1. © 2016 Paychex, Inc. All rights reserved. © 2016, PAYCHEX, Inc. All rights reserved. Independent Contractor or Employee: How Do You Know? Paychex HR Services Seminar for Small Businesses

2. © 2016 Paychex, Inc. All rights reserved. Classifying Your Workers | Legal Disclaimer  This Paychex seminar is for general information purposes only. It should not be considered legal advice or interpreted as a legal opinion of any specific facts or circumstances.  We encourage you to consult with legal counsel concerning your own situations, or for any specific legal questions you may have.

3. © 2016 Paychex, Inc. All rights reserved. Classifying Your Workers | Introduction Independent contractors and employees are not the same.  Worker classification is designed to protect workers.  While employees are protected by statutes like state workers’ compensation insurance and the Fair Labor Standards Act, independent contractors are not.  Classifying workers correctly is important to the business owner or employer, and also to the worker.

4. © 2016 Paychex, Inc. All rights reserved. Classifying Your Workers | Objectives During this seminar, we will:  Review applicable definitions of employee and independent contractor  review employer (business owner) responsibilities  discuss how to determine worker classification  review misclassification concerns and consequences, and  review common mistakes employers make.

5. © 2016 Paychex, Inc. All rights reserved. What Is an Employee?  U.S. Department of Labor – applies the Fair Labor Standards Act (FLSA) definition of employ, “to suffer or permit to work” and the economic realities test to determine whether a worker is an employee.  Internal Revenue Service – generally considers anyone who performs services for a business to be an employee if the business can control what will be done and how it will be done. The IRS evaluates the degree of control and independence of the worker (i.e., behavioral control, financial control, type of relationship) The determination of a worker’s classification cannot be made based on any one factor, as different agencies use different criteria.

6. © 2016 Paychex, Inc. All rights reserved. Employer Responsibilities  income tax  a portion of Social Security and Medicare, and  unemployment taxes. As an employer, you are responsible for withholding: Most employers are required to:  pay Social Security  pay unemployment tax, and  provide workers’ compensation insurance.

7. © 2016 Paychex, Inc. All rights reserved. Business Owner Responsibilities As a business owner who uses independent contractors, you should:  consider having a written agreement with all independent contractors  ensure careful and comprehensive documentation and recordkeeping, including a completed Form 1099-MISC for each worker classified as an IC.

8. © 2016 Paychex, Inc. All rights reserved. Making the Determination No one factor is regarded as “controlling” in making employee vs. independent contractor determinations. Employers should consider:  The extent to which the worker's services are an integral part of the business.  The permanency of the relationship.  The amount of the worker’s investment in facilities and equipment.  The nature and degree of control by the principal.  The worker’s opportunities for profit and loss.  The level of skill required in performing the job.

9. © 2016 Paychex, Inc. All rights reserved. Making the Determination – cont.  Behavioral Control  Financial Control  Type of Relationship IRS Employee classification is determined through these three categories: Note: The Department of Labor (DOL) uses their Administrator’s Interpretations #2015-1 which identifies and provides guidance around using the economic realities test to determine the definition of an employee under the FLSA.

10. © 2016 Paychex, Inc. All rights reserved. State Laws Each state may have its own regulations related to determining worker classification under specific laws including wage and hour laws, unemployment insurance, and workers' compensation insurance. Note:For more details on your specific state’s considerations for classifying workers, refer to your state’s labor and tax websites.

