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Worker Classification: Getting It Right The 1st Time

All audio is streamed through your computer speakers.

There will be several attendance verification questions during the LIVE webinar that must be answered via the online quiz at the conclusion to qualify for CPE.

For the archived/recorded version of this webinar, the link to the attendance verification quiz is a final exam on the topics covered during the presentation.


Worker classification

Worker Classification

Getting It Right The 1st Time

Part 2


Lesson outline
Lesson Outline

  • Properly classifying workers

  • 3 Categories of classification

  • What are the various classes of workers

  • Penalties for misclassification

  • Case studies

  • Form SS-8 and it’s importance

  • Federal vs. state law

  • Industries with classification issues

  • Voluntary Classification Settlement Program (VCSP)

  • Section 530 Safe Haven Protection


Independent contractor or employee
Independent Contractor or Employee

  • Which one should it be?

  • How do you determine proper classification?

  • What affect does improper classification have on employer and worker?


So how do you get it right
So How Do You Get It Right?

  • Do you know how to properly classify workers?

  • How do you determine if your workers are employees, or independent contractors?

  • What factors should you use to make the proper classification?


3 categories for classification
3 Categories For Classification

Worker classification facts are based on three main categories

  • Behavioral Control

  • Financial Control

  • Relationship of the Parties


3 categories for classification1
3 Categories For Classification

  • Must consider all facts in the case

  • Each case has different facts and circumstances

  • No single fact provides the answer

  • Misclassification can have major ramifications on employer and worker if you get it wrong


Behavioral control
Behavioral Control

  • These facts show if there is a right to direct or control how the worker performs the work

  • A worker is an employee when the business has the right to direct and control the worker

  • Business doesn’t have to control the way work is done – can direct and control the work


Financial control
Financial Control

  • These facts show whether there is a right to direct and control the business segment of the work

  • Does the business or the worker control financial elements such as expenses?


Relationship of the parties
Relationship of The Parties

  • These facts show how the business and the worker perceive their relationship

  • Does the business perceive the worker as an independent contractor?

  • Does the worker think he/she is an employee?


So where do we go from here
So Where Do We Go From Here?

  • The worker perceives employee status,

  • The business perceives independent contractor status

  • Who is right and who is wrong?

  • How do you proceed now?


Employees under common law
Employees Under Common Law

  • A worker is usually an employee if the business can control what will be done and how it will be done

  • If business has ability to control the details of how the services are performed it indicates an employee-employer relationship

  • Workers in business for themselves are not employees


Who are independent contractors
Who Are Independent Contractors?

  • Accountants

  • Doctors

  • Lawyers

  • Veterinarians


Who are employees
Who Are Employees?

  • Food servers

  • Bartenders

  • Receptionists

  • Office managers


Statutory employees
Statutory Employees

  • A Statutory Employee is a worker who cannot be classified as an employee under the Common Law rules

  • But is an employee for payroll tax purposes due to specific statutory requirements (SocialSecurity and Medicare)


Who are statutory employees
Who Are Statutory Employees?

  • An Agent or Commission Driver(Food and beverage delivery driver – “No Milk”)

  • Full-Time Life Insurance Salesperson(Sells primarily for one company)

  • Homeworker(Works from home using materials furnished by business)


Who are statutory employees1
Who Are Statutory Employees?

  • Traveling or City Salesperson(Full-Time – Works for One company taking customer orders)

  • Corporate Officers(One who provides No services or Minor services and is not entitled to receive payment)


Who are statutory employees2
Who Are Statutory Employees?

Statutory Employees must have Social Security and Medicare taxes withheld if the Three Tests are met


3 test for statutory employees
3 Test For Statutory Employees

  • Service contract states or implies that almost all services will be performed personally by employee

  • The employee has little or no investment in the equipment and property used to perform the services

  • Services are performed on a continuing basis for the same company


Statutory non employees
Statutory Non-Employees

  • Two Categories of Statutory Non-Employees

  • If worker falls into either category they can be classified as Independent Contractors

  • Statutory Non-Employees are responsible for federal income taxes, and self-employment taxes


Who are statutory non employees
Who Are Statutory Non-Employees?

