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Clarifying the Muddy Waters

Author: Keith Huggett

You have two ways to treat the people who help you run your business. You can hire them as employees, with all the legal and financial commitments “employment” carries. Or you can engage them as independent contractors. Here’s how they differ:

• Hiring employees makes you responsible for FICA (Social Security), FUTA (unemployment) and state unemployment and worker’s compensation costs. You have to include them in benefit programs like health insurance, medical expense reimbursement, and retirement plans. You’re subject to various federal, state, and local employment laws. And you’re vicariously liable for employees’ errors and omissions.
• Engaging contractors avoids FICA, unemployment, and worker’s compensation costs. You can exclude contractors from employee benefit plans. You’ll avoid much of the legal and regulatory oversight. And you’re less responsible for contractors’ errors and omissions.

In some industries, custom dictates hiring employees. In others, “recognized industry practice” lets you treat staff as employees or contractors. Contractors are easier and cheaper to hire and manage. Of course, the IRS knows this too. And they’re on the lookout for businesses that classify employees as contractors to avoid employment obligations. They use a 20-factor test to determine employment, including factors such as:

• Do you give specific instructions for completing tasks?
• Do you offer training?
• Do you specify work hours?
• Do you pay flat compensation classifiable as salary?
• Do you reimburse expenses?

If the IRS recharacterizes your contractors as employees, you’ll be liable for FICA and FUTA taxes plus stiff penalties and interest. Here are four steps to take to protect yourself:

1. Have each contractor sign a written agreement specifying they will be treated as contractors, responsible for paying their own taxes, and not covered by workers’ compensation.
2. Have each contractor complete Form W-9 to accept their responsibility for paying required taxes.
3. Treat all workers providing the same service consistently.
4. Issue Form 1099-MISC for all contractors earning more than $600 annually.

If you fear the IRS might reclassify your contractors as employees, you can file Form SS-8, “Determination of Employee Work Status for Purposes of Federal Unemployment Taxes and Income Tax Withholding.” There’s no charge, and you can file a single form for an entire class of employees. But many advisors recommend not filing this form, preferring not to alert the IRS to the issue.  

If you would like more information on employee status, 1099 Misc forms, Independent Contractors, or general tax information, please contact us, The Tax Office Inc.  Our specialists are highly trained in all matters tax related and can answer your questions as they arise.

It Could Happen to You! 

Author: Keith Huggett 

We have spoken earlier about the conflict between independent contractors and employees. It's a very hot topic and complex issue, in the tax, benefit, and legal worlds. The EDD and the IRS both have their definition of an employee and an independent contractor and the line between the two is a distinctive shade of grey. But what happens when you cannot, or do not, make the distinction, and the IRS decides to "correct" your choice, usually not in your favor? As you might guess, it generally invoves your business making large payments to the IRS in the form of penalties and interest.  If your workers that were classified as "independent contractors" get reclassified as "employees" by the IRS, here are 5 things you will need to be prepared for:

1. Federal Income Tax Withholding - as with your other employees, you are responsible for withholding income and employment taxes. There may be big liabilities in store for failure to withhold in the past. 
2. Social Security Tax - Employer and Employee each pay half of the FICA tax. OASDI payments are also required at 6.2%. As an employer your company is responsible for one half of the Medicare tax. If your workers were to be recharacterized, the past employment tax liability would quickly add up.
3. Federal Unemployment Tax - FUTA allows for the collection of a federal employer tax used to fund state workforce agencies. With reclassification your company would be responsibile for paying the past taxes along with penalties and interest.
4. State Unemployment Taxes - The state portion of this tax is determined by the state agency and depends on the unemployment experience of each company. If a company's independent contractors are recharacterized, the company would be responsible for paying applicable state unemployment insurance for both past and future, plus penalties and interest.
5. Worker's Compensation Insurance - Worker's Comp varies from state to state, and can even vary from employer to employer. The company involved would most certainly be liable for the past and would have to make premium payments for the future.

Classifying your staff correctly is a very important aspect of your business. While having independent contractors makes things easier at first, because you don't have to deal with the tax issues, problems can arise years later. 

If you are uncertain how to classify your employees, the specialists at the Tax Office, Inc. can provide you with the answers. Contact us to find out more about taxes, the effects of classification of employees on your taxes, accounting, representation services, bookkeeping or payroll. 

Which is Which and Who is Who?

Author: Keith Huggett

This question pops up more often than you would think. Between the Employment Development Department and the Internal Revenue Service, we think we've come with some answers for 10 common misconceptions about employees and independent contractors. But before we get on to those, here are a few "simple" definitions for you.

Who is an employee?

An employee includes all of the following:

• Any officer of a corporation
• Any worker who is an employee under the usual common law rules
• Any worker whose services are specifically covered by law

That's crystal clear isn't it?

Who is not an employee?

