July 31, 2003 Legal Associates Treated As Independent Contractors In a recent decision, it was determined that attorneys that were full time employees of a law firm were correctly treated as independent contractors with respect to referral fee income paid to them from the firm. The associates were paid a salary for their work at the law firm, which was reported as wages and subject to withholding taxes. Some of the associates were also given Form 1099s as independent contractors. The income reported on the 1099s was income for referring cases to the law firm. The case was decided by an administrative law judge (ALJ), which does not set precedent. The law firm generally represents individuals suffering from personal injuries. Based on New York custom, the law firm is paid on a contingency fee basis, which means that the firm retains a portion, if any, of the amount recovered for its clients. The firm obtained some of its clients through referrals from unaffiliated attorneys, and paid such referring attorneys with a share of the contingency fee collected from the referred client. These referring attorneys were treated as independent contractors, and no payroll taxes were withheld. The law firm also received referrals of clients from its own associates, who then also received a share of the contingency fee. This referral income was reported to the associate on Form 1099. Associates are paid regular biweekly salaries out of the firm’s payroll account, which are accounted for as wages subject to withholding. Referrals are not a part of associates’ duties. The firm stated that many of its associates have never referred a case in the firm. The issue was whether this referral fee compensation should be treated as wage income and subject to withholding taxes. In reaching this decision, the ALJ noted the following factors as being significant: Client referrals were not a part of an associate’s duties. An associate’s employment with the taxpayer was in no way contingent upon referrals. The firm set no rules on how associates should or might obtain referrals. There was no quota of cases or dollar value required to be brought to the firm. In fact, many of the taxpayer’s associates never referred clients to the firm. The firm controlled the manner in which all cases, including referral cases, were handled within the firm. The referring associates often did not work directly on the cases they referred. Associates of the law firm were hired as legal practitioners and not as sources of client referral. After consideration of all the facts, the ALJ agreed with the taxpayer that, in regard to this aspect of their work (the referral compensation), the associates were independent contractors, and thus their compensation for the referral of cases was not wage income. The City of New York has appealed the decision. The CPA Journal 4/03 Save on Prescription Drugs You do not have to cross the border to save money on prescription drugs, especially if your income is limited. In June, 2002 seven drug companies created “Together Rx”, a program that offers discounts on prescription drugs to Medicare enrollees who lack public or private prescription drug coverage and who have incomes below $28,000 ($38,000 for couples), the discounts range from 20% to 40% or more off normal process for drugs manufactured by: Abbott Laboratories Astra Zeneca Aventis Pharmaceuticals Bristol-Myers Squibb Company GlaxoSmithKline Johnson & Johnson Novartis For more information, call 800-865-7211 or visit www.togetherrx.com. Medicare enrollees with no drug coverage who earn less than $18,000 ($24,000 for a couple) may be eligible for the Pfizer for Living Share Card program. The cost for most Pfizer drugs (Viagra?) is a flat fee of $15 for a 30-day supply. For information, call 1-800-717-6005 or visit www.pfizerforliving.com. Eli Lilly runs a similar program. Lilly Answers offers its medications for a $12 flat fee for a one month supply. Eligibility requirements are similar to the Pfizer program. For more information call 1-800-795-4559 or visit www.lillyanswers.com. For a state by state list of pharmacy assistance programs, go to www.aarp.org/bulletin and look under “exclusive Web resources”. If you are enrolled in any of AARP’s health insurance plans, you have free access to the organization’s Prescription Savings Service which offers discounts on prescription medicines through the mail or at many retail pharmacies. If you do not have an AARP sponsored insurance policy, you can pay $19.95 per year for an identical service called MemberRx Choice. For more information call 1-800-456-2277 or visit www.aarppharmacy.com. AARP July & August 2003 If you have any questions about the foregoing or any other financial matters, please call us. Remember, We’re Here For You!!