Sec 1: ER and EE Relationship Flashcards
Employee vs. Independent Contractor
independent contractor provides the employer with a valid Taxpayer Identification Number (TIN), the employer’s only obligations are to give the contractor a Form 1099- NEC (if the total was at least $600).Because misclassification of workers as independent contractors rather than employees has led to substantial losses in revenue for the federal government and the failure to properly credit earnings for social security and unemployment benefit purposes, the IRS is focusing more resources on employment tax audits and on working with other federal and state agencies to discover instances of misclassification.
COMMON LAW TEST
While there is no uniform definition of an employee under all payroll laws, most workers can be classified as either employees or independent contractors once the “common law test” has been applied. The IRS, for example, relies on the common law test in making worker status determinations for the purposes of federal
income tax withholding and the withholding and payment of employment (social security, Medicare, and federal unemployment) taxes.
(CL Test) Right to control is the key
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.
(CL Test) IRS looks to identify key control factors (BFT)
The IRS has sought to streamline the process for determining whether a worker is an employee or an independent contractor. Evidence of the degree of control and independence can be grouped into three general types or categories: behavioral control, financial control, and the type of relationship between the parties.
Behavioral control
Factors that determine behavioral control, which is the right to direct and control the details and means by which the worker performs the work to be done
Financial control
Factors that must be considered when determining whether the business has the right to direct and control the economic aspects of the worker’s job
Type of relationship
There are several factors that generally indicate how the worker and the business perceive their relationship to each other and their intent regarding the right to direct and control the manner and means of the worker’s activities
REASONABLE BASIS TEST
Even though a worker meets the definition of an employee under the common law test, an employer may treat a worker as an independent contractor exempt from federal payroll tax laws if it has a “reasonable basis” for doing so, as determined by §530 of the Revenue Act of 1978
The reasonable basis may consist of one or more of the
following, as well as any other reasonable basis:
- Court decisions, published IRS rulings, IRS technical advice sent to the employer, or a private letter ruling from the IRS indicating that the worker (or workers in similar situations) is not an employee
- A past IRS audit of the employer (not one of its workers) that did not result in a finding of taxes owed or a penalty attributable to the employer’s treatment of the worker (or workers in similar situations) as an independent contractor
- A longstanding, recognized practice in a significant segment of the employer’s industry of treating workers in similar situations as independent contractors
Consistent treatment is a must
In order to take advantage of the “safe harbor” provided by the reasonable basis test, the employer must treat the worker whose status is in question consistently as an independent contractor and must file all federal tax and information returns for the period in question based on that treatment. The treatment must have been consistent since 1978 by the employer and/or its predecessor
Form SS-8
IRS makes the status determination. Most employers can get a definitive ruling from the IRS as to a newly hired worker’s status as an employee or an independent contractor by completing Form SS- 8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Statutory Employees
Statutory employees are workers who, while they are not employees under the common law, are treated as employees for certain employment tax purposes. No federal income tax withholding, but are subject to withholding for social security and Medicare taxes. Also, the employer must pay the employer’s share of social security and Medicare taxes and, in some instances, (FUTA)
Statutory employees fall into four categories (HAFT)
-Homeworkers
- Agent‑drivers or commission‑drivers
- Full‑time life insurance salespersons
- Traveling or city salespersons
General requirements
- They must agree with the employer that all services are to be performed personally by the worker.
- They must not make a substantial investment in business equipment or facilities (other than transportation).
- Their work must be part of a continuing relationship with the employer, rather than a single transaction
Statutory Nonemployees
While they may qualify as employees under the common law test, are nevertheless treated under the IRC as independent contractors for federal income tax withholding and social security, Medicare, and FUTA tax purposes. The earnings of statutory nonemployees are not subject to federal income tax withholding or social security, Medicare, or FUTA taxes regardless of their status under the common law test, so long as certain conditions are met
There are two categories of statutory nonemployees QD
- Qualified real estate agents
- Direct sellers
General requirements
- Most of their compensation must be directly related to sales or other work output rather than the number
of hours worked. - Their work must be performed under a written contract providing that the individual will not be treated as
an employee for federal income, social security, Medicare, or FUTA tax purposes
Companion sitters
Companion sitters who are not employees of a companion sitting placement service are generally treated as self- employed for all federal tax purposes
Leased employees
Under a leasing arrangement, the leasing company hires, trains, and qualifies workers for a client company, which pays a fee to the leasing company to cover the cost of payroll, benefits, etc. Although the client company may have the right to hire and fire the workers, set wage levels, and supervise their work, the workers generally are employees of the leasing company, which is responsible for all withholding and employment taxes as well as the administration and funding of any benefits it wishes to provide
Professional employer organizations (PEOs)
A professional employer organization is an entity that provides
comprehensive human resources, payroll, and benefits management for its client companies
Statutory employers
if a person who is not the common law employer has control of
the payment of wages, that person is considered the employer for income tax withholding purposes
Fair Labor Standards Act
The federal Fair Labor Standards Act regulates minimum wage rates, overtime pay, child labor, and equal pay for employees covered by the law
State Unemployment Insurance Laws - ABC Test
- Absence of Control - the worker is free from control or direction in performing the work both by agreement and in reality
- Business is unusual and/or away - the work is performed outside the usual course of the company’s business or away from any of the employer’s facilities
- Customarily independent contractor - the worker is customarily engaged in an independent trade, occupation, or business
IRS Penalties
- For not withholding federal income tax, the tax assessed is 1.5% of wages paid. This assessment is doubled
to 3% if the employer failed to file an information return (Form1099- NEC) for the workerwith the IRS. - For not withholding the employee’s share of social security and Medicare taxes, the tax assessed is 20% of the employee’s share. This assessment is doubled to 40% if the employer failed to file an information return (1099- NEC, see Appendix) for the worker with the IRS. The employer’s share of social security and Medicare taxes must also be paid.
Proof of the Right to Work in the U.S.
Once an employer hires a worker as an employee, the employee must prove his or her identity and right to work
in the United States
The Immigration Reform and Control Act of 1986 (IRCA)
To make it illegal for an employer to knowingly hire or continue to employ an unauthorized worker. Employers must comply with this requirement by verifying the identity and right to work of all
employees hired after November6,1986
FormI- 9, Employment Eligibility Verification
- Making sure employees provide original documentary evidence of their identity and authorization to work within 3 business days of the date of hire
- Making sure the documents establishing the employee’s identity and authorization to work appear genuine within 3 business days of the date of hire
- Properly completing the employer’s portion of FormI- 9 (Section 2) within 3 business days of the date of hire
- Keeping completed I- 9 forms for at least 3 years from the date of hire or 1 year from the date of termination, whichever is later
- Presenting FormI- 9 on request within 3 business days to an inspector from U.S. Citizenship and Immigration Services, Immigration and Customs Enforcement, or the Department of Labor
E‑Verify Program
The E- Verify Program involves verification checks of the SSA and DHS databases, using an automated system to verify the employment authorization of all newly hired employees
New Hire Reporting
Since 1997, payroll practitioners have been required to report information regarding newly hired and rehired
employees to state agencies. Under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996
Reporting Requirements
- The employee’s name, address, and social security number
- The date the employee first performed services for pay
- The employer’s name, address, and federal employer identification number (EIN)