Independent contractors are not employees. Independent contractors are engaged in separately established bona fide businesses. A bona fide business is subject to profit and loss. They usually contract to perform a specific task and have the right to control the way the task is to be accomplished. They have a substantial investment in their business and customarily perform services for more than one business.

Now that that's cleared up, we can see where we get the following misconceptions...

1. Family members are not employees... On the contrary, hiring a family member to work for you as an employee can be a great tax planning strategy. In many cases, having family members as employees of a company is more common than having family members as independent contractors. An obvious example of having a family member as an independent contractor would be something like this: Assuming that your business is not a law firm, hiring your son the attorney to handle your bankruptcy.
2. If a worker earns less than $600 a year then the worker isn't subject to payroll taxes... The $600 threshold only applies to whether or not you need to issue an IRS form 1099 MISC to an independent contractor. Before issuing that form, you need to determine if the worker is an employee or an independent contractor. Once that is determined, then the issue of payroll taxes or 1099's is applied.
3. If I issue an IRS form 1099 MISC, then the worker is an independent contractor... If only that were the case. 1099-MISC forms are used by the IRS to track and report certain types of non-employment related income. When you provide a 1099-MISC form to a worker for payment of services, it does not automatically make them an independent contractor. There are other qualifications that must be met in determining the status of the worker.
4. Day laborers or casual laborers are not employees...There are many different types of employees under the law. Many people work part-time or as temporary help. Under the law, services commonly referred to as day labor, part-time help, casual labor, temprary help, probationary or outside labor are all employees.
5. My competitors treat their workers as independent contractors, why can't I do the same... The days of "if he can, so can I..." ended back in grade school. The law defines employment relationships, not your competitors. If you misclassify your employees, it is you who will end up in hot water, dealing with unpaid payroll taxes, penalties and interest, right next to your competitors.
6. My worker does similar work elsewhere. He must be an independent contractor... Just because your employee/worker does similar work at other locations does not automatically make him an independent contractor. There are other qualifications that the employee/worker must meet before he is qualified as an independent contractor. Quite simply, he could just have multiple part-time jobs in the same field.
7. My worker has a business license and business cards. Doesn't that make him an independent contractor... While having those things certainly put him on the road to being an independent contractor, by themselves the do not. Other common law factores need to be met before your worker can be qualfied as an independent contractor.
8. I only pay by commision, so I have no employees only independent contractors... How you pay your employees is not a factor in determining if your workers are employees or independent contractors. With employees commissions are simply another form of wages.
9. I have a written contract with my worker, that makes him an independent contractor... A written contract does not automatically make your worker an independent contractor. How you actually work together in a relationship is more important than the workding of a document in determining whether a worker is an employee or an independent contractor.
10. Who has control determines if a worker is an independent contractor or an employee... The right to control, whether or not exercised, is the most important factor in determing the relationship between an employer and employee. The right to discharge at will and without cause is strong evidence of the right to control.

While we mentioned several times the common law rules. The common law rules are intended to answer two questions: What must be done, and How it must be done. If the person in control of these questions is YOU, your worker is an employee.

As you can see, this is not a black and white issue. There is no bright line test with a simple answer. Many factors play into determining the difference between employee and independent contractor. If we've raised more questions for you than provided answers, please contact us at The Tax Office, Inc. We will gladly answer any questions you have. 

Proper Distinction May Save Money

Author: Keith Huggett

Bringing independent workers or independent contractors aboard without classifying them as employees can save you a great deal of money. The savings come from your ability to just pay them for the work done without withholding taxes, paying into FICA or paying worker's compensation insurance.

Unfortunately, the potential to save money has led a number of employers to classify their workers incorrectly. This had led to a great deal of IRS scrutiny of employers who use independent workers. To help keep you out of trouble, here are three ways to find out if a worker is an employee or a contractor:

• Control: Who controls how the person does his or her job? For example, if you were to hire an off-site payroll provider, they would likely choose what software to use to do your payroll, whether to process it at 11 a.m. or 3 p.m., and what to wear while they were doing it. Although you controlled what ultimately got done, you would not control how they did it. This would make them independent workers.

• Money. Who pays the cost of doing the work? With employees, you would typically pay for all of the tools that they use to do their jobs and pay them for working for you. Contractors typically have their pay directly tied to a specific task, and could even lose money in their business if things go wrong.

• Relationship. What kind of relationship do you have with the worker? If you are giving them benefits or paid leave, the IRS would consider them an employee. Such things as set hours, set workplaces and dress codes can also cause a worker to be classified as an employee.

Ultimately, determining whether or not a worker is independent can be complicated. Letting The Tax Office, Inc. help you determine the nature of a worker can reduce your risk of being audited by multiple parties. We can even help you complete an SS-8 form to get an IRS determination of an employee's status. Given the amount of money that using independent workers can save you, this is very inexpensive insurance. Contact us here to get started today.