Employers in California need to address a number of tax-related issues, and one area that has caused confusion in recent years involves worker classification. Whether workers may be treated as employees or independent contractors is a significant question that has been raised due to the passage of AB 5 in 2019. This law limited the situations where workers may be classified as independent contractors. 

Because the trucking industry has been affected by this law, the California Trucking Association (CTA) filed a lawsuit against the state of California seeking to block this law. This lawsuit claimed that federal regulations under the Federal Aviation Administration Authorization Act (FAAAA) prohibited the state from putting these types of tax laws in place. The 9th U.S. Circuit Court of Appeals had ruled that AB 5 is a general labor law that is not affected by the FAAAA. The CTA appealed to the U.S. Supreme Court, but the Supreme Court decided in June 2022 not to hear the case. This decision maintains AB 5 in place for the trucking industry.

How Does AB 5 Affect the Trucking Industry?

Under AB 5, a process known as the “ABC test” is used to determine whether workers should be considered employees or independent contractors. This three-pronged test states that a worker can only be classified as an independent contractor if all of the following requirements are met:

There are a variety of situations where U.S. taxpayers may face penalties related to foreign assets. Some taxpayers are required to report these accounts to the IRS by filing a Foreign Bank and Financial Account Report (FBAR). Failure to file these reports when required or failure to include accurate information when filing can result in significant penalties. However, there has been some confusion about what constitutes a violation and what penalties may apply. The U.S. Supreme Court will be addressing this issue in an upcoming case.

Penalties for Non-Willful FBAR Violations

Different courts have addressed FBAR violations in different ways, and this has resulted in different penalties being applied depending on where a case was heard. The confusion involving FBAR penalties is related to non-willful violations, or situations where a person did not properly report foreign accounts because they were unaware of how the tax laws applied to them or did not know about their reporting requirements. Courts have differed on whether penalties should apply based on a report that was incorrect or based on each individual account that was not reported correctly.

Depending on how FBAR violations are handled, the penalties that taxpayers could face may be much higher if their cases are handled in certain courts. The Court of Appeals for the Ninth Circuit has ruled that FBAR penalties apply on a “per form, per year” basis. This means that no matter how many accounts are included on a form, a single penalty will apply for each year in which a form was not correctly prepared and filed. However, the Court of Appeals for the Fifth Circuit has ruled that penalties apply on a “per account, per year” basis, and a taxpayer may be required to pay a penalty for each account that was misreported even if on a single form. 

Cryptocurrencies such as Bitcoin and Ethereum have become more and more popular in recent years, and they are now widely used for multiple purposes. Some employers may pay employees in virtual currency, and these currencies may be used to purchase goods or services. Cryptocurrency can also represent a valuable investment, and as the value of different virtual currencies increase, they may be sold or transferred, allowing investors to earn significant profits. For those who have invested in cryptocurrency, it is important to understand the tax implications, including the gift taxes or estate taxes that may apply to certain types of transfers.

Taxes Issues Affecting Cryptocurrency Gifts and Donations

The IRS treats cryptocurrency as property, meaning that when it is sold or transferred to another party, capital gains taxes will apply to the gains or losses. For example, if cryptocurrency were valued at $1,000 when a person originally acquired it and it was worth $2,000 when it was sold or exchanged to someone else, this would be considered a gain of $1,000, and the person would be required to pay capital gains tax on this amount.

When giving cryptocurrency to someone else, gains or losses usually will not need to be recognized. However, gift taxes may apply depending on the value of the cryptocurrency at the time of the gift. The gift tax exclusion amount for 2022 is $16,000, so no gift taxes will apply if the value of cryptocurrency given to a single person within the 2022 tax year is below $16,000. If the amount of a gift exceeds this limit, the person giving the gift will be required to pay gift taxes on any amounts above $16,000.

Taxpayers in the United States often have difficulty navigating the complex tax laws. For U.S. citizens or residents who live in other countries, these issues can become even more complicated since a person may be required to pay U.S. taxes on income they earn, and they may also need to pay taxes in that country as well. Fortunately, U.S. taxpayers who live abroad can take advantage of a number of benefits that will allow them to address their tax issues properly and avoid unfair financial burdens. However, they will also need to make sure they are properly reporting their foreign income and the assets they own in other countries, which will help them avoid potential penalties.

Tax Benefits for Those Who Live Abroad

To address the concerns that affect taxpayers who live primarily in another country, the Internal Revenue Service (IRS) has made the following provisions:

• Automatic extension - Most taxpayers are required to submit their annual income tax return to the IRS on April 15. However, those who live outside the United States or Puerto Rico will receive an automatic extension of 2 months, as long as they can show that their main place of business is outside the United States or Puerto Rico or that they are on duty outside the United States or Puerto Rico as a member of the military. 

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Businesses will need to address multiple types of tax issues, including paying all required employment taxes. One of the key issues that can affect these taxes involves how workers are classified. Different requirements apply for employees and independent contractors, and by ensuring that workers are properly classified, an employer can avoid potential penalties or other problems 

Understanding Federal Tax Requirements for Employees and Independent Contractors

Employees who work directly for an employer have certain rights, including the right to receive a minimum wage and overtime pay. They can also receive certain benefits, including workers’ compensation for work-related injuries or illnesses, unemployment insurance, and other benefits provided by an employer, such as sick pay, vacation or personal days, and the ability to participate in a health insurance plan or an employer-sponsored retirement savings account.

For workers who are classified as employees, an employer is required to withhold employment taxes from their wages, including federal and state income taxes, as well as Social Security taxes, Medicare taxes, state unemployment insurance, and state disability insurance. For independent contractors, this withholding is not required, and an employer will instead use Form 1099-NEC to report payments that are made. The worker will pay income taxes to the IRS and state tax authorities such as the California Employment Development Department (EDD), and they will also pay self-employment taxes.