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Author: Lindy Laurence

Don’t Gamble on Your Taxes: Properly Report Your Gambling Winnings

Posted on by Lindy Laurence
The gambling industry seems to prevail even in times of rising inflation and uncertain global economics. The American Gaming Association reports year-to-date revenue reaching $44.48 billion (an increase of 14.7% compared to same period in 2021), signaling gaming's strongest year ever. Here are some key tax points to keep in mind if you have gambling-related winnings.

All Winnings Are Taxable, and the IRS Knows What You Won

Gambling winnings can come from a variety of games and events. Think slots, bingo, poker tournaments, sports betting, online gaming, and more. Depending on the type of winnings and the amount you win, the payer will issue you an information statement—typically a Form 1099-MISC: Miscellaneous Income, or a Form W-2-G: Certain Gambling Winnings. If you receive your winnings through an app such as PayPal or Venmo, you may receive a Form 1099-K: Payment Card and Third-Party Network Transactions.
When you receive an information statement indicating the amount won, so does the IRS. If you fail to report this income on your Form 1040, the IRS will easily know you are underreporting your income, which can trigger a notice or even an audit. If you receive an information statement indicating your winnings, you must report all winnings as "other income" on your Form 1040.

Withholdings and Estimated Taxes

If your winning payout is $5,000 or more, first, congratulations! Be aware that most gambling institutions will withhold federal income taxes at a flat 24% rate from your winnings. This means the winnings payout is immediately reduced by the taxes withheld, similar to how employee wages are immediately reduced by payroll tax withholding. Check out IRS Publication 505: Tax Withholding and Estimated Tax for more guidance on gambling winnings and the withholding process.
Withholding at a flat rate of 24% often helps you pay the appropriate amount of taxes and avoid tax bill surprises when you file your annual tax return. However, you may want to consider making quarterly estimated tax payments to cover any potential shortfalls.

Keep Good Records

Gambling losses can be deducted if they meet certain criteria. Gambling losses include the actual cost of the wagers plus expenses you incur in connection with the gambling activity, such as travel to and from a casino. There is a limit on the loss deduction; you cannot deduct more losses than the amount of your gaming winnings. If you don't have any winnings, then you can't deduct any related losses and expenses at all.
To deduct gambling losses, you must itemize the deductions on Schedule A of Form 1040. To itemize, you must have more expenses than the standard deduction (for tax year 2022, the minimum is $12,950 for single filers and $25,900 for married couples filing jointly).
You must maintain adequate records that clearly show your winnings and losses. This typically involves an accurate ledger of the gambling winnings and losses, with receipts, tickets, statements, or other records substantiating the amounts you report. The date and time of the specific wager activity, the name and address of the gambling establishment, and the name(s) of the people present at the gambling establishment also should be recorded.
Do not “net” gambling winnings with losses. You must report the full amount of your winnings as income, and claim the losses and expenses (up to the amount of winnings) as an itemized deduction. Because the IRS can easily match information statement earnings to the “other income” reported on your return, any “netting” could trigger notices or an audit. IRS Publication 529: Miscellaneous Deductions provides more discussion on gambling deductions.

Professional Gamblers

There are different rules for taxpayers who meet the professional gambler criteria based on facts and circumstances. The US Supreme Court ruled in Commissioner v. Groetzinger that “If one’s gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business.”
If you are a professional gambler, gambling winnings and losses need to be reported on Schedule C: Profit and Loss From Business. Unlike amateur gamblers who can’t net gambling winnings with losses, professional gamblers computing their business income can net all wagering activity but can’t report an overall loss—a change resulting from the 2017 Tax Cuts and Jobs Act. The taxpayer also may deduct ordinary and necessary expenses incurred in connection to the business.

State Tax Issues

In addition to federal tax issues, there are many state-related tax consequences for gambling. If your home state has an income tax, you should expect to include your winnings in your income on your state return. And if you win money in another state, it likely will need to be reported in that state—potentially throwing additional filing requirements and rules into the mix.
Some states have additional rules for gamblers and may have promotional credits, revenue share, and withholdings on winnings. The American Gaming Association created an interactive map showing the national and state-by-state impact of the casino industry, as well as key regulatory and statutory requirements in each state.

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Lumin Law can help you navigate the tax consequences of your gaming activity. If these topics are on your horizon, please reach out and connect.
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When to Call Your Business Attorney

Posted on by Lindy Laurence

Let's just say it: entrepreneurs are scrappy. We're curious, resourceful, gritty, independent. We are good at figuring things out and thrive when we're navigating new situations.

Most of the time, this works out great! Sometimes, it doesn't.

