Worker Classification: Getting It Right The 1 st Time

1. Worker Classification: Getting It Right The 1st Time All audio is streamed through your computer speakers. There were  several attendance verification questions presented during the LIVE webinar to qualify for CPE of the LIVE event only. For the archived/recorded version of this webinar, the link at the end of this presentation will be to final exam on the topics and learning objectives covered during this webinar plus there are also 3 online  review questions to answer per hour.

2. Worker Classification Getting It Right The 1st Time Part 2

3. Learning Objectives Upon completion of this webinar you will be able to: • Properly classify workers. • List 3 categories of classification and the various classes of workers. • Identify and address penalties for misclassification. • Differentiate between federal vs. state law. • List industries with classification issues. • Recognize what to expect during an employment examination • Use safe-harbor provisions to protect your clients during an employment exam. • Define what is willful. • List three factors to define direct sellers. • Test for statutory employees. • Differentiate between cases excluded cases qualifying for the IRS Classification Settlement Program (CSP). • Recognize what triggers an IRS worker classification examination.

4. Independent Contractor or Employee • Which one should it be? • How do you determine proper classification? • What affect does improper classification have on employer and worker?

5. So How Do You Get It Right? • Do you know how to properly classify workers? • How do you determine if your workers are employees, or independent contractors? • What factors should you use to make the proper classification?

6. 3 Categories For Classification Worker classification facts are based on three main categories • Behavioral Control • Financial Control • Relationship of the Parties

7. 3 Categories For Classification • Must consider all facts in the case • Each case has different facts and circumstances • No single fact provides the answer • Misclassification can have major ramifications on employer and worker if you get it wrong

8. Behavioral Control • These facts show if there is a right to direct or control how the worker performs the work • A worker is an employee when the business has the right to direct and control the worker • Business doesn’t have to control the way work is done – can direct and control the work

9. Financial Control • These facts show whether there is a right to direct and control the business segment of the work • Does the business or the worker control financial elements such as expenses?

10. Relationship of The Parties • These facts show how the business and the worker perceive their relationship • Does the business perceive the worker as an independent contractor? • Does the worker think he/she is an employee?

11. So Where Do We Go From Here? • The worker perceives employee status, • The business perceives independent contractor status • Who is right and who is wrong? • How do you proceed now?

12. Employees Under Common Law • A worker is usually an employee if the business can control what will be done and how it will be done • If business has ability to control the details of how the services are performed it indicates an employee-employer relationship • Workers in business for themselves are not employees

13. Who Are Independent Contractors? • Accountants • Doctors • Lawyers • Veterinarians

14. Who Are Employees? • Food servers • Bartenders • Receptionists • Office managers

15. Statutory Employees • A Statutory Employee is a worker who cannot be classified as an employee under the Common Law rules • But is an employee for payroll tax purposes due to specific statutory requirements (SocialSecurity and Medicare)

16. Who Are Statutory Employees? • An Agent or Commission Driver(Food and beverage delivery driver – “No Milk”) • Full-Time Life Insurance Salesperson(Sells primarily for one company) • Homeworker(Works from home using materials furnished by business)

17. Who Are Statutory Employees? • Traveling or City Salesperson(Full-Time – Works for One company taking customer orders) • Corporate Officers(One who provides No services or Minor services and is not entitled to receive payment)

18. Who Are Statutory Employees? Statutory Employees must have Social Security and Medicare taxes withheld if the Three Tests are met

19. 3 Test For Statutory Employees • Service contract states or implies that almost all services will be performed personally by employee • The employee has little or no investment in the equipment and property used to perform the services • Services are performed on a continuing basis for the same company

20. Statutory Non-Employees • Two Categories of Statutory Non-Employees • If worker falls into either category they can be classified as Independent Contractors • Statutory Non-Employees are responsible for federal income taxes, and self-employment taxes

21. Who Are Statutory Non-Employees? • Direct Sellers - (Must meet Three Factors to qualify) • Real Estate Agents – (No property managers)

22. Direct Sellers 3 Factors • Salesperson sells consumer goods in the home, or at a place of business other than a permanent retail establishment • Sells consumer products to any buyer on a buy-sell basis, deposit commission basis, or any similar prescribed by the regulations • Substantially all of payment made to direct seller must be directly related to sales output, or performance or service output (Can’t Be Paid For Hours Worked)

23. Direct Seller Requirements • To obtain direct seller’s exemption there must be a • Written contract between direct seller and company • Stating that direct seller will not be treated as an employee for federal tax purposes

