Monthly Archives: January 2020

Did You Pay Tax on Home Mortgage Debt Relief in 2018? You May Be Entitled to a Refund

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Article Highlights:

Appropriations Act of 2020
Cancellation-of-Debt (COD) Income
Retroactively Extended Special Exclusion
Home Affordable Modification Program (HAMP)
Amended Return

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.Whenever a taxpayer’s debt is forgiven, whether it is credit card debt, home mortgage debt, an auto loan, or other debt, that forgiven debt – referred to as cancellation-of-debt (COD) income – becomes taxable income to the taxpayer unless the debt was discharged in a bankruptcy proceeding or the taxpayer qualifies for one of the tax law exclusions providing relief from taxation of COD income. The decline in the real estate market over a decade ago, combined with the recession, left many homeowners upside down – their mortgages were significantly higher than the value of their home. As a result, many homes went back to the lenders via foreclosure, abandonment, and voluntary reconveyance, leaving taxpayers with taxable COD income. To alleviate this situation and relieve homeowners from COD income, back in 2007, Congress created a special rule that allowed taxpayers to exclude COD income from taxation if the income arose from cancellation of the debt used to acquire the taxpayer’s primary residence. This debt is termed acquisition debt. However, this special provision expired at the end of 2017, and those facing a similar problem after 2017 were stuck paying taxes on the COD income. Thankfully, Congress has retroactively extended that special exclusion (home mortgage debt relief) back to 2018 and through 2020. By making it retroactive, if you were required to pay tax on forgiven home acquisition debt income in 2018, then your 2018 return can be amended, and you can recover those tax dollars you paid in 2018. This exclusion may also apply to home debt discharged as part of the Home Affordable Modification Program (HAMP). Under this program, certain qualifying individuals could have their mortgage debt reduced so they could afford to remain in their homes. Although this program ended in 2016, the debt was forgiven over three years, which means in some cases, taxpayers may have had debt forgiveness (COD income) in 2018. This COD income will probably qualify for income exclusion that will result in a refund of taxes if the taxpayer amends their 2018 tax return. If you have questions related to home mortgage debt relief or if you paid taxes on home mortgage debt relief in 2018, please give this office a call. If you missed any of the earlier tax law change articles you can view those articles at the links below:

Congress Allowing Higher Medical Deductions for 2019 and 2020
Employer’s Pension Startup Credit Substantially Increased
Above-the-Line Education Tax Deduction Reinstated
Mortgage Insurance Premium Deduction Retroactively Extended
The Home Energy Saving Tax Credit Is Back

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The Home Energy Saving Tax Credit Is Back

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Article Highlights:

Appropriations Act of 2020
Residential Energy (Efficient) Property Credit
Lifetime Credit
Credit Limits
Qualifying Property
Per Item Credit Limits
Basis Adjustment
Retroactive Application

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you. The Residential Energy (Efficient) Property Credit was initially introduced in 2006. The credit’s name is somewhat misleading, and the credit is best described as an energy-saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. Over the years since it was first introduced, it has provided a tax credit in amounts varying from 10% to 30% of the cost of energy-saving devices installed as part of a taxpayer’s home, with the maximum credit ranging from $500 to $1,500. Currently, the credit percentage is 10%, with a lifetime credit amount limited to $500. Since the credit currently has a lifetime credit of $500, that means if you have ever claimed this credit in the past, going all the way back to 2006, you must reduce any credit currently claimed, limited to the $500, by any credit amount you claimed in any prior year. As a result, taxpayers who claimed the maximum credit amount in the past won’t be eligible for any additional credit under this extension. Generally, this tax credit equals 10% of the cost of the following energy-saving improvements that meet certain Energy Star requirements:

An advanced main air-circulating fan;
A natural gas, propane, or oil furnace;
A natural gas, propane, or oil hot water boiler;
Energy-efficient heat pumps;
Energy-efficient water heaters;
Energy-efficient central air conditioners;
Insulation;
Metal roofs with appropriate pigmented coatings;
Asphalt roofing with appropriate cooling granules;
Exterior storm windows and skylights;
Exterior storm doors; and
Others not listed here.