One of the most common questions business owners ask is "When should I involve an attorney? What should I be looking out for?" Here are six common areas of your business where there are legal issues to navigate. When you encounter one of these areas, it should trigger a call to your attorney! Discussing these things with your business attorney first will help you avoid some common mistakes.

1. Choosing Your Business Entity Type

The first step when forming a business is to decide what type of entity is the best form for your business. This decision depends on your business goals, timeline, structure, liability, management, and tax considerations. Non-tax factors are usually the primary considerations because, in some instances, an entity can choose how it's treated for tax purposes.

Businesses are formed under state law and can be corporations, partnerships (which come in several flavors), and limited liability companies (which can also come in several flavors). The state law classification of a business is not always the same as the federal tax classification of a business. For tax purposes, a business is treated as a disregarded entity, C-corporation, S-corporation, or a partnership. The tax classification is important because the tax rules are quite different for each classification.

You should discuss your business goals and timeline with an attorney so you can select the ideal entity type from the start. Entity selection isn't one-size-fits-all, and it's important your attorney understands your future growth and capital-raising plans to avoid future changes to the entity type. Some entity types that are commonly recommended for other businesses may not be a good fit for your growing startup, so being aware of how your unique factors impacts your overall decision is important. A lawyer can help you choose the type of legal entity that best supports achieving your goals from legal, tax, and early-stage investment perspectives. 

Related reading: 

2. Business Governance Documents

Your choice of entity will determine what specific business governance documents you need; corporations will have bylaws, an LLC will have an operating agreement. These foundational governing documents formalize the relationship between the company founders and keep you from doing business based on an unwritten, informal understanding. Business owners should avoid acting through oral agreements -- even (especially!) with friends and family members. Good governing documents protect important relationships and the strengthen your business.

Your attorney can provide you with recommendations for what documents you need and what they should include. A comprehensive set of governing documents will set out each founder's role and responsibilities, including the day-to-day operations of the business. These documents will also memorialize each founder's ownership percentages, as well any loans made to the business. They will specify how you and your co-founders will make key decisions, for example, about capital raises and the sale of the business, and identify a mechanism for solving disputes between the founders (such as how to break a tie if two founders disagree). 

This process requires a modest commitment of time and expense, but it will go a long way in identifying and resolving any fundamental differences between the founders at the outset. The company and its leadership will be stronger as a result. 

3. Raising Capital and Issuing Equity

a. Raising Capital

When raising capital, it's essential that your business complies with federal and state securities laws, which apply to all offers and sales of securities, including to friends and family. If your company will be issuing securities (selling shares, issuing membership interests, convertible debt instruments, conducting a SAFE financing, etc.), you must have a valid exemption from federal and state registration. If no exemption applies, then you must register your offering with the SEC. 

An attorney can help you identify a federal registration exemption and comply with state blue sky laws. If your company will issue securities to non-accredited investors, even close friends and family, you should proceed with extreme caution. Rule 506 of Regulation D, the most commonly relied on exemption from federal securities registration, is generally only practical in securities offerings made solely to accredited investors. Talk to an attorney before you begin raising money so you can take appropriate action. It's worth it to avoid regulatory action or harming the economics of a future investment in your company. 

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b. Issuing Equity

Security laws also apply when issuing equity compensation, so talk to your attorney before you issue any shares or membership interests to non-founders. Many companies don't have the cash flow to pay the high salaries or match the benefits offered by established businesses. As a result, most new companies offer some form of equity compensation (for example, stock options, restricted stock, or a profits interest) to compensate, retain, and motivate their employees.

Consider how much equity your company should designate for employees, and then consider how that will impact your overall funding strategy. Your attorney can help you understand the legal implications, tax consequences, and accounting treatment of granting each type of equity award, including any vesting requirements.

Related reading:

  • Equity Compensation

4. Protect Your Intellectual Property

a. Clear Your IP

Before you invest any value in your brand name, logo, and domain name, be sure to clear the rights to them. Do this while your business is still in the conceptual stage to avoid spending time and money creating IP that may not be useful in the long run. Protecting the IP will secure the right to use those trade designations when and where you want to sell your products or services. And, registration will prevent other similar businesses from using your them. 

b. Develop an IP Strategy

It is essential that founders develop and implement a comprehensive IP strategy to ensure that the company has (and retains!) essential IP rights. A comprehensive IP strategy should cover IP creation, acquisition, and protection. It should also factor in your anticipated growth and expansion. Startups must ensure that the core IP is owned by (or at least securely licensed to) the business. Work with your lawyer to determine the appropriate kind of IP protection for your company, taking into account how likely you are to obtain that protection, the time and costs required to obtain it, and the length and strength of that protection.

c. Protect Your IP Rights

Founders can plan for growth and success by filing proactively for rights protection in the U.S. and in foreign jurisdictions where your company reasonably expects to do business. Startups should make a list of all the countries where the company plans to operate, then decide where the company can afford to file. Consider taking advantage of intent-to-use U.S. trademark registration, which allows your company to register a trademark before actually using it, if the company has a genuine intent to use the mark in connection with the goods or services listed in the application.

