Employer- Employee Relationship Presented by Sharon Fleming, CPP 2011 Spring Study Group

Employee Vs Independent Contractor (IC) Common law test – CONTROL is the key Right to control what work will be done and how that work will be done – Employee Control or direction as to the results to be accomplished but NOT as to the details by which those results are accomplished - Contractor

Three types of CONTROL Behavioral – Level of instructions the business gives the worker Financial – What, How, When, Who are critical in deciding whether employee or contractor Types of relationship – written agreement, benefits, term, business regular operations

Behavioral Detailed instructions – when, where and how Training provided – periodic or ongoing EMPLOYEE Explain what is expected and time frame to complete the job without giving detailed instructions and training CONTRACTOR

Financial Control Unreimbursed business expenses Substantial investment in work Services available to the public Paid by job Profit or loss

Type of Relationship Written agreement Employee type benefits – vacation, sick time, health, 401k, etc Is this service an important aspect of the businesses regular operations

Reasonable Basis Test Court decision IRS rulings IRS technical advice Private letter ruling from IRS Past IRS audit of the employer Longstanding recognized practice in a significant segment of the employer's industry

Safe Harbor Relief requirements – Must meet all 3 of the following: Reasonable basis – relied on court case, previous IRS audit that did not reclassify, Industry norm or relied on a business lawyer or accountant Consistency treatment is a must! Filed required tax forms – 1099 Misc

Form 1099 Misc

Form SS-8 When in doubt complete form SS-8 and have IRS make the determination

Statutory Employees Agent drivers or commission drivers (meat, baked goods, beverage, laundry or dry-cleaning) Milkman doesn’t count Full-time life insurance salespersons Homeworkers Traveling or city salespersons

Taxation of Statutory Employees Social Security and Medicare taxes must be withheld ER share of Social Security and Medicare taxes must be paid FUTA Not subject to Federal income tax withholding

Statutory Nonemployees Workers who qualify as employees under common law test are treated as independent contractors under the IRC for tax purposes Qualified real estate agents Direct Sellers Most of their compensation is tied to sales not hours worked and must be performed under a written contract stating they will not be treated as employees for tax withholding

Taxation of Statutory Nonemployees Not subject to federal income tax withholding Not subject to social security and Medicare tax withholding or employer match Not subject to FUTA tax

Temporary Help Agency Employees Hired, screened and trained by the temporary agency rather than the employer Deal with reputable and financial sound agency. If Agency fails to make tax deposits, employer becomes liable for unpaid taxes

Leased Employees Leased Employees are paid by leasing company who is responsible for paying employees, withholding and paying of employment taxes, maintaining and administering benefits. Employees are considered to be employees of the leasing agency Leasing agency and the company have a leasing agreement, however, if the client company has too much control over the employees, they may be considered the employer instead of the leasing company

Federal Wage & Hour Law When making employment status determination the DOL considers the following: How much control the employer has over the work performed Does the worker have a chance to make a profit or loss Does the worker have an investment such as tools or materials or hires helpers Does the work require special skills Is this a permanent relationship Is this job an integral part of the employer’s business

ABC Test Under the ABC test, a worker is an Independent Contractor only if: Absence of control-the worker is free from control or direction in performing the work both by agreement and reality Business is unusual and or away – the work is performed outside the usual course of the company’s business or away from any of the employers facilities and Customarily independent contractor – the worker is customarily engaged in an independent trade, occupation or business.

Penalties for misclassification Assessments are determined based on level of intention. Intentional misclassification results in double fines. If proper forms 1099 misc are not filed, fines are doubled State fines imposed also.

