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Worker Classification: Getting It Right The 1st Time


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Title: Worker Classification: Getting It Right The 1st Time

  • Worker Classification Getting It Right The 1st
  • All audio is streamed through your computer
  • There will be several attendance verification
    questions during the LIVE webinar that must be
    answered via the online quiz at the conclusion to
    qualify for CPE.
  • For the archived/recorded version of this
    webinar, the link to the attendance verification
    quiz is a final exam on the topics covered during
    the presentation.

Worker Classification
  • Getting It Right The 1st Time
  • Part 2

Lesson Outline
  • Properly classifying workers
  • 3 Categories of classification
  • What are the various classes of workers
  • Penalties for misclassification
  • Case studies
  • Form SS-8 and its importance
  • Federal vs. state law
  • Industries with classification issues
  • Voluntary Classification Settlement Program
  • Section 530 Safe Haven Protection

Independent Contractor or Employee
  • Which one should it be?
  • How do you determine proper classification?
  • What affect does improper classification have on
    employer and worker?

So How Do You Get It Right?
  • Do you know how to properly classify workers?
  • How do you determine if your workers are
    employees, or independent contractors?
  • What factors should you use to make the proper

3 Categories For Classification
  • Worker classification facts are based on three
    main categories
  • Behavioral Control
  • Financial Control
  • Relationship of the Parties

3 Categories For Classification
  • Must consider all facts in the case
  • Each case has different facts and circumstances
  • No single fact provides the answer
  • Misclassification can have major ramifications on
    employer and worker if you get it wrong

Behavioral Control
  • These facts show if there is a right to direct or
    control how the worker performs the work
  • A worker is an employee when the business has the
    right to direct and control the worker
  • Business doesnt have to control the way work is
    done can direct and control the work

Financial Control
  • These facts show whether there is a right to
    direct and control the business segment of the
  • Does the business or the worker control financial
    elements such as expenses?

Relationship of The Parties
  • These facts show how the business and the worker
    perceive their relationship
  • Does the business perceive the worker as an
    independent contractor?
  • Does the worker think he/she is an employee?

So Where Do We Go From Here?
  • The worker perceives employee status,
  • The business perceives independent contractor
  • Who is right and who is wrong?
  • How do you proceed now?

Employees Under Common Law
  • A worker is usually an employee if the business
    can control what will be done and how it will be
  • If business has ability to control the details of
    how the services are performed it indicates an
    employee-employer relationship
  • Workers in business for themselves are not

Who Are Independent Contractors?
  • Accountants
  • Doctors
  • Lawyers
  • Veterinarians

Who Are Employees?
  • Food servers
  • Bartenders
  • Receptionists
  • Office managers

Statutory Employees
  • A Statutory Employee is a worker who cannot be
    classified as an employee under the Common Law
  • But is an employee for payroll tax purposes due
    to specific statutory requirements (Social
    Security and Medicare)

Who Are Statutory Employees?
  • An Agent or Commission Driver (Food and beverage
    delivery driver No Milk)
  • Full-Time Life Insurance Salesperson (Sells
    primarily for one company)
  • Homeworker (Works from home using materials
    furnished by business)

Who Are Statutory Employees?
  • Traveling or City Salesperson (Full-Time Works
    for One company taking customer orders)
  • Corporate Officers (One who provides No services
    or Minor services and is not entitled to receive

Who Are Statutory Employees?
  • Statutory Employees must have Social Security and
    Medicare taxes withheld if the Three Tests are

3 Test For Statutory Employees
  1. Service contract states or implies that almost
    all services will be performed personally by
  2. The employee has little or no investment in the
    equipment and property used to perform the
  3. Services are performed on a continuing basis for
    the same company

Statutory Non-Employees
  • Two Categories of Statutory Non-Employees
  • If worker falls into either category they can be
    classified as Independent Contractors
  • Statutory Non-Employees are responsible for
    federal income taxes, and self-employment taxes