It's also essential to protect your company's IP in early-stage business activities. There are many practical steps you can take to safeguard confidential business information and trade secrets. For example, ask your attorney about confidentiality and nondisclosure agreements, registering copyrights and using copyright notices, and clearing and registering trademarks and using appropriate notices. 

Lastly, if you'll be using third-party content, it's a good idea to work with your attorney to create a process for adequately clearing that content and consider what rights must be obtained (including for social media and other non-commercial uses). 

5. Paper Up Key Relationships

It's also important to properly document the key relationships for your company. Your attorney can prepare form agreements you can use for your core business activities early in the company's life-cycle. Don't rely on oral arrangements with customers, suppliers, and employees -- not even with friends and existing business contacts. And when you're negotiating contracts, don't assume that you have to accept all of the proposed terms. Your attorney can help you understand how contracts shift risk between the parties through indemnification, exclusive remedies, limitations on liability, and warranty provisions, and ensure you agree to the right contract terms. 

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6. Hiring Employees

Companies must comply with state and federal wage and hour laws for all employees from the outset. All employees must first be properly classified as exempt or nonexempt from the federal minimum wage and overtime laws under the Fair Labor Standards Act. Nonexempt employees must be paid at least minimum wage and compensated for all overtime. For exempt employees, you must ensure that they perform the job functions necessary to qualify for the exemption.

If your employees work remotely, be aware that state and local laws govern the employment relationship, and there are many laws that may be more generous to employees than the federal laws. For example, some states or cities require employers to provide paid sick leave or other benefits, and many have a higher minimum wage than the federal wage.

It's also essential you properly classify independent contractors and unpaid interns. Failure to do so can lead to substantial liability in several areas, including overtime pay, taxes and penalties, and employee benefits. Pay college students or recent grads performing services for the company at least minimum wage and overtime unless they meet the strict qualifications for unpaid interns under the FLSA.

If hiring employees is on your horizon, then plan ahead for payroll and benefits administration. However, don't assume that using a professional employer organization (PEO) or temporary staffing agency insulates your startup from liability for employment law violations. Founders must understand that they may be personally liable for unpaid wages, even if the business fails. 

Related reading:

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Lumin Law can help you navigate these issues and ensure they are properly addressed in a way that furthers your business goals. If these topics are on your horizon, please reach out and connect. 

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Tax Treatment of Business Entities

Posted on by Lindy Laurence

This is an overview of how U.S. federal income tax laws impact different types of for-profit business entities. These tax rules apply to startup companies that are U.S. corporations, partnerships, and limited liability companies. The tax rules that apply to trusts, tax-exempt organizations, banks, insurance companies, and other specialized industries are not addressed. 

The first decision a founder must make is what type of business entity to form (corporation, partnership, limited liability company). This determines the legal structure of your business. This choice of entity leads to the second decision, the federal tax classification of the business. This post walks you through the choice of entity considerations, then explores the tax classifications available to each entity type. 

1. Choice of Business Entity

The first step when forming a business is to decide what type of entity is the best form for the business. This decision depends on your business goals, timeline, structure, liability, management, and tax considerations. Non-tax factors are usually the primary considerations because in some instances a business can choose how it is treated for tax purposes.

Businesses are generally formed under state law, and can be corporations, partnerships (which come in several flavors), and LLCs (also in several flavors). For tax purposes, a business is treated as a disregarded entity, C-corporation, S-corporation, or a partnership.

The state law classification of a business is not always the same as the federal tax classification of a business. For example, a LLC can elect to be taxed as a partnership or as a corporation. The tax classification of a business is important because the tax rules that apply to a disregarded entity, C-corporation, S-corporation, and partnership are quite different.

a. Disregarded Entity

A "disregarded entity" is a business entity with a single owner that is generally ignored for tax purposes, even though it's a separate legal entity for state law purposes. The owner of the disregarded entity is considered to own the assets (and be subject to the liabilities) of the disregarded entity for tax purposes and reports the entity's income and expenses on its own income tax return. In other words, a disregarded entity is treated, for tax purposes, like a sole proprietorship, branch, or division of the owner.

