** IMPORTANT PAYROLL TAX LAW UPDATE **

TO OUR CLIENTS:

We have been recently confronted by audits by both the IRS

and New York State tax authorities, the type of which we have

never had before.

These audits concern questions of whether a person treated as

an independent contractor (1099 person) is really an

independent contractor. The audits also focus on payments

made to employees which are listed on 1099's and not included

on their W-2s such as bonuses, commissions, etc.

Until December 31, 1996, the law and the IRS attitude was

tilted in favor of the employers. Starting with January 1,

1997, the law has changed, and this is no longer the case.

First, corporate officers are now always employees of a

corporation. Any monies paid to a corporate officer now must

be classified as salaries. On officer's salaries,

withholding tax and social security must be deducted and paid

to the Federal and State governments on a regular basis. The

withholding taxes must be calculated according to the tax

charts.

On audit, and this will be a fertile field for both the

Federal and State audits, interest and penalties will be

assessed on all amounts not correctly withheld. Also, if

you, as the employer can't show that the independent

contractor, whether it's you or another person who has been

adjudged to be an employee, didn't pay his own income taxes

on the money, you will be liable for 20% of the gross amount

paid to this person as withholding tax, plus social security

tax.

As to what constitutes an independent contractor or an

employee, this can sometimes be a little blurry. Generally,

persons who are truly in business for themselves are

independent contractors. Otherwise, these persons are

employees. The same goes for part time workers or casual

help. In addition, Form 1099 must be prepared and filed for

all persons who are claimed to be independent contractors.