1 worker classification getting it right the 1 st time – level 1 presented by: andrew g. poulos,...
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Worker Classification
•Getting it Right the 1st Time – Level 1
• Presented By: Andrew G. Poulos, EA, ABA, ATP
Worker Classification Statistics
In 2010 IRS began new initiative to audit 6,000 businesses for worker classification – further audits may be conducted
Voluntary Classification Settlement Program has been launched
State Labor Agencies have contracts with IRS to report state audit findings to feds
IRS is soliciting help from State Labor Agencies to conduct labor audits
Who Can Audit You?
Internal Revenue Service – YES!
State Labor Agencies – YES! (Reports to IRS)
State Revenue Agencies – Maybe
Taxpayers beware – Everyone is at risk!
Independent Contractor or Employee
Which one should it be?
How do you determine proper classification?
What affect does improper classification have on employer and worker?
Independent Contractors Should Expect
Expect to receive a 1099-MISC
Handle their own taxes usually on Schedule C
Not eligible for employer health insurance or retirement plan
Can deduct business expenses on personal tax return
Employer’s Can Expect
Don’t withhold federal, state, FICA
Don’t pay FUTA and SUTA
Savings of 7.65% in FICA + FUTA + SUTA
No health, retirement, or sick and vacation pay provided
Employee’s Can Expect To Get
Have FICA, federal, state taxes withheld by employer
Eligible for health insurance, retirement benefits, vacation and sick pay
Receive a W-2 instead of a 1099-MISC
Little hassle to file tax return
Worker Classification Affects
How you pay Social Security, Medicare, federal, and state taxes
How you file your taxes
Affects employer benefits, Social Security and Medicare matching by company
So How Do You Get It Right?
Is it at simple as it appears?
How do you determine if your workers are employees, or independent contractors?
What factors should you use to make the proper classification?
3 Categories for Classification
Worker classification facts are based on three main categories:
1)Behavioral Control
2)Financial Control
3)Relationship of the Parties
3 Categories for Classification
Must consider all facts in the case
Each case has different facts and circumstances
No single fact provides the answer
Can have major ramifications on employer and worker if you get it wrong
Behavioral Control
There is a right to direct or control how the worker performs the work
Worker is an employee when the business has right to direct and control the worker
Business doesn’t have to control the way work is done – can direct and control the work
Financial Control
Facts that show if there is a right to direct and control business segment of work
Does business or worker control financial elements such as expenses?
Relationship of The Parties
Facts that show how business and the worker perceive their relationship
Does the business perceive the worker as an independent contractor?
Does the worker think he/she is an employee?
So What Happens Next?
The worker perceives employee status, and business perceives independent contractor status
Who is right and who is wrong?
How do you proceed now?
Let’s review the IRS 20 Factor Test that can help us
20 Common-Law Factors
IRS uses 20 Factor test to classify workers
Using 20 Factor test when hiring workers can keep business out of trouble later!
20 Factor test helps provide clarity for behavioral control, financial control, relationship of the parties
Common-Law Factor 1
Instructions
Does business provide instructions? If so, how much instruction do they provide?
Extensive instructions on how to do work implies that worker is an employee
Less extensive instructions given about what should be done, but not perhaps how it should be done, worker may be an IC
Common-Law Factor 1 (Cont)
Instructions can cover topics such as
How, when, or where to do the work
What tools or equipment to use
What assistants to hire to help with the work
Where to purchase supplies and services
Common-Law Factor 2
Training
Does business provide training?
Is worker already trained and knowledgeable?
Business providing training on procedures and methods may indicate and employee-employer relationship
Training includes classroom, by co-worker, or any other means
Common-Law Factor 3
Integration
Does business integrate the worker’s services into their operations?
Does their business revolve around the worker?
Business integrating worker’s services into their operations shows worker is under control of the business, implying an employee-employer relationship
Common-Law Factor 4
Services Rendered Personally
Can worker hire someone to do the work in their place, or does it need to be done personally?
Worker being required to perform services personally shows control by the business
Perhaps an employee-employer relationship exists
Common Law Factor 5
Hiring, Supervising, Paying Assistants
Who hires, supervises, and pays assistants?
If business hires, supervises, and pays assistants, control is implied by the business over the worker
The worker may be an employee
Common-Law Factor 6
Continuing Relationship
Is there a continuing relationship between the parties, or is work a one time event?
A continuing relationship suggests there is an employer-employee relationship
A continuing relationship doesn’t necessarily mean work is performed at regular intervals
Common-Law Factor 7
Set Hours of Work
Does the worker have the ability to set his or her own hours?
Control is exhibited when business sets the hours or schedule for the worker
Lack of freedom by the worker to set their own schedule displays an employee-employer relationship
Common-Law Factor 8
Full-Time Required
Is worker required to devote full-time to the business?
Can worker devote their time to other work?
If not, the worker is probably an employee
Common-Law Factor 9
Doing Work on Company Premises
Does worker have his or her own place of business?
Is it required that the work be done at the business premises?
If so, this may suggest control over the worker creating an employee-employer relationship
Common-Law Factor 10
Order of Sequence Set
Does the worker have ability to set work schedule?
Does business provide the order and sequence to perform the work?
An independent contractor has flexibility to set work schedule and sequence of work
Common-Law Factor 11
Oral and Written Reports
Does business require oral and written reports?
If business requires reports from worker, this indicates an employee-employer relationship
Common-Law Factor 12
Payment Made by Hour, Week, or Month
How is worker paid – hourly, weekly, monthly, commissions, or by the job?
