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The Employer/ Employee Relationship


The Employer/ Employee Relationship Kimberley Childress, CPP February 20, 2010 Proof of Right to Work in U.S. What constitutes knowingly hiring unauthorized aliens? – PowerPoint PPT presentation

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Title: The Employer/ Employee Relationship

The Employer/ EmployeeRelationship
  • Kimberley Childress, CPP
  • February 20, 2010

  • What are the employer responsibilities?

Benefits of an IndependentContractor
  • Reporting requirements are less
  • With a valid TIN Form 1099 Misc (if contractor
    was paid over 600 for services)
  • No income, social security, Medicare, federal or
    state unemployment taxes
  • No administration of or contribution to employee

Common Law Test
  • Classify by applying the common law test
  • Right to control is KEY
  • Control what and how Employee
  • Control Results to be accomplished and NOT the
    Details of how Independent Contractor

Common Law Test
  • Key Control Factors
  • Behavioral Control Instructions and training
  • Financial Control Business expenses,
    investment, public availability, pay basis,
    profit/loss potential
  • Relationship of Parties Written agreement,
    benefits plan, open-ended relationship, key
    aspect of services to business activity

Common Law Test
  • Factors not important in the determination
  • Part time vs full time work
  • Location of work
  • Hours of work
  • Length of employment

Reasonable Basis Test
  • Section 530 of the Revenue Act of 1978
  • Court decision, IRS ruling/ technical advice/
    private letter ruling
  • Past IRS audit of employer
  • Longstanding, recognized practice of employers
  • Consistent treatment since 1978
  • Clarified by Small Business job Protection Act of

Reasonable Basis Test
  • Failure to file Form 1099-Misc in one year no bar
    to Section 530 relief in later years
  • Notice of Section 530 must be provided by IRS
  • IRS auditors must be liberal in applying
    Section 530

Reasonable Basis Test
  • Technical Services Specialists
  • Tax Reform Act of 1986 excludes 3 party
    arrangement technical service specialists
  • Worker/ technical service firm/ firms client
  • Status determined by common law test
  • Includes engineers, drafter, designers, computer
    programmers, and systems analysts

Reasonable Basis Test
  • Use Form SS-8 for a definitive ruling from IRS on
    newly hired employee status
  • Employer should treat the workers in question as
    employees, with all appropriate wages and taxes
    reported and/or withheld.
  • If IRS rules the worker is an independent
    contractor the employer is not entitled to a
    refund of any employment taxes paid

Reasonable Basis Test
  • Specific Industry Guidelines for
  • Entertainment Industry
  • Limousine drivers
  • Moving van operators
  • Garment and furniture manufacturing
  • Harwood timber industry
  • Disputes can be heard by Tax Court

Statutory Employees
  • Not employee under common law test
  • Payments are not subject to federal income tax
  • Payments are subject to social security,
    Medicare, and federal unemployment taxes
  • Employers share of Social Security and Medicare
    taxes, and FUTA if applicable

Statutory Employees
  • Four categories of statutory employees
  • Agent drivers or commission drivers
  • Full time life insurance salespersons
  • Homeworkers
  • Traveling or city salespersons

Statutory Employees
  • General requirements
  • Must agree with the employer that all services to
    be performed personally by the worker
  • Must not make a substantial investment in
    business equipment or facilities
  • Work must be part of a continuing relationship
    with employer

Statutory Non-Employees
  • Statutory non-employees are employees under the
    common law test but are treated as independent
  • Earnings are not subject to Federal income,
    social security, Medicare, or unemployment taxes

Statutory Non-Employees
  • Two categories of statutory non-employees
  • Qualified real estate agents
  • Direct sellers
  • General requirements
  • Compensation directly related to sales/work
  • Written contract that the individual will not be
    treated as an employee for tax purposes

Temporary Help Agency Employees
  • Hired, screened and trained by the temporary help
  • Employees of the temp agency
  • Agency is responsible for complying with any
    payroll, benefits and HR requirements

