Worker Classification: Getting It Right The 1st Time

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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.

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Worker Classification

• Getting It Right The 1st Time
• Part 2

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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 its importance
• Federal vs. state law
• Industries with classification issues
• Voluntary Classification Settlement Program
  (VCSP)
• Section 530 Safe Haven Protection

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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?

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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?

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3 Categories For Classification

• Worker classification facts are based on three
  main categories
• Behavioral Control
• Financial Control
• Relationship of the Parties

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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

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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 doesnt have to control the way work is
  done can direct and control the work

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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?

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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?

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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?

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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

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Who Are Independent Contractors?

• Accountants
• Doctors
• Lawyers
• Veterinarians

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Who Are Employees?

• Food servers
• Bartenders
• Receptionists
• Office managers

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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 (Social
  Security and Medicare)

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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)

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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)

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Who Are Statutory Employees?

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

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3 Test For Statutory Employees

1. Service contract states or implies that almost
   all services will be performed personally by
   employee
2. The employee has little or no investment in the
   equipment and property used to perform the
   services
3. Services are performed on a continuing basis for
   the same company

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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

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Who Are Statutory Non-Employees?

• Direct Sellers - (Must meet Three Factors to
  qualify)
• Real Estate Agents (No property managers)

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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 (Cant Be Paid
  For Hours Worked)

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Direct Seller Requirements

• To obtain direct sellers 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

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So Who Are Direct Sellers?

• Door-to-door salespersons
• Home demonstration persons

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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

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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

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Real Estate Agents

• Property Management services are NOT included
• Property Managers are not classified in the real
  estate agent category

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Statutory Non-Employees

• Statutory Non-Employees are not employees for
  federal tax purposes, but
• Can be an employee for other purposes such as
  state workers compensation, and tort liability

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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
• Employees statement submitted using Form 4669

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Failure to File Return Penalty

• 5 of balance due for each delinquent month
• Maximum penalty 25

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Failure To Collect Tax Penalty

• Business that Willfully fails to collect and
  pay trust fund taxes will be assessed
• 100 penalty of tax due

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What Are Trust Fund Taxes?

• Federal income taxes and FICA taxes required to
  be withheld from employees wages
• Trust fund taxes do not include employers FICA
  portion

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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

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What Is Willful?

• Willful is defined as
• Intentional
• Deliberate
• Voluntary
• Reckless
• Knowing

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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

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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

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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

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Form SS-8

• SS-8 is a restatement of 20 Common Law questions
  
• Its an excellent self-audit tool
• Business should use it when drafting independent
  contractor agreement

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Federal vs. State Law

• Every state has different laws for determining
  independent contractor status
• Most states base it on Employment. Do
  workers 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

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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

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ABC Test

1. The worker is free from control of direction of
   the performance of the work
2. 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
3. The worker is customarily engaged in an
   independently established trade, occupation,
   profession, or business

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ABC Test

• Some states use ABC Test
• Other states use the Common Law IRS 20 Factor
  Test
• Other states use a variation of tests

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States With ABC Test
Alaska Louisiana New Jersey
Arkansas Maine New Mexico
Connecticut Maryland Rhode Island
Delaware Massachusetts Tennessee
Georgia Nebraska Vermont
Hawaii Nevada Washington
Illinois New Hampshire West Virginia
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States Using Common Law 20 Factor Test
Alabama Kentucky North Dakota
Arizona Minnesota South Carolina
California Mississippi Texas
District of Columbia Missouri Utah
Florida New York
Iowa North Carolina
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Variations of State Unemployment Insurance Tests
State Test
Colorado AC
Idaho AC
Indiana A Part of B C
Kansas AB
Michigan Economic Reality Test
Montana AC
Ohio A Part of B C
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Variations of State Unemployment Insurance Tests
State Test
Oregon AC
Pennsylvania AC
South Dakota AC
Virginia AB or AC
Wisconsin Unique 8 Factor Test
Wyoming AC
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Possible Industries With Worker Classification
Issues

• Building and construction industry
• Trucking industry
• Computer industry
• Automobile industry
• Legal industry
• Taxicab industry

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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

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Construction Industry Case Study 2 (Cont)

• Facts
• Jared gets paid on a piecework basis
• Company carries workers compensation on him
• He doesnt have a place of business
• Performs similar services for other customers
• Either party can terminate the services at any
  time

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Construction Industry Case Study 2 (Cont)

• What is Jared Jones?
• Employee or
• Independent Contractor

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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 _at_ 400 hours
• He will receive 1,280 every 2 weeks for 10
  weeks
• Not considered payment by the hour

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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

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Construction Industry Case Study 3 (Cont)

• What is Freddy Thomas?
• Employee or
• Independent Contractor

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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

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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

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Auto Industry Case Study 4 (Cont)

• What is Susan Bachman?
• Employee or
• Independent Contractor

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Auto Industry Case Study 4 (Cont)

• What are Susans workers?
• Employees or
• Independent Contractors

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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

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Taxicab Driving Industry Case Study 5(Cont)

• Facts
• Dexter uses Speedy Cabs two-way radio
  communication equipment
• Speedy Cabs dispatching services
• Speedy Cabs advertising
• These items benefit both Speed Cab Co. and
  Dexter Manning

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Taxicab Driving Industry Case Study 5 (Cont)

• What is Dexter Manning?
• Employee or
• Independent Contractor

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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 high
  dollar amounts

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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)

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2 Types of Worker Classification Audits

• Employment tax exams
• Income tax exams

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Examination Location

• IRS wants to conduct audit at taxpayers place
  of business
• Taxpayers representative wants it off the
  business premises
• Never allow examiner to conduct exam on business
  premises! Easy to misinterpret events
  observed/overheard

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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

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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

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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

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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)

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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

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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

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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!

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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

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3 Qualification Requirements For Section 530
Relief

• Reporting Consistency
• Substantive Consistency
• Reasonable Basis

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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.

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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.

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Reasonable Basis

• Business must have some reasonable basis for not
  treating workers as employees
• Reasonable basis can consist of reasonable
  reliance on several items

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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

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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

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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)

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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

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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

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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

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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 isnt in
  compliance with existing closing agreement

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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 cant be identified

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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

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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

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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 dont qualify

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Taxpayers Rights To CSP Offers

• Taxpayer participation in CSP is voluntary
• Taxpayer can accept or reject offer at any time
  during the examination process
• Declining to accept CSP offer allows taxpayer to
  retain all rights to an administrative appeal and
  all rights to judicial review

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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