you), you can file IRS Form SS-8 to seek a binding determination from the government, or seek the advice of an attorney.

As we’ve discussed previously, right now there is no estate tax.  As a result of a prior tax deal, the estate tax was phased out as of January 1, 2010 and is scheduled to return on January 1, 2011 with an exemption amount of $1 million per individual and a top tax rate of 55%.  Most folks assume, however, that the estate tax will be reintroduced in some form before then, with different exemption amounts and rates.

President Obama released his budget earlier this week and, no surprise here, he seeks to reinstate the estate tax at 2009 levels.  This would mean individual exemption amounts of $3.5 million and a top rate of 45%.  Yesterday, CNN reported that the Senate is considering a different, and more generous proposal, which would grant exemption amounts of $5 million per individual and a top rate of 35%.  Both Treasury Secretary Timothy Geithner and Senate Finance Committee Chairman Max Baucus indicated yesterday that they support making the estate tax, in whatever form it finally materializes, retroactive to January 1, 2010. (thanks to TaxProf Blog for linking to the Geithner and Baucus statements).  We will keep you updated as the debate continues.

No Net Receipts Tax

A while back, we wrote about Governor Carcieri’s decision to float the idea of a net receipts tax as a “game changer” for Rhode Island’s current tax system.  Essentially, the plan would have imposed a 2% tax on all businesses’ net receipts.  The income theoretically would have been able to replace the corporate and personal income taxes.

The Providence Journal reported today that the governor has abandoned the idea.  Speaking on Buddy Cianci’s radio show this afternoon (we’re relying on the Projo report here; we didn’t catch the radio interview), Carcieri said “It’s just too complicated right now.”  While we don’t really know enough about the tax’s proposed structure to have an opinion whether or not it’s a good idea, we certainly were encouraged to think that the administration was searching for alternative ways to raise revenue.  And today we’re equally discouraged that after only two months – with no public debate of the plan that we’re aware of – it’s dead.

On Thursday, the U.S. Supreme Court announced its decision in Citizens United v. Federal Election Commission.  This landmark holding alters the roles that corporations play in our nation’s political discourse.  Before the ruling, federal (and most state) law prevented corporations from making political donations or expenditures.  But not anymore – after Citizens United, the landscape is very, very different.

The Supreme Court held that the First Amendment bars the federal government (and, probably state governments, too) from passing laws that prohibit corporations from engaging in political speech through independent expenditures.  There are two important elements to the ruling.  First, political speech is not just the spoken word – it includes writings and other modes of communication.  Second, independent expenditures are those that advocate the election or defeat of a candidate for public office but are not coordinated or discussed with any candidate or candidate’s opponent.  For example, if a corporation wants to support a candidate for election, that corporation may now create and distribute a flier in support of that candidate (but can’t talk to the candidate or her/his campaign manager to make sure the flier is ok).

Equally important are the portions of the law that the Supreme Court left standing.  First, corporations still may not donate money directly to a candidate or a candidate committee – the potential for bribery is just too great.  Second, when corporations make these independent expenditures, the existing disclosure and reporting laws still apply.  So, in our earlier example, the corporation would have to state, somewhere on the flier, that it paid for the flier (and there are actually pretty picky rules about where the notice must be placed, how big it must be, etc.).  And, second, the corporation would have to file a report with the Federal Election Commission stating that it had created the flier (and a host of other information).

Reaction has been typically hyperbolic.  Some political liberals are screaming that this decision will lead to big businesses spending as much as they can to buy elections – while some political conservatives are just as concerned that the ruling will open the floodgates for unions to do the same thing.  The plain fact is that, even before Citizens United, big businesses and unions already exercised immense influence in politics and elections.  Anyone watching the legislative circus that has been this year’s attempt at health care reform has seen with their own eyes the power and effect that these interest groups have on the process.  Big business and unions already spend millions and millions of dollars on elections – it’s just that pre-Citizens United, they had to wash it through PAC’s and lobbyists.  But for us, the outrage is a little overblown.  Just because business and/or unions can now spend their money directly does not mean that: 1) they will spend more money (they can already spend all they want, assuming they properly wash it first); or 2) that the same amount of spending will somehow become more effective.

We think the ruling will be important, but in a local way.  When we read the decision, we thought about a client.  A small business in the retail sector, this client had a very difficult time receiving proper permits and licenses, in good part because of the intransigence of a certain local elected official (all of whom shall remain nameless).  It was so bad, they had to call us to straighten out the mess.  At the end of the affair – when the permits finally were issued – the client’s president, angry at the way the official had acted, wanted to know how to fight back.  In the aftermath of Citizens United, that owner has another option.

They’re so cool – and they’re only going to get hotter (can something be cool and get hotter?  We think so).  Smartphone apps are all the rage.  All the big names have apps for the iPhone and the Droid – CNN, Whole Foods, DirecTV and the ubiquitous Facebook are just a few of the thousands of people and businesses that have created apps so their users can stay connected while on the go.  Even Shakespeare has an app (all of the Bard’s plays smell as sweet in digital format).

Does your business have an app?  Don’t be fooled into thinking that you need an expansive outlay of cash or time to get the ball rolling.  iSites claims to be able to have your mobile app up and running in ten minutes (thanks to Fred Abramson’s New York Small Business Law for bringing this to our attention).  It costs a whopping $25 for the basic app, or a hair under $100 per year to integrate your app with other advertising programs.

We don’t know anything about the iSites product (other than what iSites claims), but for that amount of time and money, it seems like it’s worth a shot – even an app development class from Apple costs between $100-300.  Considering users downloaded 10 million apps in one weekend and the number of users and number of apps is expected to grow, maybe it’s time for you to get in on this party.