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Employee or Independent Contractor? UW Campus Tax Training Series 2010 © 2010
Why do we care? Because the IRS cares – A LOT! Because we want to be compliant with the law ◦ Employees –Federal income tax, social security and Medicare taxes, reporting and withholding requirement ◦ Independent contractor (IC) – generally no withholding requirement, but there may be a reporting requirement Because penalties can be steep © 2010
General rule for making the determination Look at control ◦ What will be done ◦ How it will be done Three types of control ◦ Behavioral control ◦ Financial control ◦ Type of relationship Weigh all facts and circumstances © 2010
Behavioral Control Do we have the right to direct or control the worker? Don’t actually have to direct or control. ◦ Type and degree of instruction given ◦ Evaluation systems ◦ Training © 2010
Behavioral Control Indicators of behavioral control ◦ When to do the work ◦ Where to do the work ◦ What tools are used ◦ What order or sequence to follow ◦ Prior approval required © 2010
Financial Control – IC indicators Significant investment in equipment ◦ Tools and equipment ◦ Supplies Unreimbursed expenses ◦ Insurance ◦ Travel ◦ Advertising ◦ Professional licenses © 2010
Financial Control – IC indicators Opportunity for profit or loss ◦ Fixed ongoing costs ◦ Can seek out other business opportunities Services available to the market ◦ Provides services to others ◦ Advertises Method of payment ◦ Flat fee ◦ Hourly, daily or weekly compensation? © 2010
Type of Relationship Written contracts ◦ But substance, not label rules Employee benefits Permanency of the relationship Services provided as key activity of the business © 2010
Tricky situations Contract with person’s corporation, not individual, ok if: ◦ Corporate formalities are followed ◦ At least one non-tax business reason exists for contracting with company ◦ LLC? May not be a corporation! © 2010
Who is an Employee - Recap UW has the right to control the work UW provides all supplies and equipment UW pays individual on an hourly, weekly, monthly basis UW provides benefits – health insurance, vacation time, sick leave © 2010
Forms and taxes for employees Federal income tax withholding Social Security and Medicare taxes ◦ Matching amount by UW Federal unemployment tax W-2 reporting of income and withholding © 2010
Who is an Independent Contractor - Recap UW has the right to control or direct only the result of the work IC gets fixed payment regardless of hours worked IC performs same services for other organizations IC supplies own equipment © 2010
Taxes and forms for independent contractors IC is responsible for paying estimated taxes on income IC is responsible for paying self- employment tax ◦ Double rate for Social security (6.2% x 2) ◦ Double rate for Medicare (1.45% x 2) © 2010
How do I make the determination? Look at facts and circumstances Use twenty factor test as guideline – Form 1631/1632 Make the determination before a contract is signed with the individual ◦ May have to go back and pay them as an employee – breach of contract? © 2010
Case studies Professor of psychology, business school asks him to give a lecture on Psychology of Wall Street traders and will pay him $200 for the lecture. Pay Prof as EE or IC? © 2010
Case studies Jane was laid off in June due to budget cuts. Her former department wants to hire her as an independent contractor for 40 hours in August to finish up the project she was working on because they have found some temporary funding. What alternatives does the department have? © 2010
Case Studies Law school hires Ima Lawyer, in November, as an independent contractor to advise the tax clinic on low income taxpayer IRS options. They like her so much they want to hire her as a permanent staff. Can they? © 2010
Case Studies Mark leaves UW Fisheries department in December, 2010 to work on The Deadliest Catch tv show. The show goes off the air in January and Fisheries wants to hire Mark to give a lecture on how to get on a TV fishing show. They want to hire him in March 2011 as an independent contractor. Can they? © 2010
Questions? & Resources http://www.irs.gov/businesses/small/article /0,,id=99921,00.html http://www.irs.gov/businesses/small/article /0,,id=99921,00.html IRS Publication 1779 @ IRS.gov http://f2.washington.edu/fm/tax/ee- ic/independent-contractors http://f2.washington.edu/fm/tax/ee- ic/independent-contractors firstname.lastname@example.org, 206-616-3003 email@example.com © 2010
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