Who Are Statutory Non-Employees?
  • Direct Sellers - (Must meet Three Factors to
  • Real Estate Agents (No property managers)

Direct Sellers 3 Factors
  • Salesperson sells consumer goods in the home, or
    at a place of business other than a permanent
    retail establishment
  • Sells consumer products to any buyer on a
    buy-sell basis, deposit commission basis, or any
    similar prescribed by the regulations
  • Substantially all of payment made to direct
    seller must be directly related to sales output,
    or performance or service output (Cant Be Paid
    For Hours Worked)

Direct Seller Requirements
  • To obtain direct sellers exemption there must be
  • Written contract between direct seller and
  • Stating that direct seller will not be treated as
    an employee for federal tax purposes

So Who Are Direct Sellers?
  • Door-to-door salespersons
  • Home demonstration persons

Statutory Non-Employees
  • Real Estate Agents
  • Need to be a qualified and licensed agent
  • Output should be based on sales and not on hours
  • Written contract stating they are not an
    employee for federal tax purposes

Real Estate Agents
  • Provide services such as
  • Advertising
  • Showing real estate property
  • Acquisition of a lease to real property
  • Recruitment, training, and supervision of other
    real estate persons

Real Estate Agents
  • Property Management services are NOT included
  • Property Managers are not classified in the real
    estate agent category

Statutory Non-Employees
  • Statutory Non-Employees are not employees for
    federal tax purposes, but
  • Can be an employee for other purposes such as
    state workers compensation, and tort liability

Penalties of Misclassification
  • Employers are required to collect withholding
  • Can ask for abatement of liability for employee
    portion of taxes if employee has paid the taxes
  • Use Form 4670 to request relief of tax liability
  • Employees statement submitted using Form 4669

Failure to File Return Penalty
  • 5 of balance due for each delinquent month
  • Maximum penalty 25

Failure To Collect Tax Penalty
  • Business that Willfully fails to collect and
    pay trust fund taxes will be assessed
  • 100 penalty of tax due

What Are Trust Fund Taxes?
  • Federal income taxes and FICA taxes required to
    be withheld from employees wages
  • Trust fund taxes do not include employers FICA

Trust Fund Penalty
  • 100 Penalty if Two Requirements are Met
  • Must be responsible person
  • Responsible person must have Willfully failed
    to collect or pay the trust fund taxes

What Is Willful?
  • Willful is defined as
  • Intentional
  • Deliberate
  • Voluntary
  • Reckless
  • Knowing

Case Study 1
  • Business misclassifies employees as independent
    contractors and does not withhold federal and
    FICA taxes
  • Should responsible be assessed the 100 penalty
    for failure to collect and pay trust fund taxes?
  • Is there reasonable basis for not collecting and
  • Crowd Management Services, Inc. DC Ore, 95-1

How Far Back Can IRS Go?
  • Statute of limitations is based on filing date
    of Form 941 and 940
  • 3 Years from filing date
  • If forms are never filed, statute never expires
  • If fraud is involved, there is NO statute of
    limitations for reclassifying workers

Form SS-8
  • Form SS-8 (Determination of Employee Work
    Status for Purposes of Federal Employment Taxes
    and Income Tax Withholding)
  • Can be submitted to IRS by worker
  • Can be submitted to IRS by employer
  • Can be requested by IRS examiner

Form SS-8
  • SS-8 is a restatement of 20 Common Law questions
  • Its an excellent self-audit tool
  • Business should use it when drafting independent
    contractor agreement

Federal vs. State Law
  • Every state has different laws for determining
    independent contractor status
  • Most states base it on Employment. Do
    workers services constitute employment?
  • Employment for state unemployment purposes is
    defined as any services performed for
    remuneration or under contract for hire, written
    or oral, express or implied

Federal vs. State Law
  • Services for remuneration are considered
    employment unless the ABC Test is met
  • If ABC Test is met worker is not an employee for
    state unemployment purposes
  • Burden of Proof falls on the business
  • Some states require that only One or Two of the
    conditions are satisfied