To qualify for the credit, the home must be the taxpayer’s primary residence and be located in the U.S., the improvement must generally have a life of 5 years or more, and the original use must begin with the taxpayer. The credit is non-refundable, meaning it can only be used to offset your tax liability to bring it down to zero, and there is no carryover provision, so any portion of the credit not used in the year when the credit is earned is lost. There are also credit limits for certain items:

Qualified Windows and Skylights $200
Qualified Advanced Main Air Circ. $50
Qualified Hot Water Boilers $150
Qualified Energy-Efficient Equip. $300

Basis Adjustment – The basis of your home is increased by the amount you spend on an energy-efficient improvement but is then reduced by the amount of the credit. So even if you can’t claim the credit because you’ve exceeded the lifetime credit limit, the cost of the energy-efficient property will increase your home’s basis. Retroactive Extension – Since this credit was retroactively extended to 2018, if you made qualifying improvements in 2018, you can amend your 2018 return and claim the credit. Since this credit has been extended through 2020, it can also be claimed for energy- efficient improvements made in 2019 and 2020 as long the $500 lifetime credit limit will not be exceeded. If you have questions about this credit or think you might qualify for the credit in 2018 and want to see if the credit is worth the cost of amending your return, please give this office a call. If you missed any of the earlier tax law change articles you can view those articles at the links below:

Congress Allowing Higher Medical Deductions for 2019 and 2020
Employer’s Pension Startup Credit Substantially Increased
Above-the-Line Education Tax Deduction Reinstated
Mortgage Insurance Premium Deduction Retroactively Extended

5 Things You Need to Know About Sales Taxes in QuickBooks Online

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If you sold only one type of product to customers in one city, collecting and paying sales tax would be easy. But most businesses have a wider reach than that. QuickBooks Online offers tools that allow you to set up sales tax rates and include sales tax on sales forms. Further, it calculates how much you must pay to state and local taxing agencies. This is one of the most complicated areas in QuickBooks Online because you may have to deal with numerous taxing agencies. If you’re not already working with sales taxes, we strongly recommend you let us help you get everything set up correctly from the start. Taxing agencies can audit your recordkeeping and you want to make sure it is set up correctly. That said, here are five things we think you should know. QuickBooks Online calculates sales tax rates based on:

Where you sell. Every state is different. If your business is located in Florida and you sell to a customer in Minnesota, you’ll be charging any sales tax levied by the state of Minnesota and possibly the city and county and other taxing authorities – if you have a connection, a “nexus” in that state (a physical location, active salesperson, etc.).
What you sell.
To whom you sell. Some customers (like nonprofit organizations) do not have to pay sales tax. You’ll need to edit their customer records to reflect this in QBO. Open a customer record and click the Edit link in the upper right. Click the Tax info tab and make sure there’s no checkmark in the box that says This customer is taxable. The Default tax code will be grayed out, and you can enter Exemption details in that field.

