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W-2s vs. 1099s: Who Should Be An Independent Contractor?
Sponsored by
RCH Credit
• This is an APA approved program for 1 (one)
RCH
• You must attend the entire 1-hour course.
• You will be sent a certificate with the
program course code upon completion for
your file folder by no later than 9/21/12.
About the Speaker
Vicki M. Lambert, CPP, is President and Academic Director of Vicki M. Lambert, LLC, a firm
specializing in payroll education and training. Known as “The Payroll Advisor,” Ms. Lambert is
Founder and Director of www.thepayrolladvisor.com, a website that provides unique and expert
services for anyone dealing with the complexities and technicalities of the payroll process.
As an adjunct faculty member at Brandman University, Ms. Lambert is the creator and instructor for
the Practical Payroll Online payroll training program, which is approved by the APA for
recertification credits.
What We Will Cover Today
• Worker Classifications
• What is the common law rule and how to apply it
• The Three Factors that apply to worker status
• IRS v. FLSA on independent contractors and employees
• Don’t forget the states have a say on who is an employee
Covering Today
• Form SS-8
• Who gets a W-2 and who gets a 1099 and why the twain should never meet
• What triggers a 1099 audit—its easier than you think
• NRP Audits are winding down
• What are the penalties for misclassifying workers
• IRS’ VCSP in full swing
Under IRS Classifications
• 5 Classification of Workers:
• Common-law Employee
• Independent Contractor
• Statutory Employee
• Statutory Non-Employee
• Leased Employee
Our focus
today
Common Law Employee
• Anyone who performs services for an employer is an employee if the employer can control what will be done and how it will be done—a matter of control
• Makes no difference how it is labeled
• Full or part time doesn’t matter
• No distinction between classes of employees
Common Law Rule
• No exact statute stating who is an employee
• Known as the common-law rule
• If it walks like a duck…
Characteristics of Employees
• Employer provides instruction, tools, supplies and training
• Employer can discharge
• Employee can quit
• Services are performed personally
• Continuous relationship
• Employer hires and pays assistants and staff
What is an Independent Contractor?
• Are self employed
• Employees of no other entity
• You have the right to control or direct only the result of the work and not the means and/or methods of accomplishing the result
Characteristics of an Independent Contractor
• Sets own order and sequence of work
• Works for more than one person or firm
• Offers services to the general public
• Contract agreements are in effect
• Furnishes own tools
Determining Who Is an Employee
• IRS regulations are not spelled out in terms of one law.
• Tests of characteristics, job duties and intent
• Boils down to the matter of control
• 20 facts are divided into three categories that provide evidence of control
3 Categories of Evidence of Control
• Behavioral Control
• Financial Control
• Type of relationship
Behavioral Control
Facts that show whether the business has the right to direct and control how the worker does the task for which the worker is hired.
Behavioral Control
Also includes type and degree of:
• Instructions that the business gives to the worker
• Training given to the worker
Instructions
• Where and when to do the work
• What tools and equipment to use
• Hiring of assistants
• Providing supplies
• Order and sequence of work
What If No Instruction?
• Amount needed varies for different jobs
• Behavioral control may exist if employer has right to control how work results are achieved
• Business may lack knowledge in highly specialized fields
• Task may require little or no instruction
Key Consideration
The business has retained the right to control the details of the worker’s performance.
Training
Worker is trained to perform services in a particular manner
Financial Control
• Extent to which worker has reimbursed business expenses
• Extent of the worker’s investment
• Extent to which the worker makes his or her services available to the relevant market
• How the business pays the worker
• Extent to which the worker can realize a profit or loss
Business Expenses
Employees are reimbursed for business expenses
Independent contractors are not
Not a hard rule…of course!
Worker’s Investment
• Employees do not have an investment in the facilities he or she uses
• Independent contractors usually do
• Again, not actually a requirement…but it helps!
Availability of Services
• Independent contractor’s services are available to the public
• They advertise
• The big Kahuna!
Paying the Worker
• Employees are generally guaranteed a regular wage amount for an hour, week or other period of time
• Independent contractor is paid a flat fee for the job
• There are exceptions—i.e. lawyers
Profit and Loss
Employees are paid a wage without deductions for costs of doing business
Independent contractors would have expenses to offset any profits.
Type of Relationship
• Written contracts
• Benefits
• Permanency of relationship
• Key aspect of the regular business of the company
Written Contracts
Describes the relationship the parties intended to create
NO! Having a written contract does not make a worker an independent contractor
Benefits
• Does the company provide the worker with employee type benefits such as insurance, a pension plan, vacation or sick pay?
• Yes – Employee
• No- Not necessarily an independent contractor
Permanency of Relationship
Is the worker engaged with the expectation that the relationship will continue indefinitely rather than for a specific project or period?
