.. Be Thankful I Don't Take it All...

The Voluntary Worker Classification Settlement program reminds me of the Beatles song "The Taxman".  The issues surrounding worker classification are complex, expensive and filled with different taxes everywhere you turn.  Being wrong about them is easy and expensive. Worker Classification is all about whether a person is an employee or an independent contractor.   There are rules to define who is an employee and who is not.  But like everything else involving the tax code the rules are subject to interpretation. 

For purposes of assessing the amnesty program, let’s assume you know that you’ve been misclassifying employees as independent contractors.  There are plenty of reasons to do this.  Having employees is expensive.  First you typically pay half of their payroll taxes.   (This year it’s more than half because the workers are getting a payroll tax holiday.)  In addition, there is the employer portion of state and federal unemployment.  Then there is the cost of administering withholding the employee portion of the taxes and filing payroll tax returns, along with the required informational returns at the end of the year.  If an employee is an independent contractor all you have to do is the informational returns. 

Because the incentive to cheat here is high, the associated penalties are steep.   If you participate in the new program,  the IRS will charge you only ten percent of what you normally would have to pay.  They’ll also waive penalties and interest.  The Tax Mama Blogger does the math and the savings can be written using exponents.  But as we know Uncle Sam is not an overly altruistic guy, so you also have to agree to an extended statute of limitations on the assessments.

There are plenty of experts who say it’s unlikely you’d ever pay up the big numbers.  This is due to the Section 530 “Safe harbor” provision.  This portion of the Revenue Act of 1978 provides a “Get of Jail Free” card to employers who consistently and persistently misclassify workers.  Essentially this legislation says if you had a reasonable basis for thinking the person was not an employee and you treated everyone else in the same position that way, we’ll just leave it be.  There are exceptions to the safe harbor provision and the “reasonable basis” is a subjective standard, so it’s not bullet proof.  I should also mention that other experts  say you should give this program a serious look.  While Section 530 may offer relief for some, it’s not like you can be sure you qualify, and as discussed earlier, the cost of being wrong is high. 

The 2011 Obama budget proposal includes $25 million in funding to enforce worker classification laws and anticipates collecting another $7 billion in taxes as a result.  Small businesses that think they have an issue in this area should seek some help in deciding the best move in their specific case.    

Small Business Credit Crunch 2010

The conflicting stories about the availability of credit for small businesses continue.  A new survey released by the Federal Reserve asking small business owners about their access to credit, showed a continuing mismatch between businesses that want to expand and banks that want to assist them in funding growth.  The survey was done in New York, but the sample was designed to match the structure of the US small business market, including that 70% of the respondents had 5 or fewer employees. 

It takes no time at all to find data points indicating the decline in lending is demand driven (that is small businesses aren’t looking for loans these days), but the Fed survey team says that’s not the case. 

The survey found 59% of respondents had applied for credit during the first half of 2010.  That compares to an average of 40% pre-recession.  More than 75% of the applicants received only “some" or “none” of the credit they wanted.  Some of the problem is arguably related to the credit worthiness of the borrowers.   66% of respondents reported they had sales / revenue declines over the last two years.  It is worth noting that the only area where financing was granted more than half of the time was equipment finance.  Clearly "collateral rules" these days. 

In general, there were three factors that were statistically significant in terms of the population ultimately ruled as credit worthy by receipt of a loan.

Firms with a track record did better, and being part of the one-third of applicants who grew revenue through this recessionary period was a big help.  Finally owners who salt away some savings in retained earnings make a better impression on their bankers.  Perhaps most interesting, was the factor that wasn’t a predictor of receiving credit – having had a loan.  70% of the applicants in the sample had been granted credit from the same financial institution  2008.  Of that group only half were approved—the same percentage approval rate as in the overall sample.  One other noteworthy twist is that although construction and retail firms were disproportionately represented among the industries looking for credit, they were granted loans at the same rate as firms in other sectors. 

The authors of the Fed study hypothesize that more banks consistently providing a “second-look program” could yield significant gains in access to credit.  They acknowledge though that this is only in theory.  It may be worth investigating.  The authors of the study also point out that these small firms typically account for about 60% of gross job creation.  The link between capital access and adding jobs is well proven.