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 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.
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 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.
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
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 Loss
Employees are paid a wage
without deductions for costs of
doing business
Independent 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 Contracts
Describes the relationship the parties intended to
create
NO! 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 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
31. 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
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 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
35. 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.
36. 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
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
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 1
Employee: 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
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:
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
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 failures
That’s just the IRS…there is a state involved there
somewhere
Many states have passed specific laws for
misclassification of employees…
49. 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.
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.
