Taxation

Harry Behr, a successful University alumnus, works as a manager at a hotel in the urban area. He is employed by a large corporation (the "Firm"). Harry is an expert in hotel management, and he only dabbles in the "pesky" aspects of tax accounting. As his filing deadline approaches, Harry knows that he must prepare his federal individual income tax return soon; so taxes have been on his mind lately. In particular, he has recalled the following events that occurred (unless otherwise noted) during 2017, which he suspects might have some significance for tax purposes: • Harry started the year on a positive note. On New Year's Day, he bought lunch at his favorite restaurant. He paid $10 for the lunch special, which came with a free drink. The iced tea he drank normally costs $2, and he savored every drop of that freebie. • As an employee of the Firm, Harry can stay at any Firm-owned hotel for free. That perk was helpful in February when Harry unexpectedly pulled off Interstate 89 during a snow storm, headed into a Firm-owned hotel, and crashed for the night in an unoccupied suite. In the morning, he realized that he saved the $120 that hotel guests normally pay for the room. • Harry prepared and filed his income tax return for 2016 during April of 2017. He smiled about his accomplishment knowing that he just deprived the dreaded bean counters of the $350 they routinely charge for the same task. • Harry's uncle, Jim, is a mooch. Jim exerts no effort in finding employment for himself, but he is persistent in hitting up Harry and other family members for money to cover basic living expenses. After a particularly intense period of begging in May, Harry gave $300 to Jim in order to get Jim to go away. • Jim resents the fact that people believe he lacks motivation to help himself. In fact, Jim tapped into his neighbor's cable box by himself and has secured unlimited access to cable TV ever since June. Because the neighbor has paid the cable company, Jim believes that no one was hurt and Jim has simply avoided the burden of paying $250 for quality television programming. • Harry invited Dave, Harry's buddy, to a "friendly" neighborhood poker game in June. Dave apparently wasn't sure when to hold 'em and when to fold 'em during a night when Harry had a remarkable winning streak. Dave ended up owing Harry $200 by the end of the game and-trying to save face in front of the neighbors-signed a cocktail napkin acknowledging his debt to Harry. After watching Dave squirm and listening to excuses about why he couldn't pay the debt, Harry ripped up the napkin during July in front of Dave and said "Merry Early Christmas." • Harry's car suffered from door dings, rust spots, and peeling paint. In fact, Harry's car looked so pathetic that a company selling a repainting service contacted Harry about restoring Harry's car. Because the company was trying to break into the urban market, the company offered to repaint Harry's car at no cost in exchange for Harry's agreement to let the company use before/after pictures of his car and his favorable testimonial in the company's marketing materials. Harry thought it was a great deal and allowed the company to repaint his car in July. As a result of the repainting, the value of Harry's car increased by $3,000. • Laura, Harry's wife, works full time at Spotty Coverage, Inc. ("Spotty"), a cell phone service provider. Spotty offers one cell phone plan that allows customers to make local and long distance telephone calls using Spotty's network. Spotty's plan gives customers unlimited cell phone service at a competitive rate of $43 per month. In order to promote usage of its network, Spotty let’s all of its employees subscribe to its plan for free. Laura has subscribed to Spotty's service and taken advantage of this opportunity for free cell phone coverage, and she did not pay for any calls during 2017. • Sara, the daughter of Harry and Laura, worked on a cruise ship for ten weeks during the summer of 2017. Harry was secretly jealous of Sara because she got to live a very glamorous lifestyle. In particular, she traveled to exotic Caribbean locations; slept for free in a cabin that customers paid $2,700 per week to occupy; ate fabulous breakfasts, lunches, and dinners at no cost whereas customers paid $900 per week to taste those delights; and received $400 in spending cash each week. • Sara returned to her senior year in college after spending the summer on the cruise ship. The cruise ship operators saw great promise in Sara and offered her an $8,000 scholarship if she promised to work full time on the ship after graduation. Sara accepted the offer and used the money to help pay her $12,000 tuition bill for the 2017 fall semester. • Nick, the son of Harry and Laura, is no slouch either. In November of 2016, he bought and ate seven chocolate bars until he found one with a golden pass tucked inside its wrapper. The pass entitled Nick and nine friends of his choice to attend a professional soccer game for free. The admission price for each ticket to the soccer game, which the ten chums attended in August of 2017, was $20. • Aside from his sweet tooth, Nick is known for his willingness to help people. In fact, Nick donated a pint of blood to the American Red Cross in September. Harry and Laura thought Nick's actions were noble. But Nick secretly admitted that he volunteered to donate the blood because he had a hankering for one of the cookies that the Red Cross gives a donor after someone has drawn the donor's blood. Those cookies are delicious, and the Red Cross spent $1.50 to purchase the one that Nick ate. • Laura's fondest thoughts about Spotty, her employer, relate to its annual company picnic. Since the event in early October, she gets a little giddy in recalling the barbeque sauce slowly dripping down her chin. Food that good would cost at least $8 per plate, but she gets her fill for free while rubbing elbows with the loving members of her corporate family. • Laura has volunteered at several nonprofit organizations over the past decade. In recognition of her good deeds, the mayor publicly thanked her at a celebratory black-tie dinner in December. The local newspaper placed a picture of the event on its front page, which provided Laura with "favorable press" equivalent to a $5,000 advertising campaign. As a newly-hired staff member of an accounting firm, count some beans. Explain to Harry whether Harry, Jim, Dave, Laura, Sara, and Nick have income (and, if so, how much) and whether they must include any such income in their respective gross incomes for the 2017 calendar year as a result of the events described above. Ignoring the events described above, assume that Sara has had many opportunities to babysit for parents living in her neighborhood. These parents always left detailed instructions and hourly schedules for Sara to follow about how to care for their children, including the play routines, sleeping and feeding regiments, bathing requirements, food restrictions, and bedtime stories and songs. The parents also left a contact phone number in case of an emergency. During 2017, Sara received $4,000 in cash from the parents as payment for her babysitting services at their homes. The parents also left food for Sara to eat while she was tending to the children, and she ate food worth $600 while babysitting in 2017. During the year, Sara also had $75 of total expenses from printing flyers, which she placed on car windshields to advertise her babysitting services throughout the neighborhood. Assume Sara pays income tax at a 15% rate. Explain what combined income and other taxes Sara would pay as a result of these activities (1) as a properly-classified employee during 2017 and (2) as a properlyclassified independent contractor during 2017.