The advantages of a disregarded entity for a startup business are that the structure is simple with minimal administrative costs. But the owner of the disregarded entity must pay self-employment tax on any net earnings, and this structure is only available if there is only one founder or owner.

b. C-Corporation

All corporations other than S-corporations are C-corporations. C-corporations are the most common corporate form and generally are subject to two levels of tax on their income: first at the entity level when earned, then at the shareholder level when distributed. The burden of two levels of tax is currently somewhat reduced by the 21% corporate income tax rate that took effect in 2018, but this low corporate tax rate is likely to change with tax reform measures.

Most publicly traded companies are required to be taxed as C-corporations. However, for smaller and non-publicly traded companies, the decision to be taxed as a C-corporation should be carefully considered because an entity that is taxed as a partnership (for example, an LLC) may be a more appropriate entity for a startup company.

If a C-corporation becomes desirable later on, it is very easy to convert from a partnership or LLC to a C-corporation, but beware that it is extraordinarily difficult to do the reverse (meaning, convert from a C-corporation to a partnership or LLC). However, if a startup company wants to immediately raise venture capital and potentially go public, the startup company may want to start out as a C-corporation. Venture capital investors generally prefer C-corporations because of the ability to structure equity ownership and have multiple classes of stock.

c. S-Corporation

An S-corporation is a pass-through entity for tax purposes, which means it generally does not pay an entity level tax. The S-corporation's profits and losses instead generally pass-through to its shareholders, who include their respective share of those items on their income tax returns (whether or not the income is distributed).

S-corporations are less common than C-corporations because of the substantial limitations on the availability of the S-corporation election. An S-corporation can have only one class of stock, no more than 100 stockholders, and, with certain limited exceptions, can only be owned by US individuals (citizens or residents). In addition, only an eligible US entity can make the election (generally a US C-corporation or other US business entity eligible to elect C-corporation tax status).

S-corporations are useful for individual entrepreneurs because not all profits are subject to the self-employment tax. However, a startup company should carefully consider the significant limitations placed on the number, types, and residency of stockholders that can own an interest in an S-corporation. In many cases, a partnership or LLC may be a better choice for a startup company that desires pass-through taxation for its owners.

d. Partnerships

Like an S-corporation, a business entity taxed as a partnership is a pass-through entity for tax purposes, which means it does not pay an entity level tax. The partnership's profits and losses are instead computed and allocated among the partners annually and pass-through to the partners, which include their respective share of those items on their income tax returns (whether or not distributed). Partners are generally subject to self-employment tax on income allocated to them.

Unlike an S-corporation, a partnership does not have any restrictions on the number (other than the requirement that a partnership have two or more owners), type or residency of its owners. Therefore, a startup that desires pass-through taxation often chooses partnership tax status. However, partnership agreements can be complicated and outside investors may not interested in a startup company that is taxed as a partnership because it can complicate their tax filings.

e. Limited Liability Company (LLC)

Even though an LLC is a recognized type of business entity formed under state corporate law, LLCs do not have their own federal income tax regime. For tax purposes, an LLC is classified as a disregarded entity, C-corporation, S-corporation, or partnership. A single-member LLC is treated as a disregarded entity and a multiple-member LLC is treated as a partnership for tax purposes unless the LLC elects C- or S-corporation tax status. LLC members are generally subject to self-employment tax on income allocated to them.

LLCs often choose to be treated as a partnership for tax purposes, which means that the LLC does not pay an entity level tax. The advantages of using an LLC that is taxed as a partnership are that there is a single level of tax at the owner level, a flexible allocation of income and loss, and no restrictions on the number (other than the requirement that an LLC have two or more members), type or residency of its owners as there are with an S-corporation.

However, LLC operating agreements can be complicated and outside investors may not be interested in investing in a startup company that is taxed as a partnership because it can complicate their tax filings.

2. Choice of Tax Classification

The state law classification of a business is not always the same as the federal tax classification of a business. Under the "check the box" Treasury regulations, a business entity is classified either as a "per se" C-corporation or as an entity eligible to choose its tax classification (an "eligible entity").

a. Per Se C-Corporation

Under the "check the box" Treasury regulations, certain entities are automatically classified as per se C-corporations and cannot make an election to be treated as a disregarded entity or partnership for tax purposes. A corporation incorporated under state law is a per se C-corporation for tax purposes. However, a per se C-corporation that meets the requirements for the S-corporation election can elect S-corporation status on formation.

b. Eligible Entities

An eligible entity (any business entity not treated as a per se C-corporation) generally chooses its tax classification. Partnerships and LLCs organized under state law are eligible entities under the check the box regulations.

