Lesson 1.1: Employee/Independent Contractor Flashcards
Identify Worker as an Employee/Independent Contractor
ER hiring an EE must withhold income, social security, and Medicare taxes from the worker’s wages. The ER must also pay the ER’s share of social security and Medicare taxes.
When hiring an independent contractor, the ER’s only obligation is to give the contractor a completed Form 1099-MISC when paying the contractor $600 or more during the calendar year. A copy of this form must also be sent to the IRS.
Worker Classification Criteria/Common Law Test EE
- Required to comply with ER’s instructions about when, where, and how to work
- Works exclusively for the ER
- Hired by the employer
- Subject to dismissal; can quit without liability
- Has a continuing relationship with the ER
- Work done personally
- Performs services under the company’s name
- Paid a salary; reimbursed for expenses; participates in company’s fringe benefits programs
- Furnished tools, equipment, materials, and training
- If an outside salesperson: company provides leads, sets terms and conditions of the sale, assigns a territory, and controls the sales process
Worker Classification Criteria/Common Law Test “1099”
- Sets own hours; determines own sequence of work
- Can work for multiple employers; services available to the public
- Is self-employed
- A contract governs how the relationship can be severed
- Works by the job
- Permitted to employ assistants
- Performs services under the worker’s business name
- Payment by the job; opportunity for profit and loss
- Furnishes own tools, equipment, and training; substantial investment by worker
- Controls the sales process and terms
SS-8
Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
While waiting for the IRS to respond to Form SS-8, ER’s should treat workers whose classification is in question as EE’s
Reasonable Basis Test
Safe Harbor Rules - Sec. 530
ER’s may treat workers who would be RECOGNIZED AS “EE’s” under the common law test as independent contractors
- court decisions, published IRS rulings, IRS technical advice or a private letter ruling from the IRS
- a past IRS audit of the employer
- guidance from an attorney or CPA
- a long-standing, recognized practice
Misclassification Penalties
For not withholding federal income tax, the penalty assessed is 1.5% of wages paid.
This assessment is doubled to 3% if the ER failed to file an information return (Form 1099-MISC)
•For not withholding the EE’s share of social security and Medicare taxes, the penalty assessed is 20% of the EE’s share of the tax.
This assessment is doubled to 40% if the employer failed to file an information return (Form 1099-MISC)
SSA’s Social Security Number Verification Service
The following information is required for SSN verification requests:
- Employee’s SSN
- Employee’s full name
- Employee’s date of birth (optional)
The following information is required for SSN verification requests:
- Employee’s SSN
- Employee’s full name
- Employee’s date of birth (optional)
Wages are not subject to federal income tax withholding or social security, Medicare, or FUTA taxes regardless of their status under the common law test,
There are two categories of statutory nonemployees.
•Qualified real estate agent
•Direct sellers. This exemption
Statutory Employee
Wages are not subject to federal income tax withholding, but are subject to social security and Medicare tax withholdings
- Agent-drivers or commission-drivers.
- Full-time life insurance salespersons. .
- Homeworkers.
- Traveling or city salespersons.
Purpose of Form W-9
Request for Taxpayer Identification Number and Certification
Form W-9 tells the company that the nonemployee is subject or not subject to backup withholding
Calculate Backup Withholding
If a 1099 payee fails to provide a Taxpayer Identification Number (TIN), then backup withholding is required
and are subject to a 28% backup withholding tax