ABC Test
  1. The worker is free from control of direction of
    the performance of the work
  2. The service is either outside the usual course of
    business for which the service is performed, or
    it is performed outside of all the places of
    business of the enterprise for which the service
    is performed
  3. The worker is customarily engaged in an
    independently established trade, occupation,
    profession, or business

ABC Test
  • Some states use ABC Test
  • Other states use the Common Law IRS 20 Factor
  • Other states use a variation of tests

States With ABC Test
Alaska Louisiana New Jersey
Arkansas Maine New Mexico
Connecticut Maryland Rhode Island
Delaware Massachusetts Tennessee
Georgia Nebraska Vermont
Hawaii Nevada Washington
Illinois New Hampshire West Virginia
States Using Common Law 20 Factor Test
Alabama Kentucky North Dakota
Arizona Minnesota South Carolina
California Mississippi Texas
District of Columbia Missouri Utah
Florida New York
Iowa North Carolina
Variations of State Unemployment Insurance Tests
State Test
Colorado AC
Idaho AC
Indiana A Part of B C
Kansas AB
Michigan Economic Reality Test
Montana AC
Ohio A Part of B C
Variations of State Unemployment Insurance Tests
State Test
Oregon AC
Pennsylvania AC
South Dakota AC
Virginia AB or AC
Wisconsin Unique 8 Factor Test
Wyoming AC
Possible Industries With Worker Classification
  • Building and construction industry
  • Trucking industry
  • Computer industry
  • Automobile industry
  • Legal industry
  • Taxicab industry

Construction Industry Case Study 2
  • Facts
  • Jared Jones Experience tile setter
  • Oral agreement with corporation to perform
    full-time services at construction sites
  • Uses his own tools and performs services in order
    designated by the corporation
  • Corporation supplies all materials, makes
    frequent inspections of work

Construction Industry Case Study 2 (Cont)
  • Facts
  • Jared gets paid on a piecework basis
  • Company carries workers compensation on him
  • He doesnt have a place of business
  • Performs similar services for other customers
  • Either party can terminate the services at any

Construction Industry Case Study 2 (Cont)
  • What is Jared Jones?
  • Employee or
  • Independent Contractor

Construction Industry Case Study 3
  • Facts
  • Freddy Thomas is an electrician who submitted a
    job estimate to apartment complex for electrical
  • 16 per hour _at_ 400 hours
  • He will receive 1,280 every 2 weeks for 10
  • Not considered payment by the hour

Construction Industry Case Study 3 (Cont)
  • Facts
  • Freddy can work more or less than 400 hours to
    get job done. He will receive 6,400 for the job
  • He performs electrical services for other
    companies obtained by advertising

Construction Industry Case Study 3 (Cont)
  • What is Freddy Thomas?
  • Employee or
  • Independent Contractor

Auto Industry Case Study 4
  • Facts
  • Susan Bachman performs auto repair services for
    auto sales agency using their space
  • She uses her own tools, equipment, and supplies
  • She seeks out business from insurance adjusters
    and other individuals and does all of the work
    that comes to the sales agency

Auto Industry Case Study 4 (Cont)
  • Facts
  • Susan hires and discharges her own helpers
  • Determines her own and her helpers working hours
  • Quotes prices for repair work, makes all
    necessary adjustments
  • Assumes all losses
  • Receives as compensation for her services, a
    large percentage of the gross collections from
    the auto repair shop

Auto Industry Case Study 4 (Cont)
  • What is Susan Bachman?
  • Employee or
  • Independent Contractor

Auto Industry Case Study 4 (Cont)
  • What are Susans workers?
  • Employees or
  • Independent Contractors

Taxicab Driving Industry Case Study 5
  • Facts
  • Dexter Manning rents a cab from Speedy Cab Co
    for 150 per day
  • He pays all costs of maintaining and operating
    the cab
  • Dexter keeps all fares that he receives from

