FastFacts Feature Presentation

1. FastFactsFeature Presentation June 26th, 2008 • We are using audio during this session, so please dial in to our conference line… • Phone number: 877-322-9648 • Participant code: 182500

2. Today’s Topic We’ll be taking a look at… Independent Contractor or Employee?Addressing the Employee/Contractor Dilemma

3. Today’s Presenter Pamela WeissmanHR Administrator, JHU

4. Session Segments Presentation Pamela will address the dilemma between distinguishing an Independent Contractor role versus an Employee role. During Pamela’s presentation, your phone will be muted. Q&A After the presentation, we’ll hold a Q&A session. We’ll open up the phone lines, and you’ll be able to ask questions. Pamela will answer as many of your questions as time allows.

5. Contact Us If you would like to submit a question during the presentation or if you’re having technical difficulties, you can email us at: fastfacts@jhu.edu You can also send us an instant message! GoogleTalk – HopkinsFastFacts@gmail.com AOL Instant Messenger – HopkinsFastFacts MSN – FastFacts@jhu.edu

6. Survey Survey At the end of this FastFacts session, we’ll ask you to complete a short survey. Your honest comments will help us to enhance and improve future FastFacts sessions.

7. Independent Contractor or Employee?Addressing the Employee/Contractor Dilemma

8. Agenda • Current IRS Issues in Higher Education • Why Choosing an Independent Contractor Appears to Make Sense • Liabilities of Misclassification • Purpose of Determination • How Do We Determine? • IRS 20 Factors • Maryland Comar Code • Totality of the Relationship • Common Misconceptions • Sponsored Projects • Examples • Future Trends • Question & Answer

9. Current IRS Issues in Higher Education • Federal and state governments are currently investigating and scrutinizing payments made to independent contractors working in higher education, due to a significant increase of hiring such individuals by universities in the past several years. • IRS auditors have examined enough abuses of the existing employment tax rules occurring in tax exempt organizations resulting in sensitization to situations that are unique to higher education.

10. Why Choosing an Independent Contractor Appears to Make Sense • Ease of administration • No prescribed employment recruitment process • Employment taxes do not have to be paid by the hiring unit • Federal and state withholding • Social Security • Medicare • Unemployment • Benefits do not have to be paid • Perception that liability exposure is reduced

11. Liabilities of Misclassification • Failure to comply with federal and state criteria may result in penalties regarding: • State Workers’ Compensation laws • Federal laws pertaining to employment • IRS code regarding payroll taxes, SS, Medicare and FICA • IRS code regarding qualification of 403 (b) and Pension Plans • State unemployment insurance • Criminal penalties and fines • University policies associated with hiring employees • Loss of government sponsored projects and grants

12. Purpose of Determination • Comply with Internal Revenue Service laws and the State of Maryland Comar Code to: • Safeguard the university • Safeguard the department • Safeguard the individual

13. How Do We Determine? • IRS and the state of Maryland presumes all individuals who provide a service are employees. • Determined on a case-by-case basis • Assessed using Independent Contractor Certification forms • Careful analysis is required in applying the twenty factors and the MD Comar Code to assure that formalistic aspects of an arrangement designed to achieve a particular status do not obscure the substance of the arrangement. • Rules to classify a worker as an employee or an independent contractor are complex and often difficult to apply.

14. IRS 20 Factors • 1.Instructions or Directions-how much and what kind of control? • Where-due to technology, can be anyplace and is not as relevant as before • When-depending on the occupation • How-protocols, manuals departmental procedures, Methods, meetings, conversations

15. IRS 20 Factors • 2. Training • Meetings • Correspondence • Other methods-online training, manuals • 3. Integration • Part of the department’s business or Raison d'être

16. IRS 20 Factors • 4. Services Rendered Personally • Indication of control • Principal is interested in the means by which the work is done • 5. Hiring Assistants • Shows an independent relationship

17. IRS 20 Factors • 6. Continuing Relationship • Sporadic or intermittent • Relationship is considered “permanent” • Length of time-determines if the performance is an isolated event or continuous in nature • 7. Set Hours of Work • Flex schedules today dilute the importance of this variable

18. IRS 20 Factors • 8. Full Time Work • Does not necessarily mean an 8-hour day or 5-day work week • May be required even though not specified orally or in writing • 9. Work Done on Premises • Work performed off premises does not necessarily indicate freedom from control

19. IRS 20 Factors • 10. Order or Sequence Set • Pattern or sequence of work • Established routine • Order of services • 11. Reports • Shows accounting of actions • End result reports are acceptable

