Employee or Independent Contractor?

According to the South Dakota Reemployment Department, contract labor is the most misused category of workers. It can be confusing for many employers to determine if a worker is an employee or an independent contractor. In this article, we will look at the distinctions between employees and independent contractors.

How does the State of South Dakota determine an independent contractor?

South Dakota Codified Law 61-1-11 states that an independent contractor must meet both of the following:

  1. The worker must be free from control or direction of the performance of the contract for services by the employer.

AND

  • The worker must have their own independently established trade, occupation, or business.

The Reemployment Assistance Tax Unit mentions the following additional criteria that is more specific to an independent contractor:

  1. They realize a profit or loss based on how well they perform their job.
  2. They choose when and for whom they will work.
  3. They provide their own supplies and equipment.
  4. They have a significant investment in the equipment they use or facility they use for performing the work.
  5. They make their services available to the public.

What determines an employee?

The Reemployment Assistance Tax Unit mentions the following criteria that indicates a person is considered an employee:

  1. They are insulated from loss and restricted in the amount of gain.
  2. They are hired for an ongoing period which may be part-time, full-time, or temporary.
  3. They follow instructions given to them by the employer on how to do their job.
  4. The employer trains them.
  5. The employer sets their hours.
  6. They work on a regular basis.
  7. The employer provides the equipment and supplies.
  8. They do not have a business of their own.

What categorizes a day- or casual-laborer?

The state of South Dakota requires them to be reported as employees, even though they are only working for a short time. These laborers are told when they will work and how long they will work for, so they fall under an employee and are covered by South Dakota Reemployment Coverage.

Even if you have a contract-labor agreement with a worker, this does not guarantee that the worker will be treated as an independent contractor. According to South Dakota law, a worker cannot sign away their right to Reemployment Assistance. For the worker to be treated as an independent contractor, they must meet the independent contractor criteria.

It is important that you make the correct determination when classifying a worker as an employee or independent contractor. If you misclassify a worker as an independent contractor when the State of South Dakota determines them to be an employee, you may be subject to back taxes, penalties, and interest.

If in doubt as to how to classify a worker, reach out to one of the professionals here at KT, or call the South Dakota Reemployment office (605-626-2312) to request a written determination.

June 17, 2024

Enhanced Child Tax Credit

President Biden’s American Rescue Plan included a significant change to the Child Tax Credit for 2021.  This change will impact both the timing of when you receive your 2021 child tax credits and the amount of these credits.

First, the credit will be raised from $2,000 to $3,000 for children between the ages of 6 and 17 and to $3,600 for children under 6 for the 2021 tax year.

The credit is available to taxpayers with modified adjusted gross income (AGI) of:

  • $75,000 or less for singles,
  • $112,500 or less for heads of household, and
  • $150,000 or less for married couples filing a joint return and qualified widows and widowers.

For modified adjusted gross income above these amounts, the Enhanced Child Tax Credit will be reduced (phased out) by $50 for every extra $1,000 in additional modified AGI.

Second, the Enhanced Child Tax Credit will be paid out monthly beginning on July 15, 2021. The payments will be direct deposited or sent via a paper check from the IRS on the following dates: July 15, August 13, September 15, October 15, November 15 & December 15. For children 5 and under a monthly payment of up to $300 per child will be made and for children between the ages of 6 and 17 a monthly payment of up to $250 per child will be made.

A qualified taxpayer will end up receiving half of the credit in 2021 and the remainder when they file their 2021 tax return in 2022. Unlike prior years, the credit is fully refundable in 2021—even if you pay no other tax. The advance payments of the 2021 Child Tax Credit will be based off your 2020 tax return. If the 2020 tax return has not been filed yet, the IRS will use the 2019 tax return.

If you have a new child in 2021, the IRS will be creating an online portal where you can update the IRS with the information needed—including a social security number.

You will also be able to update your income, filing status, and direct deposit information via an online portal through the IRS website. By updating this information, you will ensure that you receive the correct amount of the credit. More details on the online Child Tax Credit Update Portal will be available soon. Please continue to check the IRS.gov website.

What if you do not want to receive the advance payments? The IRS online portal will allow you to opt out of these advance Child Tax Credit payments. You can then take the full Child Tax Credit on your 2021 Tax Return when you file it in 2022.

The one thing to keep in mind, this is an advance payment of the Child Tax Credit. By receiving the payments in July through December of 2021 you will reduce the amount of the Child Tax Credit on your tax return in 2021.  This could create a situation where you might owe tax when you file your return. 

Please feel free to reach out to your Ketel Thorstenson, LLP advisor with any questions or concerns.

June 28, 2021