New W-2 Reporting Requirements & Worker Classification

2. New W-2 Reporting Requirements & Worker Classification Steve Hobbs Darin Alred

3. Affordable Care Act: W-2 Benefit Reporting • Employers are required to report the aggregate cost (total premium ) of certain qualified health insurance plans. • Your insurance provider can help determine which plans are required to be reported.

4. W-2 Benefit Reporting • IRS Notice 2012-9 • Effective tax year 2012 • All “Group Health Plans” according to COBRA definition. • FSA plans have special rules

5. Who must report? • Employers who filed 250 or more W-2s in 2011 must report the premium amounts on 2012 W-2s. • Exemption for Federally recognized Tribal Governments or wholly-owned Tribally chartered corporations. • Terminated employees who request a W-2 early are exempted.

6. Amounts to Report • Both Employer and Employee portions • Even if employee pays entire premium, if cost is less due to employment. • COBRA premiums are a good guide • Third Party sick pay?

7. Huh? • Questions – EAPs, Wellness Programs, on-site clinics – Employers should decide? • Generally, After-tax “Health” plans ARE included – except if related to specific diseases or indemnities. • Special rules for self-insured plans and discriminatory high comp plans

8. Calculation Methods • COBRA Applicable Premium Method (minus 2% administrative fee) • Premium Charged Method • COBRA Premium Method  • HUGE hole in legislation – Carriers

9. Terminated Employee Coverage and COBRA • Reporting of COBRA premiums paid by termed employees is optional • Must apply same rules to ALL termed employees. • Employer-funded post-employment coverage subject to same reporting election as COBRA premiums

10. Questions from Employees • Why is the IRS requiring this to be reported? • Does this change my taxes? • Is this part of “Obama Care” (i.e. Affordable Care Act/Healthcare Reform)

11. 2013 Form W-2 Changes • Premiums reported in Box 12 with Code DD • W-3 does not include a spot to report the total premiums reported. • W-3 Box b, Kind of employer.

12. 5 Kinds of Employers Federal Government State/Local 501(c) State/Local non-501(c) 501(c) non-government None Apply

13. Questions?

14. Worker Classification Independent Contractors (Form 1099) vs. Employees (Form W-2)

15. IRS 20-point Checklist 1. Must the individual take instructions from management regarding when, where, and how work is to be done? 2. Does the individual receive training from your company? 3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual? 4. Must the individual personally perform the contracted services? 5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract? 6. Is there a continuing relationship between your company and the individual? 7. Must the individual work set hours? 8. Is the individual required to work full time at your company? 9. Is the work performed on company premises? 10. Is the individual required to follow a set sequence or routine in the performance of his work?

16. IRS 20-point Checklist cont’d 11. Must the individual give you reports regarding his/her work? 12. Is the individual paid by the hour, week, or month? 13. Do you reimburse the individual for business/travel expenses? 14. Do you supply the individual with needed tools or materials? 15. Have you made a significant investment in facilities used by the individual to perform services? 16. Is the individual free from suffering a loss or realizing a profit based on his work? 17. Does the individual only perform services for your company? 18. Does the individual limit the availability of his services to the general public? 19. Do you have the right to discharge the individual? 20. May the individual terminate his services at any time?

17. Independent Contractor • Independent Contractor: Form 1099 • The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. • You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done).

18. Employee • Employee: Form W-2 • Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.

19. Common Law Rules Facts that provide evidence of the degree of control and independence fall into three categories: • Behavioral • Financial • Type of Relationship

20. Behavioral Control Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. The behavioral control factors fall into four categories: • Type of instructions given • Degree of instruction • Evaluation systems • Training

21. What Constitutes Behavioral Control? Types of Instructions Given: • When and where to do the work. • What tools or equipment to use. • What workers to hire or to assist with the work. • Where to purchase supplies and services. • What work must be performed by a specified individual. • What order or sequence to follow when performing the work.