Leased Employees (PEOs Professional Employer
  • Enter into a leasing arrangement
  • Leasing company hires, trains, and qualifies
    workers for a client
  • Workers are employees of the leasing company
  • Leasing company is responsible for all
    withholding employment taxes, administration
    and funding of benefits

Watch Out
  • Make sure that the temp or leasing agencies are
    financially secure and reputable before entering
    into a contract. Since the agencies financial
    failure could lead to the client company to
    become liable for any withholding or employment
    taxes that remain unpaid

Federal Wage Hour law
  • FLSA U.S. DOL Wage and Hour Division
  • Economically dependent on employer
  • Factors considered
  • Control, profit, investment in tools/material,
    special skills, permanency of relationship, if
    the work is an integral part of employers business

State Income Tax Withholding
  • States that require withholding of state income
    tax follow common law test used by the IRS in
    determining whether an employer-employee
    relationship exists.

Non-Resident Employees
  • Employees live in one state and work in another
  • Some states have reciprocity agreements
  • Check income tax withholding requirements fo the
    state you do business

State Unemployment Insurance
  • Laws more inclusive than federal laws
  • ABC Test Independent contractor if
  • Absence of control
  • Business is unusual and or away
  • Customarily independent contractor
  • 34 states use A and/or B and/or C (remaining
    states use Common Law Test)

IRS Enforcement and Penalties
  • Form 1099 Matching
  • 1099 from one company only
  • 1099 Form W-2 form the same company
  • Penalties
  • Federal income tax 1.5 if wages paid (3.0 if
    no 1099 filed)
  • Social security and Medicare tax 20.0 of
    employees portion plus employers share (40.0 if
    no 1099 filed)

IRS Enforcement and Penalties
  • Intentional Misclassification Penalty
  • Employer liable for full amount for Federal
    Income Tax and 100 of the employees and
    employers share of social security and Medicare
  • Reclassification as an employee can mean
    retroactive application of benefits such as
    401(k) and 423 stock purchase plans (Microsoft

Proof of Right to Work in U.S.
  • Immigration Reform Control Act of 1986
  • Illegal to hire an unauthorized worker
  • Employer must verify identity and eligibility
  • Form I-9
  • Employees complete Section 1 on first day of work
  • Review documents and complete employers Section 2
    within 3 business days of the date of hire
  • Keep for 3 years from date of hire or 1 year from
    date of termination
  • Can not require specific documents
  • Workers must present one from List A or one each
    from List B and List C

Proof of Right to Work in U.S
  • Document Changes
  • Expired documents with no longer be acceptable
    to prove identity or work authorization

Proof of Right to Work in U.S.
  • List A Proof if Identity Work Eligibility
  • US Passport or US Passport Card
  • Permanent Resident Card or Alien Registration
    Receipt Card (Form I-551)
  • Foreign passport with temporary I-551 stamp or
    temporary I-551 printed notation on a machine
    readable immigrant visa
  • Employment Authorization Document that contains
    photo USCIS Form I-766
  • Foreign passport with an Arrival-Departure
    Record, Form I-94 or I-94A

Proof of Right to Work in U.S.
  • List B Proof of Identity
  • State issued drivers license or state ID with
  • ID card issued by government agency with photo
  • School ID card with photo
  • Voters registration card
  • US Military or military dependent ID card or
    draft record
  • US Coast Guard Merchant Mariner card
  • Native American tribal documentation

Proof of Right to Work in U.S.
  • List B Proof of Identity
  • Canadian Drivers License
  • For persons under age 18
  • School record or report card
  • Clinic, doctor, or hospital record
  • Day care or nursery school record

Proof of Right to Work in U.S.
  • List C Proof of Work Authorization
  • US Social Security Card
  • Certificate of birth abroad, Form FS-545 or
  • Original or certified copy of birth with official
    seal issued by state or local government
  • Native American tribal document
  • US Citizen ID card I-197
  • Employment authorization document issued by DHS
    (other that I-766)

Proof of Right to Work in U.S.
  • Penalties for knowingly hiring unauthorized
  • 1st offense - 375 to 3,200 per employee
  • 2nd offense - 3,200 to 6,500 per employee
  • 3rd offense - 4,300 to 16,000 per employee