20. IRS 20 Factors • 12. Payments • Regular invoices • Hourly wages, paid by the piece/unit, salary • 13. Reimbursement • Travel • Materials • 14. Tools and Materials-computer, software, accessories

21. IRS 20 Factors • 15. Significant Investment • Advertising, insurance (workmen’s comp, indemnities) • Word of mouth-not recognized by IRS • Computer, software, education • 16. Profit or Loss • Payment method-lump sum • Business enterprise and judgment • 17. Works for More than One Person or Firm • Employee of several firms

22. IRS 20 Factors • 18. Offers Services to the General Public (or industry) • Advertising • Does not perform services on a continuing basis • 19. Right to Fire and Right to Quit • Question # 12 on the Independent Contractor Certification form • 20. Position in the Organization • Title or position description paid through payroll

23. IRS 20 Factors • IRS Criteria that Carry Less Weight Than in the past Evidenced Through Recent Court Rulings • Performing work on the organization's premises • Setting the hours to be worked • Termination of the relationship by the worker • Discharging the worker by the client

24. Maryland Comar Code • Presumption of an Employee: • A. The person has been and will continue to be free from the employing unit's control or direction. • B. The service is outside the usual course of business of the employing unit. • Performing duties related to the primary function of the hiring units business • C. The person performing the service is customarily engaged in an independently established business.

25. Totality of the Relationship • All of the factors are reviewed and the entire relationship between JHU and the individual is weighed. • Although we may in good faith determine that a worker is an independent contractor, an IRS agent many reach a different conclusion by for example, weighing some of the 20 factors differently. • Additionally, the IRS will focus on the intent and the substance of the work arrangement therefore, the criteria should be rigorously applied.

26. Common Misconceptions • If an (IRS) Form 1099-MISC is issued, the worker is an independent contractor. • My worker and I have signed a written agreement that makes the individual an independent contractor. • My worker performs similar work for other businesses so the worker is an independent contractor. • My worker has a business license, an LLC or a business card, so the worker is an independent contractor. • I pay my workers when I need them and by invoices; therefore they are independent contractors. • My worker has been an employee of the university and has retired. They now want to work casually and want to return as an independent contractor.

27. Sponsored Projects • When a sponsored project is to be charged for an independent contractor's fees, the department must be certain that any requirements applicable to the grant or award have been met prior to entering into a contracted services agreement. • When hiring an individual from another university who does not meet the federal and state requirements, it is recommended that the department pay the university who would then pay the individual.

28. Current Regional Example • April’s Cottage • Workers supplied own materials, equipment and supplies • Could accept or reject work; could hire assistants • Worked from home and were autonomous • Did not receive training from April’s Cottage • Had signed contracts • Paid by the piece • IRS Rejected • Long term relationship • Profit or loss • Core competency of the business • Right of business to control designs although they had never exercised that right

29. Example • Dr. B- Owns and operates Z Medical Center purchases a specialized x-ray machine • Dr. C- A well known, highly skilled and highly trained professional in the field of radiology • Dr. B hires Dr. C to take and read x-rays but does not instruct or tell him how to read them.

30. Future Trends • Testimony before the committee on ways and means, House of Representatives was presented last May 2007. • A report to the committee on finance, U.S. Senate was made by the US Government Accountability Office, July 2007. • IRS laws pertaining to worker classification are becoming more restrictive and additional funding has been granted. • More cooperation between agencies will make it easier to identify organizations who classify workers inappropriately.

31. Conclusion It’s important to remain compliant with both federal and state tax authorities due to risk of fines, fees, back taxes and loss of sponsored programs. Accurate data collection from the department and the individual is vital to appropriately classifying the individual providing services to JHU. Please don’t focus only on the favorable variables. All variables will be considered and the IRS will choose. It will become even more difficult to prove individuals are independent contractors as the U.S. General Accountability office (GAO) moves their tax gap strategy forward.

32. We’re going to open the phone lines now! There will be a slight pause, and then a recorded voice will provide instructions on how to ask questions over this conference call line. We’ll be answering questions in the order that we receive them. We’ll also be answering the questions that were emailed to us during the presentation. If there’s a question that we can’t answer, we’ll do some research after this session, and then email the answer to all participants. Q&A

33. Thank You! Thank you for participating! We would love to hear from you. Are there certain topics that you would like us to cover in future FastFacts sessions? Would you like to be a FastFacts presenter? Please email us at: fastfacts@jhu.edu

34. Survey Before we close, please take the time to complete a short survey. Your feedback will help us as we plan future FastFacts sessions. Click this link to access the survey… http://connect.johnshopkins.edu/fastfactssurvey/ Thanks again!