Here is the discovery I made, but never followed up on it. There is a form you can get from the IRS web page or from calling the IRS hotline that you fill out and mail in to determine whether or not an employee-employer relationship exists... In my case (and most cases) it did and the IRS required the company to stop considering the flight instructors independant contractors. It is a road you could go down, and the IRS very badly wanted me to sign off on letting them disclose who filed the form against the company so they could implement the change. They also were shocked that 95% of flight instructors are considered independant contractors. I was really bummed that year b/c I made very little money (poverty status) but yet still owed taxes and got sort of a reprimand from the IRS b/c I didn't estimate my taxes in advance or something like that.. and as a contractor you have 100% of the tax burden, unlike a normal employee.
No disrespect intended, but canadflyau is talking about starting a dispute that is just not needed. Just be informed of your status upon hiring and live up to that agreement. Taxes are slightly higher for the self employed, but you also tend to get paid more.
As matter of taking a job where you will be considered independent you must consider contracting vs. employed. I would think of it as needed to be paid at least twice what you would otherwise be paid. Why such a big difference?
1. You will be paying your own taxes. This will add accounting fees and self-employment tax that you wouldn't normally see coming out of your check(the expenses are still there for an employer, you just never see them).
2. You will only get paid for billable hours, whereas an employee gets paid by the hour on the jobsite and is usually on some sort of set schedule.
3. More than likely you will have additional expenses(that are tax deductable) that you would not ordinarilly incurr as an employee.
4. Health insureance and benifits. Often you get neither of these as an independent.
Filing with the IRS over disputed taxes amounts to burning bridges. It is not a magic get of paying taxes free card. The money plus penalties and interest will still need to be paid. If it is legitimate, say as in they told you they paid the taxes but did not that is one thing. If however you were aware of your employment status and operated under that status but later file a dispute to save money that is a close cousin to "playing dirty pool". The guidlines for contractor status are a tool for an employer to help set up their company structure, not tool for screwing people out of paying taxes or for getting a little more money for yourself. If you accept employment under terms you should live up to those terms. Also if you plan on staying with that employer you might consider how your work environment will be affected.
Get an accountant. Self employed is a little bit technical and an accountant will pay for their fees with the knowledge they have.
I got a question for CFI's:
Pay? How much does a CFI make per hour? And what is your best year, worst year and average for the last few years per year, including hours per year.
<<.. and as a contractor you have 100% of the tax burden, unlike a normal employee.>>
The only difference in the taxes paid is the other half of the FICA tax...about 8%(refered to as self employment tax), but don't be fooled, net net it amounts to the same. Basically eployers just pay you less to make up for their "contribution".
The big difference is who is responsible for "book keeping".
You do have certain rights as a contractor, you should look them up and know them, but remember if you like your place of employemnt it might better better to "flow" with the situation. Always work for the coolest employer you can find and these issues will be mute.
Not trying to start anything, but the IRS made me well aware that there are certain times you can be a contract laborer and certain times you cannot. The burden of discretion is on the employer. So when your employer sets the hours, provides the plane, pays you bi-weekly etc (just go down the list on the form) it is basically the test the employers are supposed to take pre-employment to determine whether or not an employee can be classified as "contractor" or "employee." You are right basically you are your own small business. Like I said I am not trying to start anything, however I was informed the rules of the game after I was audited.. so every one should know a company just can't choose to makew you a contract laborer.. in fact it is illegal
<<Like I said I am not trying to start anything, however I was informed the rules of the game after I was audited.>>
If you didn't understand that you were an independent contractor through the fault of your employer you are absolutely right in stating that you should challenge them. However if you knew your status but didn't research all that it entailed that is different.
<<.. so every one should know a company just can't choose to makew you a contract laborer.. in fact it is illegal>>
Actually it is 100% up to the company to choose how your services will be classified and there is nothing illegal about it. If they hire you as a contractor and violate the IRS statutes is a different story. I know that may be splitting hairs, but it is a very important difference.