Proof of Right to Work in U.S.
  • Penalties for knowingly hiring unauthorized
  • Failure to comply with verification requirements
    - 110 to 1,100 per person
  • Pattern and practice of violating hiring and
    verification process - 3,000 and/or 6 months in

Proof of Right to Work in U.S.
  • What constitutes knowingly hiring unauthorized

Employment Verification Pilot Programs
  • Illegal Immigration Reform and Immigrant
    Responsibility Act of 1996
  • 3 verification pilot programs
  • Basic pilot Became E-Verify
  • Citizen Attestation Pilot (not renewed after
  • Machine Readable Document Pilot (not renewed
    after 2003)

  • What is E-Verify Program?

E-Verify Program - General Rules
  • Employers can request
  • All hiring in each state or
  • Limited to hiring in one or more states or
  • One or more places or hiring within a state

E-Verify Program Rules
  • A Memorandum of Understanding (MOU) with the SAVE
    Program and SSA
  • New Hires only
  • Form I-9 completed
  • Form I-9 requirements remain the same, except all
    List B identity documents must contain a photo
  • Verify within 3 days of hire
  • All employees

E-Verify Program Rules
  • No employer cost
  • Equipment required
  • PC with modem and touch tone line with a single
    originating phone number

E-Verify Program Rules
  • Federal contractors and subcontractors must use
    E-Verify system to verify that new hires and
    current employees working on certain federal
    contracts are eligible to work in the US

IMAGE Program
  • Employer Benefits
  • Provide training education on proper hiring
    procedures, fraudulent documentation, and
    anti-discrimination laws
  • Share data on illegal schemes
  • Review hiring and employment practices

IMAGE Program
  • Employer duties
  • Company must agree to I-9 audit by ICE
  • Use Basic Pilot employment verification program
    for all new hires
  • Establish internal training

New Hire Reporting
  • Personal Responsibility and Work Opportunity Act
    of 1996
  • Facilitate collection of child support
  • Uncover fraud and abuse
  • Unemployment Compensation programs
  • Workers Compensation Programs
  • Public Assistance (Welfare) benefit programs

New Hire Reporting
  • Reporting Requirements
  • Employee name, address, and social security
  • Employer name, address, and FEIN

New Hire Reporting
  • Employers operating in only 1 state
  • Report new hire information to that state
  • Paper, magnetically or electronically
  • Multistate Employers
  • Can report to any state
  • Magnetically or electronically

New Hire Reporting
  • Multistate reporting in one state
  • Notify Secretary of Health and Human Services
  • HHS form, letter, fax or e-mail
  • Information required
  • Employer name, address, phone and FEIN
  • Designated state and report begin date
  • List of all states with employees
  • Employer contact person
  • Any subsidiary name, zip code, and FEIN included
    in the reporting

New Hire Reporting
  • General Reporting Requirements
  • Report within 20 calendar days of hire
  • Magnetically or electronically
  • 2 transmissions per month (at least 12-16 days
  • States can establish the time frames but they can
    not be longer than the federal rules

New Hire Reporting
  • General Reporting Requirements
  • Multistate employers provide only information
    required by the state they report to
  • Date of hire
  • Employees who work 1 day must be reported
  • Independent contractors

New Hire Reporting
  • General Reporting Requirements
  • Rehired, Leave of Absence
  • Temporary help firms
  • Unions and hiring halls
  • Employees
  • Individual referred for employment

New Hire Reporting
  • Reporting format and method
  • Form W-4 or equivalent
  • 1st class mail, fax, magnetically, or
  • CAUTION If you use a Form W-4 for reporting, use
    a copy of the original when adding the employers
    name, employees date of birth, etc. Do not alter
    the original Form W-4!

New Hire Reporting
  • Penalties
  • Civil penalty of up to 25
  • 500 maximum if the result of a conspiracy
    between the employer and employee

New Hire Reporting
  • Information Processing
  • The states have 5 business days to enter
    information to the State Directory
  • 2 business days from the date of entry to
    transmit a child support withholding order
  • Within 3 days from the date of entry, the state
    must furnish the information to the National