This time last year our economy was thriving. We heard stories about bonuses and promotions, not layoffs and bankruptcies. Even then, questions of "who’s the boss" at tax time raised important questions for the growing number of workers not fitting the traditional "full-time employee" model. Figuring whether you earned money as an employee or independent contractor has taken on a dramatically new meaning in Tax Time 2001. The combination of a workforce layoffs, a spiraling growth of home-based businesses, the continued of temporary and contract workforce, and the insecurity of those who are "traditional employees" have made more of us into entrepreneurs and contract workers than ever before . Home-based businesses have changed from second income efforts by seniors or part-timers to a major national industry.

        While the variety of home-based businesses is vast, this article focuses on one form --- multi-level-marketing programs (commonly referred to as MLMs). While much attention has focused on legally questionable marketing practices by some of these firms, we hear little about a much more important question facing anyone participating in an MLM at tax time -- MLM associates’ employment classification or "status" when it comes to calculating our taxes. The question of "who’s the boss at tax time" becomes extremely important, for the IRS and, therefore, for you. The right answer can go a long way to determining whether you are going to check the "REFUND" or "PAYMENT DUE" box on your tax form this year.

Not knowing the answer to this question can have costly consequences for anyone involved with an MLM or other home-based business.

The Big Difference at Tax Time: Employee vs. Independent Contractor

The issue became important after a recent legal case holding that anyone signing on as an associate or distributor with a multi-level-marketing organization is a contractor, not an employee of that organization. If you joined any MLM in the past couple of years your contract most likely states that you signed up as an independent contractors and are not an employee of that particular MLM program.

Therefore, if you’re among the thousands of folks who became used to the traditional working world of receiving and filing W-2 forms to calculate and report your taxes, you need to be extra careful. Don’t be surprised if you received a 1099 Form from an MLM you may have been associated in the past. Many of these firms have changed their accounting systems to comply with the law --- and sending all their current and prior associates/distributors 1099’s.

Costly Risks That Just Won’t Go Away

Risks of employee misclassification face employers in all sectors, from giant corporate giants like Microsoft which paid $97 million to settle a class action lawsuits with misclassified "permatemps" last year to public municipalities like King County, Washington which paid $23 million to misclassified workers. A recent study of businesses and industries most often involved in IRS-related worker status or misclassification disputes confirmed the diversity the problem. It included professionals and small business owners, clerical workers, doctors and nurses, personal care assistants, truck drivers, newspaper delivery messengers and many more in hundreds of workforce categories. Surprisingly (to some), lawyers and accountants were at the top of the list!

(Worker Status Report, at www.workerstatus.com)

Doing it the Right Way

As you do your taxes this year, ask yourself two simple questions: 1) Did I spend all or part of the year as an independent contractor, temporary, contract, part-time or other "non-traditional" worker?, and 2) Did I spend any part of the year operating a small business of any size (this includes participation in any multi-level or network marketing firm as an associate, distributor or other label?)

If you answer "yes" to either question, you may want to consider seeking professional advice from a knowledgeable attorney and/or accountant to help you in your calculations and avoid the high price of filing your tax forms incorrectly.

Conclusion

The IRS and our courts continue to use the "20 Common Law Factors Test" to decide if you are an employee or independent contractor. The "Test" is attached for your review. It is intended to inform and educate you, but not to answer your specific questions or deal with your particular situation. Bring it with you to your accountant, lawyer or other professional tax or financial advisor and ask how they apply to your particular situation.

A less expensive alternative is going directly "to the top" --- ask Uncle Sam. He may be more helpful than you expect (he may be your best source for stress relief and the important information you need You can reach him 24 hours day.) The IRS web site is www.irs.gov.

You can be your own best friend at tax time and dramatically affect the answer to your REAL question: which box do I check – REFUND or MONEY OWED -- and how much?