<<So when your employer sets the hours, provides the plane, pays you bi-weekly etc>>
To this I would respond(if I were the employer):
1. We don't set the hours, the students do.
2. No the IP does not have to stay on grounds, but that would be the best place to find new students.
3. We offer aircraft rental, IP's offer flight instruction.
4. Yes, we do require IP's to perform other duties in exchange for the priviledge of being able to instruct in our rental fleet.(such as cleaning plane)
5. I am not sure about the pay period thing, but I would simply reply that 2 wks seems to be most convienient for all parties and is as agreed to.
If you teach at a 141 school I thinknit would be quite hard to classify employees as contractors
So it is quite easy to see that in a situation like this it is easy for both parties to have valid but distinctly different perspectives. Hence, it is best to know what you are getting in to up front and abide by it. Also employers should protect themselves with employment handbooks and work contracts.
Remember, net pay may not be greatly affected with proper planning and it is all about communication. I wouldn't refuse employment based on being an employee or a contractor. I would figure out how much I'd make under both situations(hire an accountant, if needed)
My ground instructor is also a tax guy who specializes in aviation tax issues. He teaches a seminar every year at Oshkosh, and seems to really know his stuff. He has some good information on his website relating to aviation and taxes, and actually has one page dedicated to taxes for the CFI. The address is www.kosassoc.com. Look for the link that says "Aviation and Tax Issues". Hope this gives you a little help...
"If you teach at a 141 school I thinkn it would be quite hard to classify employees as contractors"
EXACTLY! But not always the case
"1. We don't set the hours, the students do. "
Since my employer ran the desk, they were the liason for my students and they in turn setand told me my schedule (according to the IRS)
"2. No the IP does not have to stay on grounds, but that would be the best place to find new students. "
I was required to be there at min from 8-5 and that can't be a condition of contractor employment (according to the IRS)
"3. We offer aircraft rental, IP's offer flight instruction."
Doesn't matter, without THEIR a/c there is no business (according to the IRS)
"4. Yes, we do require IP's to perform other duties in exchange for the priviledge of being able to instruct in our rental fleet.(such as cleaning plane)"
"5. I am not sure about the pay period thing, but I would simply reply that 2 wks seems to be most convienient for all parties and is as agreed to."
The effort must be being made for the student to pay the IP directly. (according to the IRS)
Lets don't split hairs, however it is the employers responsibilty to determine the relationship, and unfortunately in the IP profession the majority of IPs are ill-informed or mis-informed. I've worked in flight schools were it has been done right and wrong (but both is in hind sight. At the time I had no idea.)
This is my last post on this issue, I could post the exact letter I recieved from the IRS after my "unique situation" was not found to be so unique after they (IRS) did their homework. I paid what I owed them, they were the ones that didn't understand how I made so little and proportionally owed so much. They also included a packet on how to not get into the situation by basically filing all the same paperwork as a small business. Myself and one of the other guys that I worked with actually figured out we would be getting slammed and tried to estimate how much we should be putting away to cover taxes. Our estimates were pretty close, only a few hundred dollars short, so we were OK.
I'm with you as to the last post on this subject...accounting and taxes...boring...
I just want to say I was speaking mostly in general terms and not so much in relation to your case. It sounds like you did the right thing all the way around.
I'll make just a few more points:
1. <<Lets don't split hairs,>> Unfortunately that is all accounting and taxes is about.
2. I've seen this law abused in much worse ways than what you are describing. Net result from the IRS was employees still ended up paying the taxes.
3. A quick trip to the above website as well as to the IRS.gov website will show that it is a complex issue, often contentious and an easy source of dispute.
And it sound like you were at a 141 school, in which case I would say kind to your employer.
Lastly, government agencies love to investigate. Love to get people swearing out statement. Love to get a file going. My whole point at the beginning of thread is reasonable people should be able to operate under either system without all that love.