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Employee or Contractor? Understanding Tax Implications & Requirements

Learn the distinctions between employees and independent contractors, report payments correctly, and prevent misclassification liabilities. Understand control, evidence categories & filing obligations with forms SS-8, W-2, 1099-MISC. Utilize resources like Form 8952 for the Voluntary Classification Settlement Program (VCSP).

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Employee or Contractor? Understanding Tax Implications & Requirements

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  1. Federal, State, and Local Governments Employee or Independent Contractor? www.irs.gov

  2. Why? • Workers comp. providers • Department of Labor • State governments • Social Security Administration • Millions misclassified • Prevent future liability • Employers fail to deposit their full share • Workers miss out on benefits

  3. Objectives • Define an employee under the Internal Revenue Code • Determine whether a worker is an employee or independent contractor • Report payments to workers • Get assistance using Form SS-8 • Correct for misclassifications (VCSP)

  4. Define “Employee” • Internal Revenue Code & Treasury Regulations: Common law • Specific tax statute • Section 218 defined

  5. Public Officials • Mayor • Legislator or elected representative • County commissioner • Judge/justice of the peace • County/city attorney, marshal, sheriff, constable • Registrar of deeds • Tax collector or assessor • Road commissioner • Board members

  6. Common-Law Employee An employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to result, but also as to details and means.

  7. Control Test • Worker subject to control over: • What is to be done • How it is to be done

  8. Common Law Factors Revenue Ruling 87-41 20 Factors

  9. Categories of Control Common law recognizes 3 categories of evidence to consider when making a determination of employee status: • Behavioral control • Financial control • Relationship of the parties

  10. Behavioral Control • Indicators: • Instruction • Training • Location of work • Work Schedule • Meetings • Reports • Providing services personally

  11. Financial Control • Indicators: • Equipment, tools, or facilities • Unreimbursed expenses • Profit motive • Frequency and timing of pay • Liability coverage

  12. Relationship of the Parties • Indicators: • Benefits • Discharge/termination rights • Permanency • Integral function

  13. Example Independent Contractors may retain: • Right to hire • Right to manage & direct workers • Right to substitute • Right to pay substitute

  14. Example Employees may retain right to: • Permanence • Benefits • Quit

  15. Form SS-8 • If you’re unsure of worker status? • Complete Form SS-8 for IRS determination • Information requested from worker and payer • Not an audit

  16. Employee • Forms and Filing Requirements: • Secure W-4 before paying employees • File Form W-2 and W-3 • Form 941 for Employment Tax Withholding

  17. Independent Contractor • Forms and Filing Requirements: • W-9 info. before vendor payment • File Form 1099-MISC and 1096 • Form 945 for Backup Withholding

  18. Recap • Define an employee • the right to control and direct the individual • Determine whether a worker is an employee or independent contractor • three broad categories of evidence • Report payments to workers • W2 Wages or 1099-Misc • Need Help? • Use Form SS-8

  19. Mayor & Council Member • How to report their compensation? • Each receive $100 per month • Currently reported on Form 1099-Misc • Elected officials specifically identified as employees in tax law • Employment taxes and W-2 required

  20. Monday Public School District • Additional Duties & Control Relationship • Full time duties in principal’s office • Occasional duties for athletic director • Currently receives W-2 & 1099-Misc • Additional duties do not change school district’s control as employer • Employment taxes and W-2 required

  21. Voluntary Classification Settlement Program • Partial relief from federal employment taxes with reclassification: • Certain eligibility requirements apply • Form 8952, Closing Agreement • See Announcement 2012-45 • www.irs.gov “Voluntary Classification Settlement Program”

  22. Resources • Revenue Ruling 87-41; Twenty Common Law Factors • Form SS-8 • Publication 963 • Publication 15-A • Publication 1779

  23. Resources • To find an FSLG specialist in your state • www.irs.gov Keyword Search: FSLG Newsletter • Pre-recorded IRS Webinars • www.irsvideos.gov/Governments • Voluntary Classification Settlement Program (VCSP): • www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Voluntary-Classification-Settlement-Program • To find your State Social Security Administrator: • http://www.ncsssa.org/statessadminmenu.html

  24. Department of the Treasury Internal Revenue Service www.IRS.gov Thank you! www.IRS.gov

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