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30 Cards in this Set
- Front
- Back
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Tests for Employee Classification |
1. Common Law Test 2. Reasonable Basis Test
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Independent Contractors - Requirements |
1. Contractor must provide a valid Taxpayer Identification Number (TIN)
2. Employer must give the contractor a Form 1099 - MISC if payments are $600 or greater
3. Copy of 1099 - MISC sent to the IRS |
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Independent Contractors - Not Required |
1. No Social Security and Medicare Tax Withholding
2. No Federal or State Unemployment Insurance Taxes
3. No medical, dental, 401k, and other benefit deductions |
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Employee Requirements |
1. Must provide proof of eligibility of work 2. Reporting of wages on Form W-2 3. Generally withholding of employment taxes |
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Benefits of Employees |
1. Controlling methods and results of the work 2. Employees work only for you 3. Employees trained by the employer |
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Obligations of Employee Workers |
1. Income and employment tax 2. Unemployment Insurance Contributions 3. Workers' Compensation premiums |
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Common Law Test |
The IRS uses to make worker status determinations.
It's all about CONTROL
"If the employer has the right to control what work will be done and how that work will be done, then an employer-employee relationship exists and the worker is a common law employee. |
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Three categories of Common Law Test |
1. Behavioral Control 2. Financial Control 3. Type of Relationship |
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Behavioral Control |
- Level of instruction given to worker - Level of training provided to worker |
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Financial Control |
- Unreimbursed business expenses - Substantial investment in the work - Service available to the public - How the workers are paid - Can incur a profit or loss |
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Type of Relationship |
- Written agreement - Whether employee type benefits are provided - Whether worker's services are an important aspect of the business's regular operations |
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Reasonable Basis Test |
Even if a worker meets the definition of an employee under the Common Law Test, an employer may still treat a worker as an independent contractor, exempt from payroll taxes, if it has "reasonable basis" for doing so.
This exemption is based on section 530 of the Revenue Act of 1978. The key component to this "safe harbor" is consistency. |
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What qualifies as a reasonable basis? |
- Court decisions, published IRS rulings, IRS technical advice or private rulings
- A past IRS audit of the employer that did not result in a finding of taxes owed or penalty to the employer for the treatment of workers as independent contractors
- A longstanding, recognized practice in a significant segment of the industry |
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Form SS-8 |
IRS worker classification assistance Form SS-8: DeterminEmployment Taxes and Income Tax Withholdingation of Worker Status for Purposes of Federal -Form can be completed for one person representing a larger group or class -Form contains a series of guiding questions -Several weeks to 6 months for response
**While waiting the workers must be treated as an employee with wages and taxes reported and withheld. |
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Two Types of Employment Statuses |
1. Statutory Employees 2. Statutory Nonemployees |
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Statutory Employees |
These workers may not be employees under the Common Law Test but are treated as employees for certain employment tax purposes:
-Not subject to federal income tax withholding -Subject to Social Security & Medicare (EE & ER) an sometimes FUTA |
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4 Types of Statutory Employees |
1. Agent-drivers or commission-drivers 2. Full-time life insurance salespersons 3. Home-workers 4. Traveling or city salespersons |
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Statutory NONemployees |
These workers may be employees under the Common Law Test but are treated as independent contractors for taxing purposes
-Not subject to federal income tax withholding -Not subject to Social Security, Medicare or FUTA |
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2 Types of Statutory NONemployees |
1. Qualified real estate agents 2. Direct sellers |
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Temporary Help Agency Employees |
-Meets short term staffing needs -Are hired, screened, trained, and paid by the agency to provide service -Agency has the sole right to hire and fire
**Warning: Deal with a financial secure and reputable agency. Failure of the agency could lead to client being liable for unpaid withholding and employment tax |
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Leased Employees |
- Alternative to temporary help - Trained and qualified by the leasing company - Client has the ability to hire, fire, set wages and supervise work - Leasing company is still considered the employer
**Warning: Client should be leery about maintaining too much control over the employees as this could lead to their considerations as the employer |
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Complications to Employee/Employer Relationship |
-FLSA (MOREC) -State Wage-Hour Laws (state version of FLSA) -State Income Tax Withholding Laws (typically follow common law test used by IRS) -State Unemployment Insurance Laws (provide benefits for individuals who are out of work through no fault of their own. some use the common law test. more than half use the ABC Test to determine ee status) |
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ABC Test |
Absence of control - worker is free from control or direction in performing work Business is unusual and/or away - work is performed outside the usual course of the company's business or away from the employer facilities Customarily independent contractor - the worker is customarily engaged in an independent trade, occupation, or business
Please note: ABC makes it tougher for companies to exclude its workers from coverage. Some states apply only two of the three conditions. |
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IRS Penalties - Unintentional |
-Not withholding federal income tax - 1.5% of wages paid, doubled to 3% if the employer failed to file an information return
-Not withholding social security and Medicare - 20% of employee's share of tax, doubled to 40% if employer failed to file an information return |
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IRS Penalties - Intentional |
-Employer is liable for full amount of federal income tax that should have been withheld and 100% of both the employee and employer share of social security and Medicare |
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Enforcement - Audit Triggers |
-Only one 1099 filed with personal tax return -W2 and 1099-MISC issues by same employer -FLSA complaints regarding minimum wage/overtime -Workers filing for unemployment benefits -IRS information sharing with state agencies |
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Immigration Reform and Control Act of 1986 |
Makes it illegal for an employer to knowingly hire or continue to employ an unauthorized worker
-identity must be proven -right to work in the US established |
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Proof of Right to Work in the US |
Employers must protect themselves -having employee complete section 1 of Form I-9, Employment Eligibility Verification, on first day or prior -Have employee provide original documentation within 3 business days of hire date -Make sure records are genuine and current. Cannot be expired. -Completing the employer section of the Form I-9 within 3 business days from hire date -Keeping records for at least 3 years from date of hire or 1 year from date of termination, whichever is longer. |
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New Hire Reporting |
New Hire Report was established in 1997 to facilitate the collection of child support and to uncover fraud and abuse in unemployment compensation, workers' compensation, and public assistance benefit programs |
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New Hire Reporting - Employer Responsibilties |
For each newly hired employee, the employer must provide the following information to the state directory: -Employee's name, address, and SS# -The date the employee first performed services for pay -The employers name, address, and Federal Employer Identification Number (FEIN)
Employers must: -Report within 20 calendar days of the date of hire -Send two transmissions per calendar month which are 12 to 16 days apart |