  • Direct Sellers - (Must meet Three Factors to qualify)

  • Real Estate Agents – (No property managers)


Direct sellers 3 factors
Direct Sellers 3 Factors

  • Salesperson sells consumer goods in the home, or at a place of business other than a permanent retail establishment

  • Sells consumer products to any buyer on a buy-sell basis, deposit commission basis, or any similar prescribed by the regulations

  • Substantially all of payment made to direct seller must be directly related to sales output, or performance or service output (Can’t Be Paid For Hours Worked)


Direct seller requirements
Direct Seller Requirements

  • To obtain direct seller’s exemption there must be a

  • Written contract between direct seller and company

  • Stating that direct seller will not be treated as an employee for federal tax purposes


So who are direct sellers
So Who Are Direct Sellers?

  • Door-to-door salespersons

  • Home demonstration persons


Statutory non employees1
Statutory Non-Employees

  • Real Estate Agents

  • Need to be a qualified and licensed agent

  • Output should be based on sales and not on hours worked

  • Written contract stating they are not an employee for federal tax purposes


Real estate agents
Real Estate Agents

Provide services such as

  • Advertising

  • Showing real estate property

  • Acquisition of a lease to real property

  • Recruitment, training, and supervision of other real estate persons


Real estate agents1
Real Estate Agents

  • Property Management services are NOT included

  • Property Managers are not classified in the real estate agent category


Statutory non employees2
Statutory Non-Employees

  • Statutory Non-Employees are not employees for federal tax purposes, but

  • Can be an employee for other purposes such as state worker’s compensation, and tort liability


Penalties of misclassification
Penalties of Misclassification

  • Employers are required to collect withholding taxes

  • Can ask for abatement of liability for employee portion of taxes if employee has paid the taxes

  • Use Form 4670 to request relief of tax liability

  • Employee’s statement submitted using Form 4669


Failure to file return penalty
Failure to File Return Penalty

  • 5% of balance due for each delinquent month

  • Maximum penalty – 25%


Failure to collect tax penalty
Failure To Collect Tax Penalty

  • Business that “Willfully” fails to collect and pay trust fund taxes will be assessed

  • 100% penalty of tax due


What are trust fund taxes
What Are Trust Fund Taxes?

  • Federal income taxes and FICA taxes required to be withheld from employee’s wages

  • Trust fund taxes do not include employer’s FICA portion


Trust fund penalty
Trust Fund Penalty

100% Penalty if Two Requirements are Met

  • Must be responsible person

  • Responsible person must have “Willfully” failed to collect or pay the trust fund taxes


What is willful
What Is Willful?

Willful is defined as

  • Intentional

  • Deliberate

  • Voluntary

  • Reckless

  • Knowing


Case study 1
Case Study 1

  • Business misclassifies employees as independent contractors and does not withhold federal and FICA taxes

  • Should responsible be assessed the 100% penalty for failure to collect and pay trust fund taxes?

  • Is there reasonable basis for not collecting and paying?

  • Crowd Management Services, Inc. DC Ore, 95-1 USTC


How far back can irs go
How Far Back Can IRS Go?

  • Statute of limitations is based on filing date of Form 941 and 940

  • 3 Years from filing date

  • If forms are never filed, statute never expires

  • If fraud is involved, there is NO statute of limitations for reclassifying workers


Form ss 8
Form SS-8

  • Form SS-8(Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding)

  • Can be submitted to IRS by worker

  • Can be submitted to IRS by employer

  • Can be requested by IRS examiner


Form ss 81
Form SS-8

  • SS-8 is a restatement of 20 Common Law questions

  • It’s an excellent self-audit tool

  • Business should use it when drafting independent contractor agreement


Federal vs state law
Federal vs. State Law

  • Every state has different laws for determining independent contractor status

  • Most states base it on “Employment”. Do worker’s services constitute employment?

