Section 1 - The Employee-Employer Relationship Flashcards
Independent Contractor
no taxes withheld
provided a 1099-MISC to report payments over $600
no unemployment taxes are paid
Employee
taxes withheld
provided a W2
unemployment taxes paid
subjecto to all federal/state laws
Common Law Test
A test to determine if the employer has the right to control what work will be done and how that work will be done.
Key Control Factors:
- Behavior Control (what needs to be done and when)
- Financial Control (controls payments; profit/loss)
Reasonable Basis Test
An employer may treat a worker as an independent contractor if it has a “reasonable basis” as determined by section 530 of the Revenue Act of 1978.
Seciton 530 of the Revenue Act of 1978: court decisions, published IRS rulings, private letter ruling, etc.
Past IRS audit
A longstanding, recognized practice
SS-8
Determination of Workers Status for purposes of Federal Employment Taxes and Income Tax Withholding
An employer can get a definitive ruling from the IRS as to a newly hired worker’s status by completing the SS-8. The worker must be treated as an employee until the ruling is made. Decisions can take several weeks to 6 months.
Statutory Employees
Subject to Social Security and Medicare Tax; sometimes Federal Unemployment Tax
Not Subject to Federal Income Tax withholding.
CATEGORIES Agent-drivers or commission-drivers Full-Time life insurance salesperson Homeworkers Traveling or city salesperson
Statutory Nonemployees
Not subject to Federal Income, Social Security, Medicare and FUTA taxes
Treated like independent contractors. 1099-MISC issued at year end for payments made to the individual.
CATEGORIES
Qualified real estate agents
Direct Sellers
Temporary Help Agency Employees
The agency hire/fires, trains and is responsible for complying. The Client company only pays a fee.
Ex: Randstad for AON’s annual enrollment
Leased Employees
The Leasing Company hires/firest, trains and qualifies. It is responsible for compliance. The Client company pays the fee and may have some hiring rights.
Ex. Small employers, all employees are leased.
State Unemployment Insurance Laws and employee classifications
Common Law Test or ABC test to define employer-employee relationship when determinig if unemployment insurance needs to be paid.
Call state employment security agency if unsure.
ABC Test
The worker is an independent contractor only if:
- Absence of Control
- Business unusual and/or away
- Customarily independent contractor
IRS Penalties (Employee Misclassifying)
Unintentionally misclassifying and employee as an independent contrator:
Federal income tax: 1.5% of wages paid
-double to 3% of wages if the employer did not fle information returns (1099-MISC)
Social Security and Medicare taxes: 20% of the employee’s share
- doubled to 40% of wages if the employer did not fle information returns (1099-MISC)
Intentionally missclassifying an employee as an indedpendent contractor:
100% of employee and employer taxes
IRCA
Immigration Reform and Control Act of 1986
Act making it illegal for an employer to hire an unauthorized worker.
Proof of Right to Work in the US
Employers must comply by verifyin the identity and right to work. Make sure both sections of the Form I-9 are complete.
List A
Document proving both identity and work authorization
Ex.: US passport, Certificate of Naturalization, Permanent Resident Card
