1. W-2s vs. 1099s:Who Should Be An Independent Contractor?
2. Sponsored by
3. 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.
4. About the SpeakerVicki M. Lambert, CPP, is President and Academic Director of Vicki M. Lambert, LLC, a firmspecializing in payroll education and training. Known as “The Payroll Advisor,” Ms. Lambert isFounder and Director of www.thepayrolladvisor.com, a website that provides unique and expertservices 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 forthe Practical Payroll Online payroll training program, which is approved by the APA forrecertification credits.
5. 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
6. 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
8. 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
9. Common Law Rule• No exact statute stating who is an employee• Known as the common-law rule• If it walks like a duck…
10. 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
11. 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
12. 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
13. 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
14. 3 Categories of Evidence of Control• Behavioral Control• Financial Control• Type of relationship
15. Behavioral ControlFacts that show whether thebusiness has the right to directand control how the workerdoes the task for which theworker is hired.
16. Behavioral Control Also includes type and degree of:• Instructions that the business gives to the worker• Training given to the worker
17. Instructions• Where and when to do the work• What tools and equipment to use• Hiring of assistants• Providing supplies• Order and sequence of work
18. 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
19. Key ConsiderationThe business has retained the right to control the details of the worker’s performance.
20. TrainingWorker is trained to perform services in a particular manner
21. 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
22. Business Expenses Employees are reimbursed for business expenses Independent contractors are not Not a hard rule…of course!
23. 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!
24. Availability of Services• Independent contractor’s services are available to the public• They advertise• The big Kahuna!
25. 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
26. Profit and LossEmployees are paid a wage without deductions for costs of doing businessIndependent contractors would have expenses to offset any profits.
27. Type of Relationship• Written contracts• Benefits• Permanency of relationship• Key aspect of the regular business of the company
28. Written ContractsDescribes the relationship the parties intended to createNO! Having a written contract does not make a worker an independent contractor
29. 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
30. Permanency of RelationshipIs 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
31. Key Aspects of BusinessIf the worker provides servicesthat are a key aspect of the regularbusiness activity it is likely youhave the right to direct and controlhis or her activities Which means that they are an employee
32. 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
33. Safe Harbors• Section 530• Reasonable basis test• Must complete all federal returns and provide Form 1099-MISC• 5 tests
34. Five Tests for Safe Harbor1. Court ruling or other judicial precedent2. Published IRS rulings3. IRS technical advice or letter ruling directed to that particular employer4. Previous IRS audit that did not result in penalties for same type of position5. Longstanding industry practice
35. Employee Vs. Independent Contractor: Employees Under The FLSAThe test for determining whether an employer-employee relationship exists under the Fair LaborStandards Act is broader than the IRS common lawtest.
36. Some of the Significant Factors Singled out bythe Court In Determining Employee Status Are:• The extent of the individuals financial investment in the facilities, tools and equipment used in performing the job• The degree in which the individual is economically dependent on the employers business. The amount of control the employer has over the individuals opportunity to realize a profit or sustain a loss
37. 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
38. • 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
39. Remember: they are looking for your control of this worker.
40. On part 3, they’re looking for the control of the money.
41. In part 4, they’re looking for control in the relationship.
42. New for 2011 form:looking closely at sales or service workers.
43. Employee Vs. Independent Contractor: Reporting Requirements Best time to change over— January 1Employee: Independent Contractor:Form W-2 Form 1099-MISC if qualifies with $600 or more for year One worker should not get both in the same year—can trigger audit
44. 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
45. Getting CaughtEmployee:By accident—applied for unemploymentOn purpose-found out not eligible for SUI or found out about double the FICA for self employed
46. 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
47. Employee Vs. Independent Contractor: PenaltiesIf the IRS reclassifies an individual from independentcontractor to employee, the employer may be requiredto pay penalties for the misclassification. Under theIRS Code the penalties may be: 1.5% of the employees federal income tax liability, AND 20% of the amount that should have been withheld for the employees FICA
48. 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 failuresThat’s just the IRS…there is a state involved there somewhereMany states have passed specific laws for misclassification of employees…
49. For Example--MissouriSec. 285.515If a court determines that an employer hasknowingly misclassified a worker, the court shallenter a judgment in favor of the state and awardpenalties in the amount of fifty dollars per day permisclassified worker up to a maximum of fiftythousand dollars. The attorney general may enterinto a consent judgment with any person alleged tohave violated sections 285.500 to 285.515.
50. New Program• Voluntary Classification Settlement Program• Known as VCSP• Rollout on September 21, 2011
51. 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
52. 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
53. 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
54. 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
56. 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.
58. How Ascentis Can Help• Tax Law Changes – Clients have access to changes as soon as possible• Updates – Processed behind the scenes in the “cloud”• Latest and Greatest – Clients always have the most up to date version, with all tax, regulatory and compliance updates applied. This is our guarantee.
59. Our next RCH webinars• Check our website, Ascentis.com, under “Resources” and 2012 Webinars for our most up to date payroll webinars.
60. Stay Up To Date• Sign up for our Ascentis, HR, Benefits and Payroll Newsletter to be alerted via email about upcoming webinars, as well as current trends and legislation.
61. Speaker Contact Information www.thepayrolladvisor.com firstname.lastname@example.org