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Independent Contractor vs. Part Time Employee

I have served as a part time choral director for a small community children's chorus for seven years. Last year the Board of Directors voted to change my position from a part time employee to an independent contractor, with reassurances of all of the items I would be able to deduct come tax time. Now that my husband and I are working on our taxes, we're finding it isn't that simple. Some of the expenses I thought we could deduct (internet service, cell phone service, etc.) are now in question because we don't have a separate home office set up and we didn't purchase these services specifically for my employment with the choir.  I would be interested in feedback to one or more of these questions:
  1. If you are employed as an independent contractor, what are some of the more obscure things you have been able to deduct?
  2. Where do most of your deductions occur (conferences, supplies, mileage, etc.)?
  3. In your opinion, is it better for you (financially) as a choral director to be hired as an independent contractor or as a part time employee?
Thanks!
Sharon Basinger Lehman
Choral Director
Children's Choir of Huntington County
Replies (13): Threaded | Chronological
on March 22, 2012 8:42am
Sharon:  This may seem like a simple question, but it is not!  And the reason it is not is that the difference is primarily in tax implications, as you've discovered, and in its infinite wisdom the Best Congress Money Can Buy changes the tax laws every year to keep it confusing!!!
 
For many years I operated on the simple policy impressed on me by our accountant when I was in show business:  Declare every penny of income, because failure to do so is fraud; then steal back every penny you can in expenses, because if you mess up it's just a mistake!  And I've always had income from a variety of sources, not all of which were W2 employment.  So yes, I've had a home office and taken deductions for it for decades, and THAT is the answer to your first two questions.  The IRS has made it more difficult to set up and claim a home office, but if you can wade through the forms that will give you the broadest range of deductions for expenses THAT YOU ARE PAYING ANYWAY.
 
What I can't quite understand is why you should be in worse shape as an independent contractor than you were, since your office/rehearsal situation should not have changed.
 
However, the IRS has some VERY specific criteria for defining the difference between an employee and an independent contractor, having to do mainly with the amount of freedom you are given to decide how and when to do your job, and it's even possible that your children's chorus was incorrect in reclassifying your status in the first place.  We discovered this when we were hiring several caregivers for my late wife, and our accountant did the research and discovered that in that SPECIFIC case they could chose to be either one (and that it was THEIR choice, and not ours!).
 
The only real answers you will get will be from an experienced tax attorney or tax accountant who is on top of all the latest changes in the law, so please don't treat my opinion or anyone else's on ChoralNet as a valid legal opinion.  There are times when it pays to go to a professional.
All the best,
John
on March 22, 2012 12:26pm
Thanks! We are planning on working with someone, but I wanted advice from those of you who have lived this.
on March 22, 2012 8:59am
As a contractor, you can deduct the mileage driven to rehearsal. You can also deduct expenses (including dry cleaning) for your concert attire, if you have outfits you use exclusively for performances. You can deduct recordings and sheet music and books on music topics, membership dues in ACDA and other professional organizations, professional subscriptions, convention expenses, music software, music-related office supplies. I wouldn't mess with the home-office deduction; it's a big red audit invitation for the IRS.
 
Conversely, you have to pay both halves of the payroll taxes. Last time I checked for me, it was a wash (at least in years when I go to an ACDA convention), but I commute a long way to rehearsal so my mileage is high.
 