24. So Who Are Direct Sellers? • Door-to-door salespersons • Home demonstration persons

25. Statutory Non-Employees • Real Estate Agents • Need to be a qualified and licensed agent • Output should be based on sales and not on hours worked • Written contract stating they are not an employee for federal tax purposes

26. Real Estate Agents Provide services such as • Advertising • Showing real estate property • Acquisition of a lease to real property • Recruitment, training, and supervision of other real estate persons

27. Real Estate Agents • Property Management services are NOT included • Property Managers are not classified in the real estate agent category

28. Statutory Non-Employees • Statutory Non-Employees are not employees for federal tax purposes, but • Can be an employee for other purposes such as state worker’s compensation, and tort liability

29. Penalties of Misclassification • Employers are required to collect withholding taxes • Can ask for abatement of liability for employee portion of taxes if employee has paid the taxes • Use Form 4670 to request relief of tax liability • Employee’s statement submitted using Form 4669

30. Failure to File Return Penalty • 5% of balance due for each delinquent month • Maximum penalty – 25%

31. Failure To Collect Tax Penalty • Business that “Willfully” fails to collect and pay trust fund taxes will be assessed • 100% penalty of tax due

32. What Are Trust Fund Taxes? • Federal income taxes and FICA taxes required to be withheld from employee’s wages • Trust fund taxes do not include employer’s FICA portion

33. Trust Fund Penalty 100% Penalty if Two Requirements are Met • Must be responsible person • Responsible person must have “Willfully” failed to collect or pay the trust fund taxes

34. What Is Willful? Willful is defined as • Intentional • Deliberate • Voluntary • Reckless • Knowing

35. Case Study 1 • Business misclassifies employees as independent contractors and does not withhold federal and FICA taxes • Should responsible be assessed the 100% penalty for failure to collect and pay trust fund taxes? • Is there reasonable basis for not collecting and paying? • Crowd Management Services, Inc. DC Ore, 95-1 USTC

36. How Far Back Can IRS Go? • Statute of limitations is based on filing date of Form 941 and 940 • 3 Years from filing date • If forms are never filed, statute never expires • If fraud is involved, there is NO statute of limitations for reclassifying workers

37. Form SS-8 Facts TIGTA audit statistics on SS-8 program - In 2009 5,324 SS-8 applications were filed 19% (1/5) of employers didn’t comply with IRS determination 65% (2/3) didn’t issue correct forms to workers Only 17% of employers were in compliance

38. Form SS-8 • Form SS-8(Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding) • Can be submitted to IRS by worker • Can be submitted to IRS by employer • Can be requested by IRS examiner

39. Form SS-8 • SS-8 is a restatement of 20 Common Law questions • It’s an excellent self-audit tool • Business should use it when drafting independent contractor agreement

40. Federal vs. State Law • Every state has different laws for determining independent contractor status • Most states base it on “Employment”. Do worker’s services constitute employment? • Employment for state unemployment purposes is defined as “any services performed for remuneration or under contract for hire, written or oral, express or implied”

41. Federal vs. State Law • Services for remuneration are considered “employment” unless the ABC Test is met • If ABC Test is met worker is not an employee for state unemployment purposes • Burden of Proof falls on the business • Some states require that only One or Two of the conditions are satisfied

42. ABC Test • The worker is free from control of direction of the performance of the work • The service is either outside the usual course of business for which the service is performed, or it is performed outside of all the places of business of the enterprise for which the service is performed • The worker is customarily engaged in an independently established trade, occupation, profession, or business

43. ABC Test • Some states use ABC Test • Other states use the Common Law IRS 20 Factor Test • Other states use a variation of tests

44. States With ABC Test

45. States Using Common Law 20 Factor Test

46. Variations of State Unemployment Insurance Tests

47. Variations of State Unemployment Insurance Tests

48. Possible Industries With Worker Classification Issues • Building and construction industry • Trucking industry • Computer industry • Automobile industry • Legal industry • Taxicab industry

49. Review Questions for Self Study CPE: Now’s the time to answer the review questions 1-3. Click here: http://www.proprofs.com/quiz-school/story.php?title=NTc2ODc2 *Please leave quiz window open and wait to submit until prompted to complete questions 4-6. Once all questions are complete submit and close quiz window.

50. Construction Industry Case Study 2 • Facts • Jared Jones – Experience tile setter • Oral agreement with corporation to perform full-time services at construction sites • Uses his own tools and performs services in order designated by the corporation • Corporation supplies all materials, makes frequent inspections of work