1099 Matching Program Red flag – employees who receive a W-2 and a 1099 in the same year from the same employer 1099 from only one company Misclassified workers complain to DOL Reclassification can also mean retroactive benefits, payment of back taxes,

Immigration Reform & Control Act 1986 (IRCA) Completion of I-9 on first day of employment or once an employee accepts offer Request original document within 3 days of date of hire Keep I-9 on file 3 years from date of hire or 1 year from date of termination whichever is longer

Documents proving identity and work authorization List A – Documents proving both identity and work authorization US Passport Permanent resident card or Alien Registration receipt card Foreign passport with temporary I-551 stamp Employment authorization document w/photo Nonimmigrant alien authorized to work for a specific employer from I-94 or I-94A

I-9 Documentation continued List B – Documents proving Identity ONLY – Driver’s license or ID card issued by a state or US possession with photo and name, DOB, sex, height and other identifying information –ID card issued by federal, state or local govt agency with photo –School ID with photo –Voter’s registration card –US military card

I-9 Documentation continued List C – Documents proving work authorization Only US SS card Birth certificate issued by Dept of State US citizen Id card Employment authorization issued by DHS

Penalties for hiring unauthorized workers Employers who knowingly hire or continue to employ unauthorized aliens face civil penalties ranging from $375-$16k per employee. Employers who fail to comply with the verification requirements can be fined $110 - $1,100 per employee Employers who engage in a pattern and practice of violating the hiring and verifying requirements face criminal penalties and jail time

Employment verification Program Illegal Immigration Reform & Immigrant Responsibility Act of 1996 E-Verify involves verification checks of the SSA and DHS databases, using an automated system to verify the employment authorization of ALL newly hired employees Cannot be used to pre-screen applicants Must have a completed and signed I-9 Federal contractors MUST use E-Verify

New Hire Reporting Personal Responsibility & Work Opportunity Reconciliation Act of 1996 employers were required to comply with a federal new hire reporting requirement beginning October 1, 1997 For each newly hired employee, the employer MUST provide the following information –Employee’s name, address and SSN –Employer’s name, address and EIN

New Hire Reporting cont. Employers in multiple states may file their new hire reports with one state must designate that state to the Secretary of Health & Human Services Must report new hires within 20 calendar days of the date of hire Penalty for failure to report new hires range from $25 to $500

Each of the following individuals would be classified as an employee except: a. Payroll Manager of a company b. College professor c. City police officer d. Attorney (sole practitioner) C. Attorney (sole practitioner)

Form W-9 is the form submitted to the IRS to determine the employment status of an individual for federal income and employment tax purposes. True or False False SS-8

Telemarketers working under the direction of a company are usually independent contractors. True or False False Key word Direction

All of the following workers are statutory employees except: a. Full-time life insurance salesperson b. Qualified real estate agents c. Homeworkers d. Traveling or city salespersons B. Qualified real estate agents

If an employer uses the E-Verify Program, a new hire does not have to enter their SSN in Section 1 of Form I-9 True or False False If an employer uses E-Verify, new hires MUST enter their SSN in Section 1 of I-9

How long must an employer retain a Form I9 for a terminated employee who worked for the employer for more than four years? a. 1 year after termination b. 3 years after termination c. 7 years after termination d. Does not have to keep terminated employees’ I-9 forms. How long must an employer retain a Form I9 for a terminated employee who worked for the employer for more than four years? a. 1 year after termination b. 3 years after termination c. 7 years after termination d. Does not have to keep terminated employees’ I-9 forms. a. 1 year after termination

What does a social security card prove in terms of an employee’s work authorization status under IRCA? A social security card that does not contain language saying that employment is not authorized is proof of an employee’s authorization to work in the U.S., but not proof of identity.

If a business is not required to file an information return because the income paid to a worker is less than $600, could section 530 relief be available? Yes, Only required returns need to be filed

Case Studies

Case Study #1 Answer EmployeeNeutralIC One party (exclusive contract Bachelors’ DegreeOwn expenses Subject to management post review Professional organizations Advertised Attend meetings & Submit report Liable for payment to manufacturer Used manufacturer’s forms Hired workers for installation Submit invoice to General contractor for payment Has to pay bills Rep is an independent contractor

Answer to Case #2 EmployeeNeutralIC Laid off: hired back for the same kind of job Cost of equipmentOne time job Work at homeNo minimum payment Length of time for jobNot expected or allowed to go to meetings No benefitsWritten contract Form 1099 to be filed Pays own taxes No Benefits No instructions – only specifications Computer programmer is an independent contractor with respect to the services provided