Your board is jerking you around to save themselves some money. Hope that trend doesn't continue. Furthermore, if the IRS notices that you were an employee last year and are a contractor this year for the same job, they'll get in big trouble; they can't just decide that arbitrarily. Somebody better consult with an attorney pronto.
on March 22, 2012 12:28pm
Yes, the decision was made out of desperation due to finanacial instability. Good to know that changing mid year could send a red flag. My commute is very short so that won't help too much w/ deductions. Thanks for the reply!
on March 22, 2012 9:01am
Dear Sharon:
        Can I assume that the Board of Directors made this decision, and there was no one from the Board that sat down with you and outlined the ramifications -- pro and con -- of their business decision? (*PHEW!*)
        First of all, take the above questions to a good accountant or tax lawyer. Spend an hour or two talking to them, asking them your questions and more, and have them ask you questions about other aspects of your business relationship with the Choir. The time invested in correctly setting up your business will help you expodentially later on.
        When you say "independent contractor", think independent business person. Everything that you are now doing for the Children's Choir is now being handled as an independent business... Think "independent/outside consultant", at least for the purposes of employment. For income tax purposes, you will be given a "1099" form outlining the gross pay that you received with any deductions (as opposed to the W2 form).
        Start keeping a ledger of all choir-related expenses and income, and the time that you spend on Children's Choir business. You might want to get a separate cell phone, as well as a separate checking account just for Children's Choir expenses. This may make things easier for you to track. Track the mileage on your car -- I believe whatever percentage of the business usage will denote the percentage of your expenses that can be deducted.
        You may have to decide if your "place of business" is your home-office, or your Choir rehearsal space -- if it is the latter, then dirving to rehearsal is viewed as commuting and is not deductible. For musicians, the IRS has been particularly detail-oriented...
        Q.1: "Obscure things" may or may not be deductible... they usually draw the attention of IRS auditors. This will depend upon whether or not you can prove that these things are used for your BUSINESS, and if so, what percentage of the time (i.e., music stands, expenses of your piano, any recording equipment, Internet expenses...). Q.2: All of the above. Q.3: It depends...
        You mention "we" in the 3rd and 4th sentence, and 'husband and I'... What, if any, is your husband's role in the business? (There is no right or wrong answer, just whatever works best for you both...)
        Again, talk to a good tax attorney or accountant. It will be time well-spent.
 
        Ron Isaacson
Germantown, Md.
Independent Tutor and Musician/Conductor
(not an accountant or attorney...)
on March 22, 2012 12:33pm
Thanks for the info. My husband has no role in the business other than being the main one to sort out taxes. Obviously I wasn't thrilled with the Board's decision and voiced my concerns but it was passed anyway. I'm not sure most of the board members truly uinderstand the implications and the legal issues of what is/is not deductible. We will seek out professional advice but I wanted to hear from those of you with experience. Thanks again!
on March 22, 2012 9:24am
In my experience with both ways of being employed, it is far better to be an employee than an IC.   Perhaps this depends on how much your overall income is.  Without getting into the details of deductible expenses, I have found that on a modest income such as mine has been, my gross adjusted income was often low enough that I would have paid minimal or no taxes, especially given that I pay a good amount of interest on my mortgage.  But the self-employment tax is not affected by such things as the mortgage deduction. I had several years where my mortgage deduction would have completely wiped out my taxable income, but I still ended up owing tax on my IC income.  During some years, I ended up owing several hundred dollars even though I made less than the standard deduction given all my income!  
 
Paying people as an IC is good for the "employer," not the worker, in general.   It's basically a way to pay you less. In some cases, it's illegal, if you fit certain criteria for an employee. 

 
on March 22, 2012 12:36pm
Thanks for replying. Yes, I've known all along that this is in their best interest, not mine. It was a decision made in response to fairly severe financial instability. I considered leaving the organization partly because of this decision but I love what I do too much! We'll seek professional advice and see what happens!
on March 22, 2012 1:30pm
The American Guild of Organists has this on their website.  Your situation sounds similar; therefore, it appears that you are an employee not an independant contractor.  You might find the help of a good accountant useful in your own particular situation.
 
Occasionally churches or synagogues will hire musicians as independent contractors instead of employees. According to the IRS, workers are generally considered employees if they:
  • Must comply with the employer's instructions about the work.
  • Receive training from or at the direction of the employer.
  • Provide services that are integrated into the business.
  • Provide services that must be rendered personally.
  • Are aided by assistants who are hired, supervised, and paid by the employer.
  • Have a continuing working relationship with the employer.
  • Must follow set hours of work.
  • Work full-time for an employer.
  • Do their work on the employer's premises.
  • Must do their work in a sequence set by the employer.
  • Must submit regular reports to the employer.
  • Receive payments of regular amounts at set intervals.
  • Receive payments for business travel expenses.
  • Rely on the employer to furnish tools and materials.
  • Lack a major investment in the facilities or equipment used to perform the services.
  • Cannot make a profit or suffer a loss from their services.
  • Work for one employer at a time.
  • Do not offer their services to the general public.
  • Can be fired by the employer.
  • May quit work at any time without incurring liability.


According to these guidelines, the majority of church and synagogue musicians are employees.

 

Good luck.

