Independent contractor or common law employee 2013

INDEPENDENT CONTRACTORS

OR COMMON LAW EMPLOYEE GARY GARNER, EA

I.R.S. Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The Concern

Employee Classification Errors

Employee vs. Contractor

IRS

80% of contractors are misclassified

STATES

Income Tax Revenues

State Unemployment Tax Revenues

Contractors are unique in that they are:

A. Self Directed

B. Have clients not employers

C. Responsible for their own tax compliance

What will trigger and audit?

1. A former contractor files for unemployment benefits.

2. A competitor files a complaint.

3. The IRS and states have goals to audit a

certain percentage of businesses every year.

4. The IRS and states will target certain industries

and geographic locations.

Four Industries Considered Highest Targets

Construction Industry


Technology



Independent Contractor

Pub 15/ Circular E

Common-Law Rules

To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.

Independent Contractors

Degree of Control - 8 Common Law Factors

Custom

Skill Required

Furnishing of Tools

Control from premises

Length of time employed

Method of payment

Nature of occupation

Intent


Custom

The IRS considers the normal

practice for each industry.


Skill Required

The assumption is that

contractors normally provide

more highly skilled services.


Furnishing of Tools

The furnishing of tools,

equipment and materials

indicates an employment

relationship.


Control from Premises

This is called the Where,

When, and How rule. If we tell

the contractor where, when

and how this indicates an

employment relationship.


Length of Time Employed

Employment over a

considerable period with the

fact of full time hours worked

indicates an employment

relationship.


Method of Payment

Payment per hour, week or

month indicates an

employment relationship.

Payment per job indicates a

contractor relationship.


Nature of Occupation

If the work preformed is the

same or similar to the regular

activities of the employer this is

an indication of employee

status.


Intent

Although not determinative the

intentions of the parties in

entering into a relationship is

one factor to consider.

States Interest

States utilize the ABC Test

A = Control and Direction of Work

B = Outside Service

C = Independent Business or

Trade


State Issues

Test A Control and Direction of Work

1. Instructions and training

2. Set hours of work

3. Set schedule or routine


State Issues

Test B Outside Services

1. Outside the course of usual

business operations


State Issues Test C Independent Business or Trade

1. Has a separate office or business location

2. Financial investment in business

3. Has own liability and workers’ compensation insurance.

4. Possesses all the applicable business licenses

5. Files business federal income tax returns

Communication

between the IRS

and states

States Memorandum of Understanding

• Arizona, Arkansas, California, Colorado,

Connecticut, Hawaii, Idaho, Kentucky,

Louisiana, Maine, Massachusetts,

Michigan, Minnesota, Nebraska, New

Hampshire, New Jersey, New York, North

Dakota, Ohio, Oklahoma, Rhode Island,

South Carolina, South Dakota, Texas, Utah,

Vermont, Virginia, Washington, Wisconsin

Memorandum of Understanding

Goals

1. Increase compliance with 1099 filing

2. Increase collection of federal and state

income and unemployment taxes

3. Leverage state and federal resources

in improve compliance


Federal Voluntary Classification

Program

Want to voluntary reclassify

certain workers as employees

for income tax withholding,

FICA, and FUTA tax purposes


Voluntary Classification

Program

Have consistently treated

the worker as a

nonemployee



Program

Have satisfied the 1099 filing

requirements for the previous

3 years prior to filing to

voluntary disclose and

reclassify



Program

Have satisfied the 1099 filing

requirements for the previous

3 years prior to filing to

voluntary disclose and

reclassify

Firms can still qualify

if they have not filed

all 1099’s the previous

three years. They will

pay a higher penalty.



Program

Are not currently under audit

by the IRS or the Department

of Labor or a state government

agency for classification of

workers.

Penalties for Misclassification


Pub 15/ Circular E Page 9

Treating Employees as Non–Employees

You will generally be liable for social

security and Medicare taxes and withheld

income tax if you do not deduct and

withhold these taxes because you treated

the employee as a non-employee

Misclassification Consequences

Penalties

1.028% of pay up to $110,100 (2012)

.324% of pay over $110,100 (2012)

Section 530 Relief

Section 530 Relief

1.Reasonable Basis

2.Substantive Consistency

3.Reporting Consistency

Section 530 Relief Reasonable Basis

1. Relied on a court ruling, IRS ruling, or IRS Technical

advice (SS-8)

2. IRS previously audited your business and did not

reclassify that type of worker

3. A significant segment of your industry customarily

treats this type of worker as an independent

contractor

4. Relied on some other reasonable basis such as a

CPA or attorney told you to treat the worker as an

independent contractor

2. Financial Control

3. Type of Relationship

Section 530 Relief

Substantive Consistency

1. you (and any predecessor business)

must have treated the workers, and

any similar workers, as independent

contractors. If you treated similar

workers as employees, this relief

provision is not available.

2. 10 year look back

Section 530 Relief

Reporting Consistency 1. Finally, you must have filed all required federal tax

returns (including information returns) consistent with

your treatment of each worker as not being

employees. This means, for example, that if you

treated a worker as an independent contractor and

paid him or her $600 or more, you must have filed

Form 1099-MISC for the worker. Relief is not

available for any year and for any workers for whom

you did not file the required information returns.

Back Up Withholding

If contractor fails to provide a

valid Tax Identification

Number

We must withhold BACKUP

WITHHOLDING

28%

Back Up Withholding

Payments Subject to Backup Withholding

•Rents

•Commissions

•Non-employee compensation for services

• Interest

•Dividends

Back Up Withholding

Payees Exempt from Back Up

Withholding

Tax Exempt Organizations

Government Agencies

Corporations

Financial Institutions

Real Estate Investment Trusts

1099 Rules Not required for Corporations

TWO EXCEPTIONS TO THE CORPORATION RULE

Back Up Withholding Reported in Box 4

Medical and health care payments reported

in Box 6 even if they are incorporated!

We must report all payments to attorneys

over $600 even if they are incorporated

Failure to file 1099’s = $10,000 penalty

For every 1099 not filed that was

required = $500

Failure to File Penalties

Recommended Practices

1. Use an Independent Contractor Agreement

A. Termination Date

B. Define the project to be completed

C. Define the payment policies

D. Define the consequences of non completion

E. State that “responsible for own tax compliance”

2. Obtain the independent contractor’s taxpayer

identification number.

3. File all required form 1099.

4. Request that the contractor issue invoices for

payment.

5. Allow the independent contractor to

determine when, where and how to complete

the work.

6. Use contractors who are incorporated.

Recommended Practices

THANK YOU FOR ATTENDING!

If you have additional questions

or comments please contact

[email protected]

Please completed the evaluation form

Documents

Independent contractor or common law employee 2013