  • Employment for state unemployment purposes is defined as “any services performed for remuneration or under contract for hire, written or oral, express or implied”


Federal vs state law1
Federal vs. State Law

  • Services for remuneration are considered “employment” unless the ABC Test is met

  • If ABC Test is met worker is not an employee for state unemployment purposes

  • Burden of Proof falls on the business

  • Some states require that only One or Two of the conditions are satisfied


Abc test
ABC Test

  • The worker is free from control of direction of the performance of the work

  • The service is either outside the usual course of business for which the service is performed, or it is performed outside of all the places of business of the enterprise for which the service is performed

  • The worker is customarily engaged in an independently established trade, occupation, profession, or business


Abc test1
ABC Test

  • Some states use ABC Test

  • Other states use the Common Law IRS 20 Factor Test

  • Other states use a variation of tests






Possible industries with worker classification issues
Possible Industries With Worker Classification Issues

  • Building and construction industry

  • Trucking industry

  • Computer industry

  • Automobile industry

  • Legal industry

  • Taxicab industry


Construction industry case study 2
Construction Industry Case Study 2

  • Facts

  • Jared Jones – Experience tile setter

  • Oral agreement with corporation to perform full-time services at construction sites

  • Uses his own tools and performs services in order designated by the corporation

  • Corporation supplies all materials, makes frequent inspections of work


Construction industry case study 2 cont
Construction Industry Case Study 2 (Cont)

  • Facts

  • Jared gets paid on a piecework basis

  • Company carries workers compensation on him

  • He doesn’t have a place of business

  • Performs similar services for other customers

  • Either party can terminate the services at any time


Construction industry case study 2 cont1
Construction Industry Case Study 2 (Cont)

  • What is Jared Jones?

  • Employee or

  • Independent Contractor


Construction industry case study 3
Construction Industry Case Study 3

  • Facts

  • Freddy Thomas is an electrician who submitted a job estimate to apartment complex for electrical services

  • $16 per hour @ 400 hours

  • He will receive $1,280 every 2 weeks for 10 weeks

  • Not considered payment by the hour


Construction industry case study 3 cont
Construction Industry Case Study 3 (Cont)

  • Facts

  • Freddy can work more or less than 400 hours to get job done. He will receive $6,400 for the job

  • He performs electrical services for other companies obtained by advertising


Construction industry case study 3 cont1
Construction Industry Case Study 3 (Cont)

  • What is Freddy Thomas?

  • Employee or

  • Independent Contractor


Auto industry case study 4
Auto Industry Case Study 4

  • Facts

  • Susan Bachman performs auto repair services for auto sales agency using their space

  • She uses her own tools, equipment, and supplies

  • She seeks out business from insurance adjusters and other individuals and does all of the work that comes to the sales agency


Auto industry case study 4 cont
Auto Industry Case Study 4 (Cont)

  • Facts

  • Susan hires and discharges her own helpers

  • Determines her own and her helpers working hours

  • Quotes prices for repair work, makes all necessary adjustments

  • Assumes all losses

  • Receives as compensation for her services, a large percentage of the gross collections from the auto repair shop


Auto industry case study 4 cont1
Auto Industry Case Study 4 (Cont)

  • What is Susan Bachman?

  • Employee or

  • Independent Contractor


Auto industry case study 4 cont2
Auto Industry Case Study 4 (Cont)

  • What are Susan’s workers?

  • Employees or

  • Independent Contractors


Taxicab driving industry case study 5
Taxicab Driving Industry Case Study 5

  • Facts

  • Dexter Manning rents a cab from Speedy Cab Co for $150 per day

  • He pays all costs of maintaining and operating the cab

  • Dexter keeps all fares that he receives from customers


Taxicab driving industry case study 5 cont
Taxicab Driving Industry Case Study 5(Cont)

  • Facts

  • Dexter uses Speedy Cab’s two-way radio communication equipment

  • Speedy Cab’s dispatching services

  • Speedy Cab’s advertising

  • These items benefit both Speed Cab Co. and Dexter Manning


Taxicab driving industry case study 5 cont1
Taxicab Driving Industry Case Study 5 (Cont)

  • What is Dexter Manning?