 


 

 
on March 23, 2012 7:35am
Sharon:  Myron has it right. If you do work on their schedule (leading rehearsals) and at a place where they specify (rehearsals and concert venues), you are a part-time employee.  (By contrast, if you are a freelance graphic designer working on your chorus's brochures, you can work anywhere and on your own time, and you are a contractor.)  Chicago a cappella's singers are part-time and yet, because of the above, we do the right thing and treat them as employees.  The law is very clear.  If the chorus is trying to save $$ in payroll taxes, as many believe mistakenly they can, they are mistaken and they can be punished.  In other words, the vote that the Board took was improper and not in keeping with tax law, although they may have felt it would save them some shekels.  You can use this gently yet firmly in your negotiations for next season.   -- Jonathan Miller
on March 23, 2012 8:37am
Hi Sharon.  While my true love is choral conducting and I am blessed to be the Artistic Director of a wonderful 65 – 70 voice auditioned concert choir, by day I am an employment attorney.
  1. While it is accurate that, generally, church musicians should be treated as W-2 employees of the church, treating the conductor/director of an independent music making organization (like your children’s choir) as a 1099 independent contractor is extremely common and 100% legal.  Same goes for the accompanist, etc.  While there are other factors, the most significant reason is the fact you are permitted to sell your services to any other organization you want. 
 
  1. Converting you from a W-2 to a 1099 will not create legal difficulties for the choir.  From the point of view of the IRS, the choir was being quite generous treating you as a W-2 employee and paying half of your SSI.  Changing that relationship to 1099 is permissible because it is legal to treat you that way.
  1. Unless you have really *significant* business deductions, it is likely you will end up paying more to the IRS because you now have to pay all of SSI.  Also – you should be making quarterly tax payments.  See http://www.irs.gov/businesses/small/article/0,,id=115045,00.html#obligations
 
  1. Converting you to a 1099 was a money-saving step for the choir – nothing else.  If they tried to sell you on the change by claiming your deductions would make up for the increased SSI costs – that was hooey.  Would have been better to just be honest and acknowledge it was a cost saving step for the organization.
Dave
***************************
David M. Spitko, Artistic Director
 
Applauded by an audience of 1
on March 23, 2012 9:55pm
Hi Sharon,
 
I have read all of the responses above and agree that your board made a move to save money that probably would not hold up in an audit, for all those reasons listed above. (But the chances of their being audited are slim.) I believe David's first statement #1 is incorrect.
 
According to my CPA, deductions and/or depreciation for business offices in homes and business automobiles are difficult to prove and often disallowed by auditors. If you are not audited, you have nothing to worry about, but I was audited in 2001, and because the IRS found fault with some of these claims, they audited me for two subsequent years. It was not a pretty sight--cost me major dollars in tax owed, interest charges, penalties, and the hourly cost of my CPA and her staff. Not only did the IRS disallow some of my deductions (like concert attire--because you can "easily" wear those outfits on other occasions--seriously!), but my return also triggered "Alt Min" or alternative minimum. (Talk with your CPA about that.)
 
Our children's choir treats all directors, accompanists and administrative workers as employees (and pays the associated taxes) because, as AGO, Myron and Jonathan stated above, we set the rules, schedules and policies for their employment. (It is not up to the employee when or where he/she does the job. We tell them when and where to work, and that makes them employees by definition. Period.) You undoubtedly have no choice in the employee/contractor discussion because your "employer" is making the decision not to treat you as an employee.
 
However, your CPA can help you deal with one type of deduction, which is: If your organization is a nonprofit, you can write off the cost of any services you provide your organization as a gift. If you buy books, DVDs, music, treats, etc. (and give them to the choir or use them for your volunteer work) or take a board member out to dinner, you can deduct those expenses as a contribution to your nonprofit organization. You can also deduct mileage driven to your volunteer activities which are not directly related to your employment.
 
Good luck. And don't get audited like I did!
 
 
on March 24, 2012 11:38am
The only thing I would add to the discussion is this:
  • If your board sets the schedule and the location, basically telling you when and where to work, I can't see any way in which the IRS would consider your relationship with the board anythin other than that of employer-employee.
  • If, on the other hand, you tell them when you are working, and you tell them where you are working, and you tell them what you're charging, then you could probably build a case to be consider a contractor.
These are my observations, and my understandings. I'm not from the IRS. I'm not an attorney. There are enough variables in these kinds of things that you would probably benefit from a conversation with an attorney where you share exactly what your arrnagement was before this change, and what it is now. Good luck! 
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