Customer records for exempt organizations should contain details for that exemption. You’ll need to see their exemption certificate or at least know its official number.
Intuit now offers a revamped version of QuickBooks Online’s sales tax features. At some point, you’ll be asked if you want to switch to the new, more automated system. The actual mechanics of the process are simple, but you’ll be moving historical and in-process data to a new structure. If you have sales tax set up right now and your situation is at all complicated, you’re going to want our help with the transition. This enhanced feature only supports accrual accounting. You can combine individual tax rates. If you are required to pay city, county, and state sales tax rates for a particular customer, for example, you can create a Combined tax rate that contains all of the individual components. The customer will only see the total on an invoice or sales receipt, but QuickBooks Online will track each one accordingly for payment and reporting purposes
You can combine sales tax rates in QuickBooks Online (image above from current Sales Tax Center in QuickBooks Online, not the enhanced one).
Product and service records should contain sales tax information. This is another area that will require some research. Just as some services are subject to tax, some products are not (like groceries in Arizona). So, you’ll need to find out what the rules are for what you sell. You can find this information on the website of the state’s Department of Revenue (sometimes called the Department of Taxation). Once you know, you can record that status in QuickBooks Online. Open a product record by going to Sales | Products and Services and clicking Edit in the Action column or create a new one by clicking New in the upper right. Scroll down to Sales tax category in the record. You can choose between Taxable – standard rate and Nontaxable. There’s a third option here: special category. This gets complicated. We can help you determine whether it applies to you. QuickBooks Online tracks the sales tax you owe. You can see what you owe to each agency by running the Sales Tax Liability Report, and record payments when you’ve made them. Summary and detail versions of the Taxable Sales report are also available. Once you get sales taxes set up in QuickBooks Online, it’s easy to add them to the relevant sales forms. Getting to that point, though, takes time, study, and careful attention to detail. If you’re getting ready to sell, or you’re already selling and struggling with sales taxes, let us know. We can schedule an initial consultation to see how we can be of assistance.

Mortgage Insurance Premium Deduction Retroactively Extended

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Article Highlights

Appropriations Act of 2020
Amended Return for 2018
Qualifications for the Deduction
Qualified Mortgage Insurance

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you. For tax years 2007 through 2017, when taxpayers itemized deductions, they could deduct the cost of premiums for mortgage insurance on a qualified personal residence as home mortgage interest. This deduction has been retroactively extended back to 2018 and through 2020. If you paid premiums for mortgage insurance in 2018 or were amortizing prepaid mortgage insurance premiums from an earlier year’s home purchase, you may be able to amend your 2018 return for a tax refund. To be deductible:

The premiums must have been paid in connection with acquisition debt, which is debt incurred to purchase or substantially improve a home. (Note: acquisition debt includes refinanced acquisition debt but not equity debt.)
The mortgage insurance contract must have been issued after Dec. 31, 2006.
It must be for a qualified residence (taxpayer’s first and second homes).
The premiums must have been paid or accrued after Dec. 31, 2006, and before Jan. 1, 2021.
The cost of the insurance does not affect the $1,000,000/$750,000 (or grandfathered debt) limitation for acquisition debt.
The deductible amount of the premiums ratably phases out by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000). The deduction is totally phased out if the taxpayer’s AGI is over $109,000 ($54,500 for married filing separate).

Qualified mortgage insurance means mortgage insurance provided by the:

Dept. of Veterans Affairs (VA),
Federal Housing Administration (FHA), or
Rural Housing Services (RHS) as well as
Certain private mortgage insurance.

If you have any questions related to the mortgage insurance deduction or think you might qualify for the deduction in 2018 and would like to have an amended return prepared, please give this office a call. If you missed any of the earlier tax law change articles you can view those articles at the links below:

Congress Allowing Higher Medical Deductions for 2019 and 2020
Employer’s Pension Startup Credit Substantially Increased
Above-the-Line Education Tax Deduction Reinstated