Taxicab Driving Industry Case Study 5(Cont)
  • Facts
  • Dexter uses Speedy Cabs two-way radio
    communication equipment
  • Speedy Cabs dispatching services
  • Speedy Cabs advertising
  • These items benefit both Speed Cab Co. and
    Dexter Manning

Taxicab Driving Industry Case Study 5 (Cont)
  • What is Dexter Manning?
  • Employee or
  • Independent Contractor

What Triggers An IRS Worker Classification
  • The employee (worker) files Form SS-8 requesting
    a ruling
  • The business issues an extraordinarily high
    number of 1099-MISC forms
  • The business issues 1099-MISC forms with high
    dollar amounts

What Triggers An IRS Worker Classification
  • The state unemployment agency conducts an audit
    and shares information with IRS
  • IRS performs project audits on a certain
  • Informant tips off IRS or DOL and provides audit
    lead (Be cautious of disgruntled former employees
    or vengeful competitors)

2 Types of Worker Classification Audits
  • Employment tax exams
  • Income tax exams

Examination Location
  • IRS wants to conduct audit at taxpayers place
    of business
  • Taxpayers representative wants it off the
    business premises
  • Never allow examiner to conduct exam on business
    premises! Easy to misinterpret events

Voluntary Worker Classification Settlement Program
  • VCSP allows employers to voluntarily reclassify
    workers as employees for future tax periods
  • Provides partial relief from federal employment
  • Nearly 1,000 employers have applied as of
    February 2013

Who May Qualify for VCSP?
  • Businesses, tax-exempt organizations, and
    government entities may qualify
  • Must currently be treating workers (or a class
    or group of workers) as independent contractors
    or other nonemployees
  • Must have consistently treated workers as
    independent contractors or other nonemployees

Who May Qualify for VCSP?
  • Must have filed all required Forms 1099 for
    workers the previous three years (temporarily
    waived thru 6/30/13 See Announcement 2012-46)
  • May not currently be under employment tax audit
    by IRS, or under classification audit by DOL or
    State agency
  • Taxpayer previously audited for classification
    must be in compliance with audit results

Who May Qualify for VCSP?
  • May not currently be contesting the
    classification of workers in court
  • If you qualify apply using Form 8952,
    Application for Voluntary Classification
    Settlement Program (at least 60 days before you
    want to begin treating workers as employees)

What Does It Cost for VCSP?
  • Accepted employers will pay an amount equaling
    to just over 1 of wages paid to reclassified
    workers for the past year
  • No interest or penalties will be due
  • Employer will not be audited on payroll taxes
    related to these workers for prior years

What Does It Cost for VCSP?
  • Employers applying for VCSP under the temporary
    relief program (Announcement 2012-45) may qualify
    even if Forms 1099 were not filed
  • Will pay a slightly higher amount than 1, plus
    some penalties, and must file any unfiled Forms
    1099 for workers that will be reclassified

Section 530 Safe Haven Protection
  • Section 530 of the Internal Revenue Act of 1978
    provides a safe haven for companies who use
    independent contractors
  • Passed in 1978 To provide relief for
    businesses that used independent contractors in
    good faith
  • Intended to last only one year until Congress
    evaluated and passed legislation defining
    independent contractors. 35 years later Congress
    is still evaluating the matter!

Section 530 Safe Haven Protection
  • Section 530 provides the new IRS Classification
    Settlement Program (CSP)
  • CSP establishes procedures for early and timely
    resolution of cases, reducing taxpayer burden
  • It is Mandatory that examiner offer a CSP to
    taxpayer if they qualify for Section 530 relief

3 Qualification Requirements For Section 530
  • Reporting Consistency
  • Substantive Consistency
  • Reasonable Basis

Reporting Consistency
  • All federal tax returns and information returns
    must be filed by the business on a basis
    consistent with the business treatment of the
    individual worker not being an employee.
  • Test must be applied to each worker separately
    since Form 1099-MISC may be filed for one worker
    in a class, but not another worker in same class.
    Treat these workers as separate classes.

