Brian T. Whitlock CPA, JD, LLM Employee vs. Independent Contractor
Who cares? Classification Rules HIRE Act and Illinois Tax Credits Wage and Hour Issues Overview
Who Cares? Infernal Revenue Service Income Tax Withholding - $465B Tax Gap FICA and Medicare Taxes Illinois Dept of Employment Security SUTA Tax Benefits/claims Immigration & Dept of Homeland Security Employee SECA surprise Unemployment and Workers Compensation
Infernal Revenue Service Audits Starting in February 2010 IRS officials will start random audits of approximately 6,000 US employers for employment tax compliance and proper worker classification. Looking for misclassification and non-filers Withholding tax; health benefits, wage and hour, overtime, retirement contributions and unemployment insurance Reviewing for the proper issuance of Form 1099-Misc for any workers classified as independent contractors. Looking at employees W-2’s for missing: Fringe benefits, officer compensation, employee expense reimbursement
Infernal Revenue Service Audits Department of Labor Study in 2000 revealed that 10 to 30 percent of firms that were audited in nine states had misclassified some of their employees. Penalties associated with 1099’s A $50 penalty may be assess for the failure to issue each Form 1099-Misc when required to independent contractors. If the business does not have the taxpayer identification number of the independent contractor, the business would have been required to subtract “backup withholding” from the payment. The IRS can make the business pay the amount that should have been withheld.
Immigration and Homeland Security Forms related to Employees Form I-9 requires all employers to verify that each employee hired after November 6, 1986, is authorized to work in US. Penalties, Fines, and Criminal Consequences The Department of Homeland Security can impose: Fines for &quot;paperwork&quot; violations range from $110 to $1,100 per employee, whether or not the employee(s) in question had the legal right to work in the United States. If the DHS determines that an employer knowingly hired unauthorized aliens, fines can reach up to $11,000 per employee. If the DHS determines that an employer has a pattern of knowingly hiring unauthorized aliens, the employer could be subject to criminal charges.
Classification Rules The first step in determining how to treat payments that you make for services provided is to determine which category an individual falls into: Statutory nonemployee Statutory employee Independent contractor or employee
Statutory nonemployee There are two categories of statutory nonemployees: Direct sellers and Licensed real estate agents. These individuals are treated as self-employed for all federal tax purposes if: All payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes
Statutory employee The statutory employee classification is only relevant to a few classifications of employees. Compensated corporate officers are considered statutory employees for Income Tax Withholding. Compensated corporate officers, agent drivers, full-time traveling sales persons, full-time life insurance sales persons and home workers are considered statutory employees for FICA tax statute purposes. For FUTA statute purposes all workers mentioned above for the FICA statute except full-time life insurance salespersons and home workers are statutory employees for FUTA purposes.
Employee vs. Independent Contractor Common Law - The factors that courts consider The courts have put together a series of questions based on the common law principles to determine a worker's classification. No one factor is determinative, and simply having more than half of the factors doesn’t guarantee a result. The importance of each factor varies depending on the occupation and the context in which the services are performed. Some courts have held that these twenty (20) factors are not all-inclusive and other factors might come into play.
Classification Rules The factors are divided into three classifications: Behavioral control covers facts that show whether the business has a right to direct and control how work is done. Financial control refers to factors that show whether the business has a right to control the financial and business aspects of the worker's job. Relationships Include written contracts, ability to perform services for other similar businesses, permanency of the relationship, and importance of service to the company’s regular business
The 20 Common Law Factors 1. Level of instruction Direct when, where and how the work is done. 2. Amount of training Employees typically receive training 3. Degree of business integration Is there a continuing working relationship? 4. Extent of personal services Does the worker provide services personally? 5. Control of assistants who hires, supervises and pays assistants
The 20 Common Law Factors (continued) 6. Continuity of relationships A continuous relationship usually means an employment relationship is present. 7. Flexibility of Schedules Independent contractors generally set their own hours. 8. Demands for full-time work Full time generally suggests an employment relationship 9. Need for on-site services Work on the company's premises suggests an employment 10. Sequence of work If required to work in a certain order or sequence .
The 20 Common Law Factors (continued) 11. Requirement for reports Report his or her progress usually demonstrates an employment relationship 1 2. Method of payment Paid hourly, weekly or monthly 13. Pa yment of business or travel expenses If travel and business expenses are reimbursed 14. Pr ovision of tools and Services Provides tools and materials in order to perform their jobs? 15. Investment in facilities Independent contractors typically invest in and maintain their own work facilities.
The 20 Common Law Factors (continued) 16. Realization of profit or loss Employees receive a salary do not have the risk of a loss. 17. Work for multiple companies Contractors can be working for multiple companies at once. 18. Availability to public An independent contractor generally makes his or her services available to the general public. 19. Control over discharge Contractor's termination usually depends on the contract terms. 20. Right of termination Employees can quit their job at any time without incurring a liability, whereas independent contractors have contract terms.
Section 530 Relief To qualify for relief under Section 530 the employer must satisfy three conditions: Reasonable Basis; A Federal Court Case dealing with Taxes, An IRS Ruling; Advise of Attorney or CPA; or Evidence of a Previous IRS Audit Substantive Consistency Establish that treated all similar workers consistently Reporting Consistency. You must have filed all required federal tax returns consistent with your treatment of each worker as an independent contractor
Hiring Incentives to Restore Employment Act Grants employers a payroll tax holiday plus a general business credit of up to $1,000 per new employee hired. A Payroll Tax Holiday - Employers hiring previously unemployed workers are exempt from the employers’ share of FICA taxes on wages paid from 3/19/2010 to 2/31/2010 (2 nd , 3 rd and 4 th Quarters). Qualified Employer – any non-governmental employer Qualified Employee – Not hired to replace another employee Begins work after Feb 3, 2010 and before Jan 1, 2011 Signs IRS Form W-11 certifying lack of 40 hour per week employment 60 days prior hire date Not a related party to the qualified employer employed for 52 weeks with level wages (or recapture) $1,000 Credit provided wages exceed $16,123
Illinois New Hire Credit Employers with fifty or fewer total employees who hire new, full-time Illinois employees from July 1, 2010 through June 30, 2011 are eligible for a $2,500 withholding tax credit. Only $50 million of credits are available, first 20,000 jobs. Thus, the opportunity to obtain the credit is limited. To qualify, the new full-time job must pay at least $25,000 annually and be sustained for at least one year. Subject employees must average at least thirty-five hours per week. Eligibility for the credit does not require that the same individual be retained for one year, only that a new, full-time Illinois job be created and sustained for one year. The applicant cannot have more than fifty full-time employees as of June 30, 2010. Applications for the credit must be submitted online to the Illinois Department of Commerce and Economic Affairs. Once approved, the taxpayer will be issued a tax credit certificate.
Wage and Hour Issues Federal Fair Labor Standards Act Minimum Wage, overtime, and recordkeeping Applies to “any individual employed by and employer” Other than independent contractors or volunteers Exempt Employees Minimum requirements for Exemption Paid at least $23,600 per year Paid on a salary basis Perform exempt job duties (outlined by regulations) Professional – lawyers, doctors, architects, accountants (but not bookkeepers), teachers, registered nurses, etc. Executive – management responsibility Administrative – office work, related to management, and involves the exercise of independent judgment and discretion about matter of significance
Brian T. Whitlock JD, CPA, LLM Blackman Kallick, LLP 10 S. Riverside Plaza, Chicago, IL 60606 Phone: (312) 980-2941 Website: www.blackmankallick.com Email: [email_address] Linked-in Blog www.untaxinglyyours.com