The check the box regulations have two default rules for eligible entities: (1) An eligible entity with a single owner is automatically classified as a disregarded entity unless it elects C-corporation tax status; and (2) An eligible entity with multiple members is automatically classified as a partnership unless it elects C-corporation tax status.

An eligible entity only needs to make a formal check the box election on IRS Form 8832 if it desires C-corporation tax status instead of its default tax status.

To avoid potential adverse tax consequences, an eligible entity should file a check the box election within 75 days of its formation. If an eligible entity elects C-corporation tax status after formation, it generally cannot make an election to change its tax classification to partnership or disregarded entity tax status for five years unless there is a significant ownership change (more than 50%) and the IRS permit it. This limitation on changing elective tax classification does not apply if the election to be taxed as a C-corporation is made by a newly formed eligible entity and is effective on the date of formation.

c. Tax Classification of a Partnership

A partnership organized under state law is automatically classified as a partnership for tax purposes unless it elects C-corporation tax status or is treated as a "publicly traded partnership." It is not common for a partnership to elect C-corporation tax status, or for a partnership to be publicly traded.

Technically, under the Treasury Regulations, a partnership meeting the requirements for the S-corporation election can elect S-corporation tax status on formation (or after formation if it elected C-corporation tax status), but it is not that common in practice. An S-corporation election is typically made by a corporation or an LLC.

d. Tax Classification of a Single-Member LLC

Under the default classification rules, a single-member LLC is treated as a disregarded entity for tax purposes unless it elects C-corporation tax status. A single-member LLC meeting the requirements for the S-corporation election can elect S-corporation tax status on formation (or after formation if it elected C-corporation tax status). If a single-member LLC (treated as a disregarded entity for tax purposes) adds another member, the LLC automatically converts to a partnership for tax purposes.

e. Tax Classification of a Multiple-Member LLC

Under the default classification rules, a multiple-member LLC is treated as a partnership for tax purposes unless it elects C-corporation tax status. A multiple-member LLC meeting the requirements for the S-corporation election can elect S-corporation tax status on formation (or after formation if it elected C-corporation tax status). If a multiple-member LLC (treated as a partnership for tax purposes) reduces its membership to a single member, the LLC automatically converts to a disregarded entity for tax purposes.

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Let Lumin Law help you navigate the decisions around choice of entity and federal tax classifications. Reach out today and let’s find a time to connect.

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Developing a Remote Work Model

Posted on by Lindy Laurence
Covid-19 has completely changed the business game. The evolution of the workplace from fixed to virtual is likely a permanent feature of the employment landscape. Current business trends indicate that a hybrid or remote work model is here to stay, and many companies have already announced they will allow employees to work remotely on a permanent basis.
The shift to hybrid and remote work offers an avenue to reset culture, boost morale, improve employee retention, and increase productivity. Many businesses have embraced this, and will continue to provide flexible work arrangements. But the location of your employees matters, often in unexpected ways. Businesses with a wandering workforce will need to navigate a complex patchwork of state and local laws. 
Work Anywhere = Manage Everywhere

Companies and employees alike fully grasp the implications of a permanent remote option. Business owners are swiftly realizing that they can secure the best talent from anywhere while saving money on things like a centralized office staffed with exclusively local talent. However, the physical place where an employee performs services matters in three core areas: 

  • Corporate governance
  • Business taxes
  • Employment laws and employee-related taxes

Before establishing a remote work model, companies should understand the full impact of remote workers on these complex areas. Savvy business owners will develop a comprehensive remote work model that keeps their business competitive and avoids any nasty surprises and unnecessary complexity. 

Corporate Governance

Many businesses have accommodated the desire for more flexibility without fully understanding the effect it will have on their corporate governance. Companies should be aware of the consequences of having a workforce that spans state lines. 


Business owners must consider if a remote employee in one state will cause the company to establish a connection to that state. If it does, your company is considered to be “doing business” in that state.  “Doing business” is defined differently in each state, but in general, if your company has employees who are physically located in another state on a regular basis, that constitutes “doing business” there.


Why does this matter? Because any company “doing business” in a state must also be qualified to do business in that state—meaning you’ll likely need to register your business with the state, file regular reports, and pay the associated fees and taxes. You may have to hire a registered agent in that state, adding additional costs. 


This is all routine maintenance for large, multinational corporations. But what about small-to-mid-sized businesses? If a company allows remote workers in other states, that could create connections to multiple other states, resulting in expensive and burdensome mandatory corporate governance obligations. 