Budget Tips for Covering A Surprise Tax Bill

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Tax time is always a bit unnerving, but when you’re hit with a large, unexpected tax bill, it can be shattering. There are few people who have the resources to simply pull out their checkbook and write a check for thousands of dollars, yet it can feel like that’s your only choice. The truth is that even people who owe significant amounts of money have several options available to them, including taking advantage of the IRS’ Fresh Start Initiative, which was specifically created for this purpose back in 2011. Though the lien program won’t make your tax obligation go away, it does offer solutions to make things a bit easier, including offering expanded installment plan options, the ability under a program called Offers in Compromise to negotiate a lower tax bill under severe circumstances, and even the opportunity to avoid having to pay some assessed penalties. Start by Checking the Math Though it’s a relief to know that these options exist, your very first step when faced with an overwhelming and unexpected tax bill is to check the math. It’s unlikely that you’ll have big changes to your tax obligation unless there’s been another significant shift in your life. Unless you’ve sold a business or property, or no longer can claim a child as a dependent, there’s a very good chance that there’s a math error that needs to be fixed, so start by comparing this year’s return to last year’s, and contact the tax professional who prepared your latest return to enlist their help both in understanding the big bill and to help you determine the best way to address it if it is correct. What If the Math is Right? If the math is right and you really do owe the amount that set off those alarms, your choices are really limited to figuring out the best way to pay it. It may be tempting to simply skip sending in the return, but doing so is not going to help – the IRS will quickly figure out that you haven’t filed and the amount that you owe, and that will land you in big trouble – and owing even more money because of penalties and interest. It is much better to take control of your situation rather than let the IRS take the lead and contact your employer to garnish wages or file a lien on your home or other property. Many people make the mistake of filing for an extension and thinking that will delay the need to pay; unfortunately, an extension does not negate the obligation to make your payment – it just extends the time for your paperwork. Some people submit a small amount of the amount owed along with an indication that more will be forthcoming when you can afford it. Though this can serve as a stopgap to a problematic situation, the truth is that the best way to approach this situation is to find a way to pay your debt immediately, no matter how painful doing so may be. Ways to Pay If you decide to pay in full without having the funds immediately available, there are really only a few options. These include:

Charge your tax debt on a credit card – Though you may be able to earn whatever points your credit card entitles you to by charging your tax debt, that bonus will likely be negated by the fact that the IRS charges a 2% fee for that service, and of course you’ll have to pay whatever interest rates your credit card is charging. Still, if you can get a credit card with zero percent interest for a limited period, or even one that offers a cash bonus for charging a certain amount, this may be the smartest way to go (as long as you actually find a way to pay the debt).
Ask the IRS about an installment plan – This option is available to taxpayers who owe less than $50,000 and who can pledge to pay their debt in full within six years by making payments online. This option carries a fee and a variable interest rate that can be excessive, especially because the interest compounds daily, and the risk of having a lien placed on your property or your wages garnished remains very real should you fail to make a scheduled payment.
Take out a home equity loan – If you have the time to apply and enough equity in your home, you may want to apply for a low interest rate home equity loan for which you can deduct any interest that you pay on future tax returns.

What You Should Never Do It can be frightening to be in debt to the government and tempting to withdraw money from your retirement accounts. Though this might seem like the easiest way to eliminate the problem, doing so can be a very big mistake, as it not only severely limits the amount of money that you will have available once you stop working, but also puts you in a position of having to pay additional fees for early withdrawals. Thinking Ahead At the same time that you are dealing with a surprise tax bill from last year’s tax return, you are already several months into this year’s earnings, and may unwittingly be furthering your fiscal problems. Take the time to learn how you got into the position you’re in and then take steps to ensure that you are setting aside money for next year or have the proper amount of withholding being taken out by your employer. Self-employed individuals who are required to pay quarterly estimated taxes are strongly encouraged to set up a special tax savings account so that they don’t find themselves at a loss when their tax payments are due. The IRS provides a withholding calculator to help with this. Contact our office so we can help you determine the best steps going forward.