Hourly, weekly, monthly payments suggest worker is an employee
Commissions or payments by the job suggest an independent contractor relationship
Common-Law Factor 13
Payment of Business and/or Travel Expenses
Does business pay for business or travel expenses?
Does the worker pay for their own expenses?
Payments by business suggest employee relationship due to control of expenses
Common-Law Factor 14
Furnishing of Tools and Materials
Does the company provide or pay for worker’s tools, supplies, and equipment?
Does the worker have their own tools and equipment to do the work?
If business furnishes it could suggest an employee-employer relationship
Common-Law Factor 15
Significant Investment
Does worker invest in their own facilities?
Does worker rent his/her own office or building?
Does worker rent office space from the business?
Lack of significant investment by worker could suggest an employee-employer relationship
Common-Law Factor 16
Realization of Profit or Loss
Can the worker realize a profit or incur a loss?
Is there a real risk of economic loss?
Does the business bear the economic risk?
Worker bearing economic risk implies he/she is an independent contractor
Common-Law Factor 17
Working For More Than One Business at a Time
Can worker provide his/her services to more than one business at a time?
Is workers time consumed by only One business?
If worker can provide services to multiple companies at one time, it suggests an independent contractor relationship
Common-Law Factor 18
Making Services Available To The Public
Does worker make their services available to the general public?
Are the services available to the general public on a regular and consistent basis?
If so, this suggests worker is an independent contractor
Common-Law Factor 19
Right To Discharge
Can the business discharge the worker?
Can they discharge due to contract obligations not being met, or
Because worker is an employee and the business has control and can terminate employment?
Common-Law Factor 20
Right To Terminate
Can worker terminate the relationship at any time without incurring liability?
Can worker walk away from a contractual obligation to the business?
Terminating a true IC agreement most likely requires some notice
Depending on facts and circumstances worker may be an employee or independent contractor
What is the Verdict?
You have gone through the 20 Factor Test
You answered “NO” to 13 of the 20 questions
Does this mean your worker’s are employee’s or independent contractors?
What kind of determination do you think IRS will give?
Employees Under Common Law
A worker is usually an employee if business can control what will be done and how it will be done
If business has ability to control the details of how services are performed it indicates an employee-employer relationship
Workers in business for themselves are not employee’s
Who Are Independent Contractors
Accountants
Doctors
Lawyers
Veterinarians
Who Are Employees?
Food servers
Bartenders
Receptionists
Office managers
Statutory Employees
A Statutory Employee is a worker who can’t be classified as an employee under Common Law rules,
But is an employee for payroll tax purposes due to specific statutory requirements (Social Security and Medicare)
Who Are Statutory Employee’s?
An Agent or Commission Driver (food and beverage delivery driver – “No Milk”)
Full-Time Life Insurance Salesperson (Sells primarily for one company)
Homeworker (Works from home using materials furnished by business)
Who Are Statutory Employee’s? (Cont)
Traveling or City Salesperson (Full-time, works for One company taking customer orders)
Corporate Officers (One who provides No services or minor services and is not entitled to receive payment)
Who Are Statutory Employee’s? (Cont)
Statutory employee’s must have Social Security and Medicare taxes withheld if the Three Tests are met
3 Test for Statutory Employee’s
1) Service contract states or implies that almost all services will be performed personally by employee
2) The employee has little or no investment in the equipment and property used to perform the services
3) Services are performed on a continuing basis for the same company
Statutory Non-Employee’s
Two categories of Statutory Non-Employees
If worker falls into either category they can be classified as independent contractor
Statutory Non-Employee’s are responsible for federal income taxes, and self-employment taxes
Who Are Statutory Non-Employee’s?
Direct Sellers – (Must meet Three Factors to qualify)
Real Estate Agents
Who Are Direct Sellers?
Door-to-door salespersons
Home demonstration persons
Real Estate Agents
Provide services such as
Advertising
Showing real estate property
Acquisition of a lease to real property
Recruitment, training, and supervision of other real estate persons
Real Estate Agents
Property Management services are Not included
Property managers are not classified in the real estate agent category
Statutory Non-Employees
Statutory Non-Employee’s are not employee’s for federal tax purposes, but
They can be an employee for other purposes such as state worker’s compensation and tort liability
Possible Industries With Worker Classification Issues
Building and Construction industry
Trucking industry
Computer industry
Automobile industry
Legal industry
Taxicab industry
What Triggers an Worker Classification Examination?
The worker files Form SS-8 requesting a ruling
The business issues an “extraordinarily high number” of 1099-MISC forms
The business issues 1099-MISC forms with “high dollar” amounts
What Triggers an Worker Classification Examination?
The state unemployment agency conducts an audit or investigation and shares information with IRS
IRS performs “project audits” on a certain industry
Informant tips off IRS and provides audit lead (Be cautious of disgruntled former employee’s or vengeful competitors)
2 Types of Worker Classification Audits
Employment tax audits
Income tax audits
Information Document Request (IDR)
What you should expect to see on the IDR
Copies of Form 941 for each quarter under audit
Copies of Form 940
State unemployment tax returns
Form 1096 and Forms 1099
Forms W-2, W-2C, W-3, W-3C
Information Document Request (IDR)
Form W-4 if worker’s completed them
Form W-9 if obtained from worker’s
Payroll journal for exam period (including work papers)
Cash disbursements journal for exam period
General journal for exam year with adjusting entries
Information Document Request (IDR)
Trial balance for exam period
Copy of prior years’ federal audit reports
Copies of contracts between company and workers
Additional documentation may be requested
Conclusion of Examination
At conclusion company will receive one of the following notices
Good Notice – No problems continue what you are doing
Bad Notice – Assessment letter aka “30 day letter”. 30 days to appeal agents findings!
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