Business Taxes

The same issue applies to corporate income and other business taxes. When it comes to taxes, states typically look to the connection between that business and the state. This is important in the tax world because, under the Constitution, states must establish a connection between a taxpayer and the state to impose taxes. Having an employee located in that state could create the required connection for taxes.


Beyond that, cities and states have their own requirements about how work performed inside their boundaries affects taxation. This can create a significant tax burden for businesses.


Like corporate governance concerns, tax problems arise when an employee relocates to an area where the company didn’t previously have a physical location. Those moves can have implications for income and sales taxes, depending on the local and state rules involved.


For example, a local business that previously had all its employees in one place could be venturing into a complex situation if its workers scatter to numerous locations under a permanent remote work arrangement. Even in a single metro area there can be a number of different jurisdictions; their varying rules can be complicated to untangle.


The difficult part for employers is monitoring so many different local rules and ordinances—including those that conflict. This could prove particularly challenging for companies using a hybrid model, where a worker’s location could vary every day. 

Employment Laws and Employee-Related Taxes

The laws of the state where employees are physically located while performing work will govern the employment relationship. This can have significant impact on wages, overtime, and employee leave. 

Wage and Hour Laws

Wage-and-hour laws can be distinctly local for employment compliance. Many states have their own minimum wage and overtime regulations. Even cities have gotten into the regulatory act, requiring significantly higher minimum wages for hourly workers within city and regional areas.


For example, Seattle small businesses must pay hourly employees a minimum wage of $17.27/hour beginning January 1, 2022. That’s nearly $3/hour more than the Washington state minimum wage of $14.49/hour beginning 2022, and more than double the federal hourly wage of $7.25. This example is not an outlier; many cities and states have equally beneficial wage-and-hour laws.  The employee is entitled to the higher wage rate.


Every business must know where its employees are located so it can make the proper withholdings. Without that knowledge, an employer cannot calculate, withhold, and pay the correct amounts for income taxes, as well as assessments for unemployment, disability, workers comp, and other state-specific mandates. 

Impact to Other Benefits

Wages aren’t the only subject of local regulation. Other laws, such as sick leave, disability leave, and even family leave can change regionally. This can impact preexisting company leave policies. State licensing laws could also affect where employees can lawfully perform services. And, some insurance plans may be geographically limited, so you’ll want to understand how that might impact your business. 

Do You Know Where Your Employees Are?

The pandemic has caused many employees to relocate—some temporarily, some permanently—to locations considered safe or convenient. For some, the lure of affordable housing and the ease of working remotely made the decision to relocate natural and obvious. Perhaps some of your employees moved far away from their offices since the start of the pandemic and didn’t tell you. Your business might unknowingly be out of compliance. However, t’s important to find out, because business owners are obligated to ensure that the company complies with all state and local regulations. 

Identifying Work Location

Ask employees to identify their physical work location, and require that they notify you when they change their work location. Many companies ask their employees to establish their primary location up front and let the company know if that changes. Others require employees to record their location each time they access a network. Whatever you decide, it’s wise for companies to regularly ask the location question and to require certification of the response. 

Best Practices for Developing a Remote Model

Take some time to develop a thorough understanding of how remote workers will impact your business in the areas of corporate governance, tax, and employment. Using that as a framework, develop a remote work model that supports your employees, aligns with your business goals, and has a manageable level of complexity for your business. Here are some best practices to consider as you develop your company’s remote or hybrid workplace model. 

Prioritize Business Goals

Companies should bring both short and long-term business goals to the forefront and work with employees to find a balance between productivity, flexibility, and achieving those goals. 

Consider Differences

Companies need to consider the different personalities and life situations of their employees. Some workers may crave the camaraderie of being on-site with colleagues. Others may prefer a more flexible arrangement to avoid a grueling commute or accommodate family responsibilities. 

Set Realistic Expectations

Consider a trial period to see how your model works in practice. Be open to being informed by the process; you may want to adjust based on experience. Make it clear that you’re test driving the remote work model, and give employees opportunity to provide input. 

Create a Consistent Process

Consider creating an approval and tracking process for remote employees. This could include a list of acceptable locations, such as places where the company has a physical presence and is already qualified to do business there. 

Communicate Clearly

It’s essential for every business to communicate the expectations under your new remote work model. Though shifting community health data continues to make it difficult to pinpoint an exact return-to-work date, it’s helpful to have defined expectations for how often an employee should be in the office. It might also be helpful to train employees on performance expectations, workflow, and reporting structure under the new model. 