11. © 2016 Paychex, Inc. All rights reserved. Misclassification Concerns  Back taxes  1.5% of wages paid for failing to withhold employee’s income tax  20% of employee’s share of FICA taxes  100% of employer’s share of employer taxes  100% of FUTA taxes  Unpaid overtime  Back pay  Fines and penalties may also apply at the state level.  Enforcement of misclassification can vary by state.  Employers may be subject to greater fines and penalties for willful misclassification. Misclassification may result in civil and criminal penalties for your company, including but not limited to:

12. © 2016 Paychex, Inc. All rights reserved. Common Mistakes  Only considering a couple of factors – Employers should not base worker classification on one or two factors, but consider the entire situation. For example, basing the relationship on a signed contract or the fact that the worker does assignments/projects for more than one company may not be enough.  Not following standard guidelines – Don’t just do something because another business has done it. Refer to the IRS Guidelines, the U.S. DOL Fact Sheet #13, Administrator's Interpretation No. 2015-1, as well as applicable state guidelines when attempting to classify workers. Avoid these common pitfalls:

13. © 2016 Paychex, Inc. All rights reserved. Common Mistakes – cont.  Taking advice from friends – Remember to only take advice from a “reputable source” when trying to determine worker status. For example, starting someone as an independent contractor during onboarding to save on unemployment taxes because a friend did it and saved some money is not a safeguard!  Going it alone – Not consulting with an attorney or accountant when classifying a worker as an independent contractor or creating an independent contractor agreement.  Not double-checking documentation – Always confirm that an independent contractor has his own workers' compensation insurance.

14. © 2016 Paychex, Inc. All rights reserved. Common Mistakes – cont.  Letting the worker make the determination – Letting the worker classify himself as an independent contractor does not protect the business. Even if the worker signs a written agreement, the business is still responsible for proper classification of workers.  Treating independent contractors as employees – For example, providing an offer letter or an employee handbook. Giving independent contractors access to benefits like health insurance, paid time off, paid holidays, and leave benefits. Retaining independent contractors for lengthy periods of time (over a year).

15. © 2016 Paychex, Inc. All rights reserved. Common Mistakes – cont.  Using the wrong language – You should never refer to independent contractors as “1099 employees.” They are independent contractors, not employees. Also avoid the terms “hiring” and “firing” when referring to independent contractors. Independent contractors are neither hired nor fired; their contracts are simply fulfilled or terminated.

16. © 2016 Paychex, Inc. All rights reserved. IRS Safe Harbors The IRS has safe harbors in place against these fines and penalties if there is a reasonable basis for the determination, such as:  judicial precedence, published rulings, with respect to the taxpayer, or a letter ruling to the taxpayer  past IRS audits (Note that this is only applicable if there was no penalty assessment related to the treatment of individuals holding substantially similar positions in the business. Prior audits must have included an examination for employment tax purposes of whether the worker, or anyone in a substantially similar position, should be treated as an employee.), or  a long-standing, recognized practice of a significant portion of the industry.

17. © 2016 Paychex, Inc. All rights reserved. IRS Safe Harbors – cont. Employers or business owners may be denied safe harbor protections if they inconsistently classify workers who are doing the same tasks, or if the employer has not filed the appropriate tax forms consistent with the treatment of the worker as an independent contractor.  Employers are therefore encouraged to treat all individuals considered to be independent contractors consistently and to file required tax forms.  Consult your own legal counsel for more guidance.

18. © 2016 Paychex, Inc. All rights reserved. Resources Refer to the Internal Revenue Service website to review available resources and safe-harbor options. If you still find yourself doubting a worker’s classification, consider these resources:  Legal counsel  Accountant or tax professional  Paychex HR generalist

19. © 2016 Paychex, Inc. All rights reserved. Resources  IRS Website  www.irs.gov www.irs.gov  Form SS8  http://www.irs.gov/pub/irs-pdf/fss8.pdf http://www.irs.gov/pub/irs-pdf/fss8.pdf  Payments to Independent Contractors  http://www.irs.gov/uac/Newsroom/Payments-to-Independent-Contractors http://www.irs.gov/uac/Newsroom/Payments-to-Independent-Contractors  U.S. Department of Labor – Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA)  http://www.dol.gov/whd/regs/compliance/whdfs13.pdf http://www.dol.gov/whd/regs/compliance/whdfs13.pdf  US Department of Labor (DOL) Administrator’s Interpretation on Worker Misclassification  http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm

20. © 2016 Paychex, Inc. All rights reserved. Q&A