The Difference Between an Audit, a Review, and a Compilation

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When it comes time for financial documents to be corroborated, the three options available are a compilation, a review, and an audit. Each of these represents a very different degree of effort and investigation, and therefore each provides differing levels of confidence for investors and lenders. Let’s take a closer look at all three. The Compilation A compilation requires the least amount of work from an auditor, and though it is likely to cost the least of the three and take the least amount of time, it also provides the lowest level of assurance about the accuracy of the information presented. This is because in a compilation, the auditor does little more than hand over the original financial statements that were prepared internally by the company’s management, with no due diligence performed even to determine whether the information contained in the documents is accurate or true. It relies entirely on the information originally presented. The Review A review demands significantly more work on the part of the auditor, who is expected to determine the accuracy of the information contained in the financial documents presented to them through a series of inquiries and analytical procedures. Because some of the information contained in the financial documents presented by management has been tested, a review provides a moderate degree of assurance that the information is correct and can be trusted. The Audit An audit requires a much greater degree of due diligence than either a compilation or a review. It represents a significant amount of time spent making sure that all of the disclosures and ending balances that are contained in the organization’s financial statements are accurate, including time spent testing internal controls, confirming the engagement and statements from third parties, and examining all source documents in order to make sure that they are representative of the true situation at hand. An audit will often include a physical inspection where appropriate, as well as other procedures that are designed to confirm or refute the information that management has presented. Though an audit will take the most time and be the most expensive procedure, it also provides the highest level of assurance for those considering investing in an organization or lending it money. Feel free to contact this office with any questions relating to the different options for financial documents to be corroborated.

February 2020 Business Due Dates

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February 10 – Non-Payroll Taxes
File Form 945 to report income tax withheld for 2019 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time.February 10 – Social Security, Medicare and Withheld Income Tax File Form 941 for the fourth quarter of 2019. This due date applies only if you deposited the tax for the quarter in full and on time.February 10 – Certain Small Employers File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2019. This due date applies only if you deposited the tax for the year in full and on time.February 10 – Farm Employers File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2019. This due date applies only if you deposited the tax for the year timely, properly, and in full.February 10 – Federal Unemployment Tax File Form 940 for 2019. This due date applies only if you deposited the tax for the year in full and on time.February 18 – Social Security, Medicare and Withheld Income TaxIf the monthly deposit rule applies, deposit the tax for payments in January.February 18 – Non-Payroll WithholdingIf the monthly deposit rule applies, deposit the tax for payments in January.February 19 – Payroll Withholding
Employers begin withholding for employees who claimed exemption for withholding in 2019 but have not provided a W-4 (or W-4(SP)) to continue the exemption for 2020.February 28 – Payers of Gambling WinningsFile Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2019. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.February 28 – Informational Returns Filing DueFile government copies of information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2019, other than the 1099-MISCs that were due January 31. There are different 1099 forms for different types of payments.
February 28 – Applicable Large Employers (ALE) – Form 1095-C
If you’re an Applicable Large Employer, file 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you’re filing any of these forms with the IRS electronically, your due date for filing them will be extended to March 31. See the Instructions for Forms 1094-B and 1095-B and the Instructions for Forms 1094-C and 1095-C for more information about the information reporting requirements.

February 2020 Individual Due Dates

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February 1 – Tax AppointmentIf you don’t already have an appointment scheduled with this office, you should call to make an appointment that is convenient for you.
February 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10.
Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
February 18 – Last Date to Claim Exemption from Withholding
If you claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

Employer’s Pension Startup Credit Substantially Increased

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Article Highlights:

Eligible Plans
Eligible Expenses
Qualification Rules
Credit Amount

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you. If you are considering establishing a qualified pension plan for your business, you may be entitled to the Credit for Small Employer Pension Startup Costs. Eligible small employers that adopt a new plan, such as a 401(k), a SIMPLE plan, or a simplified employee pension plan (SEP), may claim a nonrefundable credit. The first credit year is the tax year that includes the date when the plan becomes effective or, electively, the preceding tax year. Examples of qualifying expenses include the costs related to changing the employer’s payroll system, consulting fees, and set-up fees for investment vehicles. There are some qualification rules, the most predominant being:

The business did not employ, in the preceding year, more than 100 employees with compensation of at least $5,000.
The plan must cover at least one non–highly compensated employee.
The plan must be a new plan; during the three prior years, the employer must not have had a qualified employer plan for which contributions were made or in which benefits accrued for substantially the same employees who are in the plan for which the credit is being claimed.
If the credit is for the cost of a payroll-deduction IRA plan, the plan must be made available to all employees who have worked with the employer for at least three months.