Remote Work is Here to Stay

More than 90% of U.S. employees hope to work in a hybrid or remote capacity for the foreseeable future. A well-developed model is clearly necessary to attract top talent and remain competitive. As the workplace continues to evolve, businesses must protect themselves from unanticipated corporate governance responsibilities, unforeseen tax obligations, and unfamiliar employment laws. Whatever approach your company takes, you can develop a remote work model that is competitive and that protects your business. 

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Lumin Law can help you understand how these considerations impact your business and develop a remote work model that aligns with your company’s values and supports your business goals. Please reach out and arrange a time for us to connect. 

Properly Classifying Workers

Posted on by Lindy Laurence

It’s critical for your business to periodically review the status of its workers to ensure they are properly classified as either employees or independent contractors. Your business will have significantly different obligations depending on whether the worker is classified as an "employee" or an "independent contractor."

For workers classified as employees, your business must withhold federal income tax, social security taxes, and federal unemployment taxes. You may also need to provide employees with health insurance and other fringe benefits. For Washington businesses, there are also unemployment insurance and workers compensation obligations. Other states may have different tax obligations. 

But, for workers classified as independent contractors, the business has none of these responsibilities. It simply pays them for their services and sends them a Form 1099-MISC (if the amount is $600 or more). That’s it. 

Who is an "employee"?

This stark contrast between how employees and independent contractors are treated means the business must engage in a high stakes analysis to determine who is an employee? 


Unfortunately, there is no uniform definition of the term. The question of whether a worker is an employee for federal income and employment tax purposes is complex and intensely factual. And because of the related tax obligations, the stakes can be very high. 

Right to Control

Workers are generally employees if the employer has the right to control and direct them regarding the job they do and how they do it. The employer doesn’t actually have to direct or control how the services are performed; it’s enough if the employer has the right to do so. Otherwise, the workers are independent contractors. 

Factors to Consider

The IRS usually examines the following factors to see if the employer has the right to direct and control the worker:

1. A worker who must comply with instructions about when, where, and how he must work is ordinarily an employee. This control factor is present if the business has the right to make the worker follow instructions (regardless of whether you exercise that right).


2. Training a worker by teaming an experienced employee with the worker, by corresponding with the worker, by requiring her to attend meetings, or by using other methods, indicates the business wants the services performed in a particular method or manner. Ongoing training is a particularly strong sign of an employer-employee relationship, but orientation or information programs about company policies are not.


3. Integration of the worker’s services into the business operations generally shows the worker is subject to the direction and control of the business.


4. If the services must be rendered personally, the business probably is interested in the methods used to accomplish the work as well as in the results, indicating an employer-employee relationship.


5. A business that hires, supervises, and pays assistants for a worker is exhibiting employer-like control over the worker on the job. Conversely, an independent contractor relationship is indicated if a worker is contractually obligated to hire, supervise, and pay assistants.


6. A continuing relationship between the worker and the business indicates an employer-employee relationship exists. A continuing relationship may exist where the worker is called in at frequently recurring, although irregular, intervals.


7. The fact that a business requires work to be performed on its premises suggests control over the worker (if the work could be done elsewhere). Work done off the premises, such as at the worker’s office, indicates some freedom from control. The importance of this factor depends on the type of services involved and whether an employer generally would require employees to do similar work on its premises.


8. A business exhibits control over a worker if it requires her to perform services in a specific order or sequence.


9. A business’s requirement that the worker submit regular or written reports indicates a degree of control over the worker.


10. Payment by the hour, week, or month generally points to an employer-employee relationship, if this method of payment isn’t just a convenient way of paying a lump-sum agreed upon as the cost of a job. Payment by the job or on a straight commission basis generally indicates a worker is an independent contractor.


11. A business exhibits the characteristics of an employer if it supplies a worker with significant tools, materials, and other equipment, or ordinarily pays the worker’s business or traveling expenses.


12. A worker exhibits independent contractor status if he invests in facilities that aren’t typically maintained by employees (e.g., renting his own office). By contrast, an employee usually relies on the employer to provide the facilities needed to do the job.


13. A worker who can realize a profit or suffer a loss as a result of her services generally is an independent contractor, but a worker who can’t is an employee. The risk that a worker won’t be paid isn’t factored in.


14. A worker who performs more than minimal services for a number of unrelated businesses at the same time generally is an independent contractor. However, a person who works for more than one business may be an employee of each business, especially where the businesses are part of the same service arrangement.


15. The fact that a worker makes her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.


16. The right to fire a worker is a factor indicating that he is an employee. An independent contractor, on the other hand, can’t be fired as long as he produces the work that the business contracted for.