22. What Constitutes Behavioral Control? • Degree of Instruction: Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker.

23. What Constitutes Behavioral Control? • Evaluation Systems: • If an evaluation system measures the details of how the work is performed, then these factors would point to an employee. • If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

24. What Constitutes Behavioral Control? • Training • If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee.

25. Financial Control • The financial control factors fall into five categories: • Significant investment • Unreimbursed expenses • Opportunity for profit or loss • Services available to the market • Method of payment

26. What Constitutes Financial Control? • Significant Investment An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees.

27. What Constitutes Financial Control? • Unreimbursed Expenses • Independent contractors are more likely to have unreimbursed expenses than are employees. • However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

28. What Constitutes Financial Control? • Opportunity for Profit or Loss • The opportunity to make a profit or loss is another important factor. - Having the possibility of incurring a loss indicates that the worker is an independent contractor.

29. What Constitutes Financial Control? • Services Available to the Market An independent contractor is generally free to seek out business opportunities.

30. What Constitutes Financial Control? • Method of Payment • An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. • An independent contractor is usually paid by a flat fee for the job.

31. Type of Relationship • The factors for the type of relationship between two parties generally fall into four categories: • Written contracts • Employee benefits • Permanency of the relationship • Services provided as key activity of the business

32. What Constitutes the Type of Relationship? • Written contracts How the parties work together determines whether the worker is an employee or an independent contractor.

33. What Constitutes the Type of Relationship? • Employee Benefits Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance.

34. What Constitutes the Type of Relationship? • Permanency of the Relationship Indefinite Employment or Specific Project or Period

35. What Constitutes the Type of Relationship? • Services Provided as Key Activity of the Business If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities

36. At the End of the Day . . . • Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. • The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination

37. Once More Consideration: Statutory Employees • Drivers • Insurance Sales • Work-from-Home • Traveling Salespeople

38. Statutory Employees • Drivers: A driver who 1) distributes beverages (other than milk), meat, vegetable, fruit, or bakery products 2) picks up and delivers laundry or dry cleaning 3) is your agent or is paid on commission. • Full-time life insurance sales An agent whose principal business activity is selling life insurance or annuity contracts, primarily for one life insurance company. • Work-from-Home Works on materials or goods that you supply and that must be returned to you or to a person you name • Full-time traveling salesperson works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments

39. Statutory Employees’ Taxability • Withhold Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply. • The service contract states or implies that substantially all the services are to be performed personally by them. • They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities). • The services are performed on a continuing basis for the same payer.

40. Some Subjective Advice? Form SS-8 • Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” can be filed with the IRS. • The form may be filed by either the business or the worker. • The IRS will review the facts and circumstances and officially determine the worker’s status.

41. Amnesty? • Voluntary Classification Settlement Program • The VSCP, Form 8952, is a new optional program • To participate in this new voluntary program, the taxpayer must: • Meet certain eligibility requirements 2. Apply to participate in the VCSP by filing Form 8952, and 3. Enter into a closing agreement with the IRS.

42. Payroll Outsourcing Is it for you?

43. Reasons for Outsourcing Payroll • Costs - Generally less expensive when all costs considered • Reliability - Never get sick, go on vacation or quit the day before pay day • Adaptability - Keeping up with changes in taxing and filing requirements, electronic banking. • Increased employee productivity – takes less time • Accountability – Shared responsibility

44. Outsourcing Continued… Accuracy • Increased compliance with Federal and State laws • Fewer lapses in deposits which helps prevent penalties and audits • Automated and integrated systems • Enhanced audit processes

45. Related Services • HRIS – integration vs encapsulation • Time and Attendance • Garnishment Administration • Third Party Reporting (non-gov’t) • System Integration (accounting etc.) • Benefit Enrollment • Pay-as-you-go Workers Compensation

46. Human Resource Benefits • Partnership • Communication • Transparency • Access to Data on demand • Partnership!

47. Additional Questions? Thank you! www.swpay.com