Prior to 2020, this non-refundable credit was limited to the lesser of $500 or 50% of administrative and retirement-education expenses for the plan, for each of the plan’s first three years. The Appropriations Act of 2020 increased the maximum credit for years beginning after 2019 to the greater of $500 or the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The term “highly compensated employee” generally means any employee who (a) was a 5% owner at any time during the year or the preceding year, or (b) had compensation from the employer in excess of $130,000 (2020 amount, which is inflation adjusted for future years) during the year. If you have questions related to starting a company pension plan or qualifying for this credit, please give this office a call. If you missed any of the earlier tax law change articles you can view those articles at the links below:

Congress Allowing Higher Medical Deductions for 2019 and 2020

Will Independent Contractors Become Extinct?

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Article Highlights:

New California Legislation
Employee or Independent Contractor
Dynamex
ABC Test
Impact on Employers
Impact on Workers
Safe Harbor

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, for a worker to be classified as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation. Although this issue currently pertains to California, other smaller states are sure to follow, and this will ultimately become an issue for employers nationwide. Background: The distinction between employee and independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally the most aggressive in classifying workers as employees. In the California case, the legislation was prompted by a labor case that was ultimately settled by the California Supreme Court. In that case, Dynamex Operations West, a trucking company, was treating its drivers as employees. It started classifying them as independent contractors to reduce costs, which caught the eye of the California Employment Development Department and ultimately reached the California Supreme Court. The court determined the drivers were employees and not independent contractors. However, in making that decision, the California Supreme Court adopted the so-called “ABC test” used by some other states to make their determination. As a result of this decision, the California Legislature passed legislation (AB-5) codifying, with some exceptions, the ABC test for determining whether a worker is an independent contractor. The ABC Test: Several states, including Massachusetts and New Jersey, have also adopted this so-called ABC test. The test is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor: (A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) That the worker performs work outside the usual course of the hiring entity’s business; and (C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. The objective of the ABC test is to create a simpler, clearer test for determining whether a worker is an employee or an independent contractor. It presumes that a worker hired by an entity is an employee and places the burden on the employer to establish that the worker meets the definition of an independent contractor. But California’s AB-5 legislation did not just adopt the ABC test; it also added numerous and complicated exceptions to using the ABC test, which will surly enrich California labor attorneys. Impacts on Employers: Employers who have been treating a worker as an independent contractor but must treat him or her as an employee must pay at least minimum wage and provide sick time, meal and rest periods, and health insurance. The employer will also have to pay worker’s compensation benefits and health insurance. On top of that, California has severe monetary penalties for misclassifying workers. Impacts on Workers: The impacts on workers vary by occupation. Some workers incur significant amounts of expenses, and under the tax reform, they can no longer deduct employee business expenses on their tax returns. Thus, for example, an Uber driver who must provide the vehicle and pay for the gas, insurance and upkeep would be unable to deduct these substantial costs of providing the service and would have to pay taxes on his or her gross income. Large Employers Are Fighting Back: Some larger employers are fighting back and challenging AB-5. Uber and Doordash have joined forces with some contract drivers to file a suit in the U.S. District Court for Central California alleging that AB-5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms. The California Trucking Association (CTA) successfully obtained a temporary injunction against AB-5 for CTA drivers by contending that AB-5 is in direct conflict with several federal laws related to motor carriers. Regardless of the outcomes of these cases, they will be appealed, and the ultimate outcome is no doubt months, if not years, away. This leaves few choices for smaller employers other than to carefully assess the provisions of AB-5 when treating a worker as an independent contractor. For those who are unsure, it might be wise to consult a labor attorney. Of course, the safe-harbor option is to treat all workers as employees until all of the legal challenges to AB-5 have run their course. Please give this office a call if you have further questions.