This issue’s “Tax Tips” covers employee classification for IRS purposes, a donee’s liability for unpaid gift tax and interest, and the now permanent 100% exclusion for federal capital gains taxes on sales of qualified small business stock.
Are your employees classified correctly?
Employers gain several benefits by treating workers as independent contractors. Among other factors, you don’t need to withhold or pay income or payroll taxes, make federal unemployment contributions, pay overtime or provide employee benefits. But you must make sure workers are properly classified as independent contractors before taking advantage of these benefits.
If the IRS reclassifies an independent contractor as an employee, your company (as well as certain “responsible persons”) may be liable for unpaid taxes and unemployment contributions, as well as penalties and interest. And don’t share the popular misconception that employers can avoid liability so long as they file Forms 1099 and the workers pay all taxes due. Even if you’re not liable for back taxes, the IRS can still hit you with a 20% penalty. Plus, the worker may sue you for unpaid benefits, overtime or other perks of employee status.
Donee’s liability for unpaid gift tax and interest
In the event that a donor fails to pay gift tax, the Internal Revenue Code allows the IRS to collect the unpaid tax plus interest from the donee(s). In a recent case, U.S. v. Marshall, the U.S. Court of Appeals for the Fifth Circuit ruled that a donee’s liability for unpaid gift tax and interest is capped by the amount of the gift.
In 1995, the donor in this case made gifts of more than $84 million to several donees. The IRS sought to hold the donees liable for almost $75 million beyond the value of the gifts, much of which consisted of accrued interest on the unpaid gift tax liability. The court, joining the Third and Eighth circuits, held that the donees’ gift tax liability was limited to the value of the gift. The court noted, however, that the Eleventh Circuit — which has jurisdiction over cases originating in Alabama, Florida and Georgia — has reached a contrary conclusion.
Qualified small business stock offers tax-free capital gains
The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended several expired or expiring tax incentives, among them a particularly valuable tax break for investors: the 100% exclusion for federal capital gains taxes on sales of qualified small business stock (QSBS). The exclusion, which fell to 50% at the end of 2014, has been permanently extended at 100% for all QSBS acquired after September 27, 2010, and held for more than five years.
To qualify, stock must have been issued after August 10, 1993, by a C corporation with gross assets of $50 million or less. Several other requirements apply, so be sure to consult your advisors before taking advantage of this tax break.