Evidence the intent was to create an employer-employee relationship
Key Aspects of Business
If the worker provides services that are a key aspect of the regular business activity it is likely you have the right to direct and control his or her activities
Which means that they are an employee
Pit Falls
• Consultants
Especially former employees or retired employees
• Employees performing other tasks
• Watch out for the states
Especially for SUI – May not match IRS
Safe Harbors
• Section 530
• Reasonable basis test
• Must complete all federal returns and provide Form 1099-MISC
• 5 tests
Five Tests for Safe Harbor
1. Court ruling or other judicial precedent
2. Published IRS rulings
3. IRS technical advice or letter ruling directed to that particular employer
4. Previous IRS audit that did not result in penalties for same type of position
5. Longstanding industry practice
Employee Vs. Independent Contractor: Employees Under The FLSA
The test for determining whether an employer-employee relationship exists under the Fair Labor Standards Act is broader than the IRS common law test.
Some of the Significant Factors Singled out by the Court In Determining Employee Status Are:
• The extent of the individual's financial investment in the facilities, tools and equipment used in performing the job
• The degree in which the individual is economically dependent on the employer's business. The amount of control the employer has over the individual's opportunity to realize a profit or sustain a loss
Significant Factors…
• The extent to which the services are integrated into the business
• The amount of initiative or skill level required for the worker to perform the job
• The permanency of the relationship between the employer and the individual providing the services
• Provided by IRS to help determine status
• They will review and give ruling-not the first choice by most
• Easy to complete yourself--then apply the results—a little safer in most cases
• There are state equivalents
• Let’s do a quick review of the form’s questions-see where they are looking
Remember: they are looking for your control of this worker.
On part 3, they’re looking for the control of the money.
In part 4, they’re looking for control in the relationship.
New for 2011 form: looking closely at sales or service workers.
Employee Vs. Independent Contractor: Reporting Requirements
Employee:
Form W-2
Independent Contractor:
Form 1099-MISC if
qualifies with $600 or more
for year
One worker should not get both in
the same year—can trigger audit
Best time to
change over—
January 1
How Do I Get Caught?
• Random audit by IRS-not likely unless you had more than one form for a worker—but they are looking for it
• Audit due to other audits—FLSA will get you IRS—State will get you IRS
• They are teaming up on this one—especially for SUI audits
Getting Caught
Employee:
By accident—applied for unemployment
On purpose-found out not eligible for SUI or found out about double the FICA for self employed
Employment Tax National Research Program Initiative (ET NRP)
• Focus on independent contractors
• Auditing 6,000 employers over 3 year period
• Employers chosen at random—is this your lucky day?
• Round 2 is done—Round 3 is now underway
• IRS will take prior action into account when assessing penalties
• Non NRP audits are using the same exhaustive list
Employee Vs. Independent Contractor: Penalties
If the IRS reclassifies an individual from independent contractor to employee, the employer may be required to pay penalties for the misclassification. Under the IRS Code the penalties may be:
1.5% of the employee's federal income tax liability, AND
20% of the amount that should have been withheld for the employee's FICA
Penalties…
If the employer failed to file the information returns (e.g., Form 1099) before the reclassification, the penalties double to 3% and 40% respectively.
Can get one time interest free adjustment on Form 941 failures
That’s just the IRS…there is a state involved there somewhere
Many states have passed specific laws for misclassification of employees…
For Example--Missouri
Sec. 285.515
If a court determines that an employer has knowingly misclassified a worker, the court shall enter a judgment in favor of the state and award penalties in the amount of fifty dollars per day per misclassified worker up to a maximum of fifty thousand dollars. The attorney general may enter into a consent judgment with any person alleged to have violated sections 285.500 to 285.515.
New Program
• Voluntary Classification Settlement Program
• Known as VCSP
• Rollout on September 21, 2011
Purpose Of Program
• Designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government
• Permits taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes
• Program is optional
• Applies to future tax periods with limited federal unemployment tax liability for past nonemployee treatment
Eligibility
• Available for taxpayers/employers who want to voluntarily change a prospective classification of their workers
• Applies to employers who are currently treating their workers as independent contractors or other nonemployees
• Can be a worker or class or group of workers
• Employer must want to prospectively treat the workers as employees
Eligibility Requirements
• Be presently treating the workers as non-employees
• Have satisfied any Form 1099 requirements for each of the workers for the 3 preceding calendar years ending before date Form 8952 is filed
• Have consistently treated the workers as non-employees
• Have no dispute with the IRS as to whether the workers are non-employees or employees for federal employment tax purposes
Eligibility Requirements
• Not be under examination by the IRS
• Not be under examination by the Department of Labor ( federal)
• Not be under examination by any state agency for the proper classification of the workers
• Not have been examined previously by the IRS or DOL for the classification of workers
Questions
RCH Credit
• This is an APA approved program for 1 (one) RCH
• You must attend the entire 1-hour course.
• You will be sent a certificate with the program course code upon completion for your file folder by no later than 9/21/12.
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