The document discusses the classification of workers as independent contractors or employees, highlighting the IRS's 20-factor control test and various considerations such as behavioral and financial control, as well as the relationship between the parties. It also covers the implications for S corporations regarding reasonable compensation and medical insurance treatment, along with details on employment tax examinations and classification settlement programs. Additionally, it provides examples, necessary forms, and information on potential penalties for misclassification.

1. Compensation and
Employment Tax Issues
Presented by
Rick Lahr, CPA

2. I. Independent Contractor or Employee
A. IRS 20-factor control test based upon common law
principles
B. Independent Contractor or Employee (Publication
1779)
1. Behavioral Control
a. Right to direct or control how the worker does the work
b. Instructions
c. Training

3. I. Independent Contractor or Employee
B. Independent Contractor or Employee (Publication
1779)
2. Financial Control
a. Right to control the business part of the work
b. Significant investment
c. Expenses
d. Opportunity for profit or loss
3. Relationship of the Parties
a. How the business and the worker perceive their relationship
b. Benefits
c. Written contracts

4. I. Independent Contractor or Employee
C. Tax Court Factors1
1. The degree of control exercised by the payer
2. Which party invests in the work facilities used by the worker
3. The worker’s opportunity for profit or loss
4. Whether the payer can discharge the worker
5. Whether the work is part of the payer’s regular business
6. The permanency of the relationship
7. The method of payment
8. Whether the work required special skills
9. The relationship the parties believed they were creating
1 Lisa Beth Levine v. Commissioner, TC Memo 2005-86

5. I. Independent Contractor or Employee
D. Can an individual be an employee in one capacity and
an independent contractor in another capacity?
1. Full-time university professor who also provided seminars in
classrooms provided by the university1
2. On-air radio personality who also rendered services in
promoting the products and services of his sponsors2
3. Consultant working on two projects for the same company3
1 James S. Reece, TC Memo 1992-335
2 Juan A. Ramirez, et ux v. Commissioner, TC Summary Opinion 2013-38
3Information Letter 2012-0069

6. I. Independent Contractor or Employee
E. Example: Employee & Contractor
Nonemployee compensation

7. Wages, tips, other compensation

8. Wages, tips, other compensation

9. Wages, tips, other comp.

10. Other Income

11. E) Example: Employee
& Partner
Wages, tips, other comp.

12. Guaranteed payments

13. Nonemployee compensation

14. Nonemployee compensation

15. I. Independent Contractor or Employee
F. Forms
1. W-4
a. Employee’s withholding allowance certificate
b. Purpose so that your employer can withhold the correct federal
income tax from your pay
c. Two-earners/multiple jobs worksheet

18. I. Independent Contractor or Employee
F. Forms
2. W-9
a. Request for taxpayer identification number and certification
b. Purpose so that the requester can file an information return to
report income paid to you
c. $50 penalty for failure to furnish your correct taxpayer identification
number to a requester
d. $500 penalty for false information with respect to backup
withholding
e. Criminal penalty for falsifying information

20. I. Independent Contractor or Employee
F. Forms
3. SS-8
a. Determination of worker status for purposes of federal
employment taxes and income tax withholding
b. Behavioral control
c. Financial control
d. Relationship of the worker and firm
e. It can take at least six months to get a determination

25. I. Independent Contractor or Employee
F. Forms
4. 8919
a. Uncollected social security and medicare tax on wages
b. You performed services for a firm
c. You believe your pay from the firm was not for services
as an independent contractor
d. The firm did not withhold your share of social security
and medicare taxes from your pay
e. Reason code A, C, G or H applies to you

27. II. S Corporation Compensation and
Medical Insurance
A. Reasonable Compensation
1. IRS authority to reclassify payments to a
shareholder-employee as a wage expense subject to
employment taxes
2. If most of the gross receipts and profits are
associated with the shareholder’s personal services,
then most of the profit distribution should be
allocated as compensation

28. II. S Corporation Compensation and
Medical Insurance
A. Reasonable Compensation
3. Factors1
a. Training and experience
b. Duties and responsibilities
c. Time and effort devoted to the business
d. Dividend history
e. Payments to non-shareholder employees
f. Timing and manner of paying bonuses to key people
g. What comparable businesses pay for similar services
h. Compensation agreements
i. The use of a formula to determine compensation
1David E. Watson, PC vs. U.S., 668 F. 3d 1008 (8th Cir. 2012)

29. II. S Corporation Compensation and
Medical Insurance
B. Example

31. Wages, salaries, tips,
etc.

32. II. S Corporation Compensation and
Medical Insurance
C. Treating Medical Insurance Premiums as Wages
1. If paid on behalf of 2-percent shareholder-employee,
deductible and reportable as wages
2. Not subject to social security or Medicare or
unemployment taxes
3. 2-percent shareholder-employee may deduct in
arriving at adjusted gross income unless eligible to
participate in any subsidized health care plan

33. II. S Corporation Compensation and
Medical Insurance
D. Example

35. Wages, tips, other compensation
Medicare wages and tips

36. III. Guaranteed Payments
A. Treatment
1. Payments to a partner that are determined
without regard to the partnership’s income
2. Not subject to income tax withholding
3. Deduction to the partnership; ordinary income
to the partner subject to self-employment tax
4. Partners are not employees and should not be
issued a Form W-2

37. III. Guaranteed Payments
B. Self-employed Health Insurance Premiums
1. If paid on behalf of a partner, for services as
a partner, then deductible as a business
expense and the partner must include them in
gross income
2. If paid for a partner as a reduction in
distributions to the partner, the partnership
cannot deduct the premiums

38. III. Guaranteed Payments
C. Example

39. Guaranteed payments
Amounts paid for
medical insurance

40. IV. Employment Tax Examination
A. Section 530 Relief (Publication 1976)
1. Reasonable basis
a. Reliance on court case or IRS ruling
b. Prior audit
c. How a significant segment of your industry treats
similar workers
d. Professional advice
2. Substantive consistency
a. Predecessor business
b. Not available if you treated similar workers as
employees

41. IV. Employment Tax Examination
A. Section 530 Relief (Publication 1976)
3. Reporting consistency
a. Filed Form 1099-MISC if a worker paid $600 or
more
b. Not available for any year and for any workers for
whom you did not file the required information
returns and federal tax returns

42. IV. Employment Tax Examination
B. Classification Settlement Program
(CSP)/Application for Voluntary Classification
Settlement Program (VCSP) (Form 8952)
1. Reclassify workers as employees for future tax periods
with limited federal employment tax liability for past
non-employee treatment
2. 100% CSP offer if the taxpayer meets the section 530
reporting consistency requirement but not the
substantive consistency requirement or the reasonable
basis test, then a full employment tax adjustment of the
most recent tax year

43. IV. Employment Tax Examination
B. Classification Settlement Program
(CSP)/Application for Voluntary Classification
Settlement Program (VCSP) (Form 8952)
3. 25% CSP offer if the taxpayer meets the section 530
reporting consistency requirement and the substantive
consistency requirement or the reasonable basis test, then a
one-quarter tax adjustment for the most recent tax year
4. Taxpayer may qualify for more than one CSP offer if
several classes of workers are at issue

46. If you have any questions
please feel free to contact
Rick at:
214-635-2520
rlahr@gppcpa.com