Charles Blair, DDS and
John McGill, MBA, CPA, JD
Question:
For several years, I have employed an associate in my practice on a part-time basis. The doctor works in several different practices in our area and, for that reason, I always have treated him as an independent contractor rather than an employee. Recently, I was contacted by the IRS and was told that they were going to audit my corporation. During the course of the audit, the agent indicated that he was going to re-classify my part-time associate as an employee and hit me with substantial additional payroll taxes and penalties. I know that several other doctors who are using this associate also are treating him as an independent contractor and have always filed 1099s on him, as I have done. What should I do?
Answer:
The 1996 tax law may provide some benefit to you. The new tax law made major changes to the interpretation of Section 530 of the 1978 Revenue Act, which provides retroactive and prospective relief from employment-tax liability to employers who misclassify workers as independent contractors using the common law facts and circumstances test.
Section 530 protection applies only:
- If the practice filed all federal tax returns consistent with the treatment of a worker as an independent contractor.
- Treated all similarly-situated workers as independent contractors.
- Had a reasonable basis for not treating the worker as an employee.
The reasonable-basis standard can be met by showing that it was an industry practice to treat part-time workers as independent contractors rather than employees.
Under this approach, the practice has a reasonable basis for not treating a dentist as an employee if it reasonably relied on a long-standing, recognized practice of a significant segment of dentistry. Under the new tax law, as long as you can show that more than 25 percent of the industry was classifying such part-time associates as independent contractors, rather than employees, you have passed this test. In fact, the new tax law allows a lower percentage showing to count in your favor, based on particular facts and circumstance.
The new tax law also changed the burden of proof for proving that a worker is an independent contractor rather than an employee. Effective for disputes for periods after 1996, if the doctor establishes a prima facie case that it was reasonable to treat a worker as an independent contractor, the burden of proof shifts to the IRS. Unfortunately, no inference is intended with respect to the burden of proof in these matters for cases before 1997.
The long-standing battle between the IRS and small businesses regarding classification of workers as employees vs. independent contractors is far from settled. We expect legislation within the next one or two years that will dramatically simplify the test for determining if doctors must consider associates, hygienists, etc. as employees or independent contractors.
Question:
Due to severe back problems, I have recently had to sell my practice and retire on disability. Due to expensive surgery costs and unexpected complications, I have had significant medical expenses this year.
Unfortunately, I did not have sufficient cash on hand to cover my portion of these expenses and have had to dip into my IRA. I understand that I will have to pay federal and state income taxes on the money withdrawn, but will I also be hit with the 10 percent penalty for withdrawing funds prior to age 591/2?
Answer:
No. Effective January 1, 1997, the new tax law provides an exception to the 10 percent premature distribution tax for amounts withdrawn from an IRA to meet medical expenses in excess of 7.5 percent of adjusted gross income.
Question:
Recently, I purchased a $100,000 boat and financed $80,000 on a 10 percent note. I read somewhere that a boat may qualify as a second home, so that the mortgage interest can be deductible.
Is this the case, and if so, what are the rules?
Answer:
To qualify as a second home, the boat must have living quarters, sleeping quarters, kitchen and bathroom facilities. If these requirements are met, the interest that you pay should be tax-deductible.
It is recommended that you contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217; or call (704) 523-5882.