  • Employee or

  • Independent Contractor


What triggers an irs worker classification examination
What Triggers An IRS Worker Classification Examination?

  • The employee (worker) files Form SS-8 requesting a ruling

  • The business issues an “extraordinarily high number” of 1099-MISC forms

  • The business issues 1099-MISC forms with “highdollar” amounts


What triggers an irs worker classification examination1
What Triggers An IRS Worker Classification Examination?

  • The state unemployment agency conducts an audit and shares information with IRS

  • IRS performs “project audits” on a certain industry

  • Informant tips off IRS or DOL and provides audit lead (Be cautious of disgruntled former employees or vengeful competitors)


2 types of worker classification audits
2 Types of Worker Classification Audits

  • Employment tax exams

  • Income tax exams


Examination location
Examination Location

  • IRS wants to conduct audit at taxpayer’s place of business

  • Taxpayer’s representative wants it off the business premises

  • Never allow examiner to conduct exam on business premises! Easy to “misinterpret” events observed/overheard


Voluntary worker classification settlement program
Voluntary Worker Classification Settlement Program

  • VCSP allows employers to voluntarily reclassify workers as employees for future tax periods

  • Provides partial relief from federal employment taxes

  • Nearly 1,000 employers have applied as of February 2013


Who may qualify for vcsp
Who May Qualify for VCSP?

  • Businesses, tax-exempt organizations, and government entities may qualify

  • Must currently be treating workers (or a class or group of workers) as independent contractors or other nonemployees

  • Must have consistently treated workers as independent contractors or other nonemployees


Who may qualify for vcsp1
Who May Qualify for VCSP?

  • Must have filed all required Forms 1099 for workers the previous three years (temporarily waived thru 6/30/13 – See Announcement 2012-46)

  • May not currently be under employment tax audit by IRS, or under classification audit by DOL or State agency

  • Taxpayer previously audited for classification must be in compliance with audit results


Who may qualify for vcsp2
Who May Qualify for VCSP?

  • May not currently be contesting the classification of workers in court

  • If you qualify apply using Form 8952, Application for Voluntary Classification Settlement Program (at least 60 days before you want to begin treating workers as employees)


What does it cost for vcsp
What Does It Cost for VCSP?

  • Accepted employers will pay an amount equaling to just over 1% of wages paid to reclassified workers for the past year

  • No interest or penalties will be due

  • Employer will not be audited on payroll taxes related to these workers for prior years


What does it cost for vcsp1
What Does It Cost for VCSP?

  • Employers applying for VCSP under the temporary relief program (Announcement 2012-45) may qualify even if Forms 1099 were not filed

  • Will pay a slightly higher amount than 1%, plus some penalties, and must file any unfiled Forms 1099 for workers that will be reclassified


Section 530 safe haven protection
Section 530 Safe Haven Protection

  • Section 530 of the Internal Revenue Act of 1978 provides a “safe haven” for companies who use independent contractors

  • Passed in 1978 – To provide relief for businesses that used independent contractors in good faith

  • Intended to last only one year until Congress evaluated and passed legislation defining independent contractors. 35 years later Congress is still evaluating the matter!


Section 530 safe haven protection1
Section 530 Safe Haven Protection

  • Section 530 provides the new IRS Classification Settlement Program (CSP)

  • CSP establishes procedures for early and timely resolution of cases, reducing taxpayer burden

  • It is “Mandatory” that examiner offer a CSP to taxpayer if they qualify for Section 530 relief


3 qualification requirements for section 530 relief
3 Qualification Requirements For Section 530 Relief

  • Reporting Consistency

  • Substantive Consistency

  • Reasonable Basis


Reporting consistency
Reporting Consistency

  • All federal tax returns and information returns must be filed by the business on a basis consistent with the business’ treatment of the individual worker not being an employee.

  • Test must be applied to each worker separately since Form 1099-MISC may be filed for one worker in a class, but not another worker in same class. Treat these workers as separate classes.


