Taxation of Sports Officials
Independent Contractor versus Employee
Worker classification is an area of great interest to employers, the federal government, state governments and sports officials. Its impact on each of those entities can be very large. Generally, employees are more expensive for employers than are independent contractors. Conversely, a worker’s overall tax liability is generally greater if taxed as an independent contractor than as an employee. State governments manage unemployment programs that benefit employees but do not benefit independent contractors. This discussion will be limited to the impact on sports officials of the employee versus independent contractor issue.
There are two main categories of workers: employees and independent contractors.
Employees are individuals who provide services for employers within an employment relationship. That relationship developed from common law so it is not particularly clear-cut.
Independent contractors are individuals who provide services outside an employment relationship. They are self-employed.
Generally, a worker’s status will be determined by the business, not the worker, and is sometimes controlled by a matter of law. For example, if the officials are employees of a school district, that school district should treat them as employees for officiating despite the common law factors. The sports official’s tax and financial burden will be different if the official is an employee rather than an independent contractor.
Sports Officials as Employees
When sports officials are treated as employees, they report their income as salary on page one of Form 1040. Income includes remuneration for services provided and amounts received for job-related expenses. If the expenses incurred are not reported to the employer or are reimbursed at an amount different from that which would be deductible, the difference would be reported as income. Job-related expenses which an employer does not reimburse or reimburses at an amount different from a deductible amount can only be claimed as miscellaneous itemized deductions on Schedule A. Those deductions are subject to a floor equal to 2% of adjusted gross income and a reduction in itemized deductions for high income individuals.
The employee pays income tax on that income through wage withholding based on information provided to the employer on Form W-4. In addition, the employee must also pay Social Security tax at 6.2% and Medicare at 1.45%. The employee also satisfies the payment of that tax through payroll withholding. The employer matches the Social Security and Medicare tax of each employee.
Sports Officials as Independent Contractors
When sports officials are treated as independent contractors, they are responsible for all taxes. Depending on the net amount of officiating income (gross income minus expenses), the official may have to pay income tax and self-employment tax by making estimated tax payments. Often, those payments are referred to as quarterly payments. In fact, the due dates of those payments are not tied to calendar quarters. They are due April 15, June 15, September 15 and January 15. Their purpose is to get self-employed individuals on a pay-as-you-go system, similar to employees who pay taxes through payroll withholding. The taxes that are due are based on the gross income and expenses that are known as of the date of the estimate.
Officiating as a Part-Time Job
If officiating is a part-time or seasonal job, you may be able to satisfy those tax payments through additional withholding from earnings from your primary employment. This keeps things simple and may save a penalty since payroll withholdings are considered paid ratably throughout the year whereas estimated tax payments are considered paid the date they are received by the IRS. Failure to pay sufficient taxes through this system may result in a penalty.
The self-employment tax for independent contractors is equal to the employer and employee share of Social Security and Medicare taxes, 15.30%. The good news is that one-half of this amount is deductible from gross income. Filing a Schedule C determines how much income is subject to income tax and self-employment tax.
Fringe Benefit Issues
Another issue for the independent contractor is fringe benefits. An employee is generally taken into account for purposes of the employer’s retirement and fringe benefit plans. Accordingly, an employee may be eligible for health insurance, educational assistance and many other tax-advantaged benefits.
An employee may also be eligible for unemployment compensation and worker’s compensation for job-related injuries or disabilities. Independent contractors generally must provide their own retirement and fringe benefit plans and have no protection when there is no work. They may cover job-related disabilities with separate insurance coverage paid for by the contractor.
See more in the downloadable chart: Tax Considerations for Sports Officials.