Substantive Consistency
  • Business must have consistently treated
    similarly situated workers as independent
  • If business or predecessor treated a similarly
    situated worker as an employee, Section 530
    relief is not available.
  • Test must be applied to each class of workers.

Reasonable Basis
  • Business must have some reasonable basis for not
    treating workers as employees
  • Reasonable basis can consist of reasonable
    reliance on several items

Reasonable Basis
  • Judicial Precedent
  • Published Ruling
  • Private Letter Ruling
  • Technical Advice Memorandum
  • Results of past audits
  • Long standing recognized practice of a
    significant segment of the industry

Are Section 530 Requirements Met?
  • If business clearly meets the reporting,
    substantive consistency requirements, and
    satisfies the reasonable basis test
  • Section 530 requirements are fully met and
    business is eligible for Safe Haven relief

Are Section 530 Requirements Met?
  • If the business does not meet Section 530 relief
    provisions, the IRS examiner will proceed to
    determine if workers are independent contractors
    or employees using the Common Law rules (20
    Factor Test)

When Does CSP Get Offered?
  • If examiner determines that a reclassification
    issue does exist, examiner will consider whether
    or not CSP applies.
  • If examiners proposal is to reclassify workers
    as employees and business has timely filed Forms
  • Examiner should make a CSP offer to taxpayer

When Does CSP Get Offered?
  • It is mandatory that examiner present a CSP
    offer if all requirements are met
  • Taxpayer can accept or decline offer
  • Businesses that have not filed the required
    information returns are not entitled to CSP offer

Cases Qualifying for CSP
  • Form 941/940 Non-Filers Eligible for CSP if
    Forms 1099-MISC were filed
  • Statutory Employees If business timely filed
    Forms 1099-MISC
  • Household Employees If employer timely filed
    Forms 1099
  • Corporate Officers If business treats
    corporate officer as IC and timely filed Form

Cases Excluded From CSP
  • Cases with Other Issues - CSP only available
    for worker classification. Not available for
    dividend or wages issues with S Corp reasonable
  • Prior Closing Agreement Taxpayer who has
    entered into a prior CSP is not eligible
  • CSP Non-Compliance Business that isnt in
    compliance with existing closing agreement

Cases Excluded From CSP
  • Prior Coverage Not available to a business
    that incorporated after the closing agreement was
    signed by principals, owners of the prior
    business that had worker classification issues.
  • Three Party Arrangements No CSP is available
    if the correct employer cant be identified

Cases Excluded From CSP
  • Information Returns other than Forms 1099 Not
    available for any returns beside 1099s. Not
    available for K-1s if workers were treated as
  • Wage Issues Not available for officer -
    shareholder compensation issues
  • Administrative or Judicial Proceeding If prior
    year employment tax returns are part of an
    administrative or judicial proceeding No CSP

Cases Excluded From CSP
  • Litigation No CSP offer available if worker
    classification issue is resolved through
  • Criminal Investigation No CSP if tax return is
    part of an on-going investigation
  • Claims No CSP for settlements available for
    cases closed prior to CSP implementation

Cases Excluded From CSP
  • Government Employers CSP not available to
    state and local government employers
  • Taxpayer No Longer in Business CSP is only
    available to taxpayers still in existence. Closed
    business dont qualify

Taxpayers Rights To CSP Offers
  • Taxpayer participation in CSP is voluntary
  • Taxpayer can accept or reject offer at any time
    during the examination process
  • Declining to accept CSP offer allows taxpayer to
    retain all rights to an administrative appeal and
    all rights to judicial review

  • IRS audit process is designed to select returns
    with a high probability of error for audit
  • Being selected for audit does not indicate there
    is a problem
  • A No Change in a worker classification
    examination is possible
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