Substantive consistency
Substantive Consistency

  • Business must have consistently treated similarly situated workers as independent contractors.

  • If business or predecessor treated a similarly situated worker as an employee, Section 530 relief is not available.

  • Test must be applied to each class of workers.


Reasonable basis
Reasonable Basis

  • Business must have some reasonable basis for not treating workers as employees

  • Reasonable basis can consist of reasonable reliance on several items


Reasonable basis1
Reasonable Basis

  • Judicial Precedent

  • Published Ruling

  • Private Letter Ruling

  • Technical Advice Memorandum

  • Results of past audits

  • Long standing recognized practice of a significant segment of the industry


Are section 530 requirements met
Are Section 530 Requirements Met?

  • If business clearly meets the reporting, substantive consistency requirements, and satisfies the reasonable basis test

  • Section 530 requirements are fully met and business is eligible for “Safe Haven” relief


Are section 530 requirements met1
Are Section 530 Requirements Met?

If the business does not meet Section 530 relief provisions, the IRS examiner will proceed to determine if workers are independent contractors or employees using the Common Law rules (20 Factor Test)


When does csp get offered
When Does CSP Get Offered?

  • If examiner determines that a reclassification issue does exist, examiner will consider whether or not CSP applies.

  • If examiners proposal is to reclassify workers as employees and business has timely filed Forms 1099

  • Examiner should make a CSP offer to taxpayer


When does csp get offered1
When Does CSP Get Offered?

  • It is mandatory that examiner present a CSP offer if all requirements are met

  • Taxpayer can accept or decline offer

  • Businesses that have not filed the required information returns are not entitled to CSP offer


Cases qualifying for csp
Cases Qualifying for CSP

  • Form 941/940 Non-Filers – Eligible for CSP if Forms 1099-MISC were filed

  • Statutory Employees – If business timely filed Forms 1099-MISC

  • Household Employees – If employer timely filed Forms 1099

  • Corporate Officers – If business treats corporate officer as IC and timely filed Form 1099-MISC


Cases excluded from csp
Cases Excluded From CSP

  • Cases with Other Issues - CSP only available for worker classification. Not available for dividend or wages issues with S Corp reasonable compensation

  • Prior Closing Agreement – Taxpayer who has entered into a prior CSP is not eligible

  • CSP Non-Compliance – Business that isn’t in compliance with existing closing agreement


Cases excluded from csp1
Cases Excluded From CSP

  • Prior Coverage– Not available to a business that incorporated after the closing agreement was signed by principals, owners of the prior business that had worker classification issues.

  • Three Party Arrangements– No CSP is available if the correct employer can’t be identified


Cases excluded from csp2
Cases Excluded From CSP

  • Information Returns other than Forms 1099 Not available for any returns beside 1099s. Not available for K-1s if workers were treated as partners

  • Wage Issues – Not available for officer - shareholder compensation issues

  • Administrative or Judicial Proceeding – If prior year employment tax returns are part of an administrative or judicial proceeding No CSP


Cases excluded from csp3
Cases Excluded From CSP

  • Litigation – No CSP offer available if worker classification issue is resolved through litigation

  • Criminal Investigation – No CSP if tax return is part of an on-going investigation

  • Claims – No CSP for settlements available for cases closed prior to CSP implementation


Cases excluded from csp4
Cases Excluded From CSP

  • Government Employers – CSP not available to state and local government employers

  • Taxpayer No Longer in Business – CSP is only available to taxpayers still in existence. Closed business don’t qualify


Taxpayer s rights to csp offers
Taxpayer’s Rights To CSP Offers

  • Taxpayer participation in CSP is voluntary

  • Taxpayer can accept or reject offer at any timeduring the examination process

  • Declining to accept CSP offer allows taxpayer to retain all rights to an administrative appeal and all rights to judicial review


Conclusion
Conclusion

  • IRS audit process is designed to select returns with a high probability of error for audit

  • Being selected for audit does not indicate there is a problem

  • A “No Change” in a worker classification examination is possible


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