Classify Workers Properly from the Start

There is no clear test for exactly how many of these factors must be satisfied, nor are these factors uniformly applied. Proper worker classification is a highly contested topic between taxpayers and the IRS. That's why it's so important that you properly classify your workers from the start. 


Lumin Law can help with this analysis. Reach out and connect with us to discuss how these complex rules apply to your business and to ensure that all your workers are properly classified.

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What if Workers are Classified Wrong?

What if Workers are Classified Wrong?

Posted on by Lindy Laurence
What if you've reviewed the IRS factors and think maybe a worker is classified wrong? You're not the first business owner to get a knot in your stomach after reading through that list.
Fortunately, the IRS has developed a program that allows a business to resolve past worker classification issues by voluntarily reclassifying their workers without undergoing an audit.

Voluntary Classification Settlement Program

The Voluntary Classification Settlement Program (VCSP) is an employment tax settlement program offered by the IRS that allows a business to reclassify as employees those workers it erroneously treated as independent contractors. The program has generous payment terms, and participants get relief from employment tax audits for previous years.
Who is Eligible?
The VCSP is available to taxpayers who have consistently treated their workers (or a group of their workers) as independent contractors and now want to begin treating them as employees. To be eligible, the taxpayer must have filed all required Forms 1099 for the workers for the previous 3 years within 6 months of the Form 1099 due dates (including extensions). 
A taxpayer who is currently under an IRS employment tax audit isn’t eligible for the program. Similarly, a taxpayer who is under audit for worker classification issues by the IRS, the Department of Labor (DOL), or a state government agency is ineligible. However, a taxpayer that was previously audited by the IRS or the DOL for worker classification is eligible if it has complied with the results of that audit. 
If a corporate taxpayer’s parent, subsidiary, or other member of its consolidated group is under audit, then the taxpayer can’t participate in the VCSP. An audit of one member of a taxpayer’s consolidated group is treated as an audit of the taxpayer for these purposes.
Terms of the Program
Once accepted into the VCSP, the taxpayer must agree to treat the class of workers as employees for future tax periods. The taxpayer must also agree to allow the IRS an extra 3 years to assess employment taxes. This extension applies for the first 3 calendar years beginning after the agreement takes effect.
In exchange for making these concessions, the taxpayer gets the following benefits: 
1. The taxpayer must pay only 10% of the employment tax liability on compensation paid to the workers for the most recent tax year, determined under reduced rates (see “Figuring the Payment,” below);
2. The taxpayer won’t be liable for any interest and penalties on the employment taxes; and
3. The taxpayer won’t be subject to an employment tax audit for the classification of the workers for prior years.
Taxpayers may choose to reclassify some or all of their workers. However, once a taxpayer chooses to reclassify certain workers as employees, it must treat all workers in the same class as employees.
Figuring the Payment
The payment due under the VCSP is 10% of the employment taxes, calculated under reduced rates, on the compensation paid to the reclassified workers in the most recently completed tax year, determined at the time the VCSP application is filed. 
If you apply for the VCSP in 2022, the most recently completed tax year will be 2021. The reduced rate is 10.68% of compensation up to $142,800 (the social security wage base for 2021; the wage base for 2022 is $147,000) and 3.24% of compensation above $142,800. You’ll pay only 10% of that amount.
Illustration: A company paid $1.5 million in 2021 to workers that are the subject of a VCSP application. None of the workers were paid more than $142,800 in wages. The company submits its application on October 1, 2021. It wants to begin treating the workers as employees on January 1, 2022. The company calculates the payment due based on amounts paid to the workers in 2021, because 2021 was the most recently completed tax year when the application was filed. Under the reduced rates, the employment taxes on $1.5 million of wages would be $160,200 (10.68% of $1.5 million). The company’s VCSP payment would be 10% of $160,200, or $16,020.
Procedure to Apply
Taxpayers apply to participate in the VCSP by filing Form 8952 with the IRS at least 60 days before the date they want to begin treating the workers as employees. No payment should be made at that time. After the IRS reviews the application, it will contact the taxpayer, or the taxpayer’s authorized representative, to complete the process. 
Taxpayers who are accepted into the VCSP must enter into a closing agreement with the IRS. Full payment is due when the taxpayer returns the signed closing agreement to the IRS.
Should you participate?
Although the VCSP’s terms are generous, any decision to participate must be made carefully, after weighing the costs and benefits. Agreeing to treat workers as employees may have far-reaching consequences under a variety of federal and state statutes. The right choice may depend on how clear it is that the workers are in fact employees. 
Let's discuss the pros and cons of participating in the VCSP for your specific situation and help you determine how to proceed. Please reach out and arrange a time for us to connect.
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