Section 1: The Employer/ Employee Relationship

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Section 1The Employer/ EmployeeRelationship

• Kimberley Childress, CPP
• February 1, 2014

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Benefits of an IndependentContractor
Classification

• Reporting requirements are less
• With a valid TIN Form 1099 Misc. (if contractor
  was paid over 600 for services)
• Social Security and Medicare taxes need not be
  withheld or paid by the employer
• No federal or state unemployment taxes are
  required
• EE benefits do not have to be funded, paid or
  administered on their behalf

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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

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Common Law Test

• Behavioral Control-Right to direct control the
  detail means by which the worker performs the
  work
• Level of Instruction - Subject to detail
  instructions about when, where and how to work
  tends to show the worker is an employee
• Level of Training - The business provides
  periodic or ongoing training regarding particular
  procedures to be followed and methods to be used
  in performing work

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Common Law Test

• Financial Control-Factors that must be considered
  when determining whether the business has the
  right to direct and control the economic aspects
  of the workers job. These include
• Unreimbursed Business Expense - IC are more
  likely to have unreimbursed business expenses
• Substantial investment in the work - Have a
  significant financial investment
• Services available to the public - Offers
  services to the public at large

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Common Law Test

• Financial Control
• How is he paid- IC are usually paid by the job.
  However, lawyers and accountants are usually paid
  by the hour.
• Can realize a profit or loss Whether a worker
  has the opportunity to make a profit or suffer a
  loss.
• Independent contractor status is indicated

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Common Law Test

• Relationship of Parties Several factors that
  generally indicate how the worker the business
  perceive their relationship
• Written agreement A written contract may
  indicate the type of relationship the parties
  intended to create
• Employee-type benefits provided Will the
  company provide benefits
• Term of the relationship Continue indefinitely
  or for a specific period of time
• Services are an important aspect of the
  business regular operation If worker provides
  services that make up a key aspect of regular
  business activity, business will have right to
  direct control worker

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Common Law Test

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

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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
  industry
• Consistent treatment since 1978
• Application was clarified by Small Business job
  Protection Act beginning after December 31, 1996

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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

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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

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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
• Disputes can be heard by Tax Court

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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

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Statutory Employees

• Four categories of statutory employees
• Agent-drivers or commission drivers
• Full-time life insurance salespersons
• Home workers
• Traveling or city salespersons

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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

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Statutory Non-Employees

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

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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

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Temporary Help Agency Employees

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

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Leased Employees (PEOs Professional Employer
Organizations)

• 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

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Leased Employees (PEOs Professional Employer
Organizations)

• Watch Out
• The leasing companys treatment as the employer
  of the leased employees stems from its control
  over the payment of the employees wages
  benefits. The more control the client company
  retains, the greater the likelihood that it may
  be considered the employer rather than the
  leasing company.

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Leased Employees (PEOs Professional Employer
Organizations)

• Wage bases restart with leasing agreement
  Leasing company provides employees to a client
  company, those same employees worked as
  employees of the client company earlier in the
  same calendar year before the leasing agreement
  was signed, the leasing company must apply
  separate social security and FUTA wage bases to
  the wages it pays to those employees.

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Leased Employees (PEOs Professional Employer
Organizations)

• Employment status issues lead to benefit plan
  relief from IRS
• Exclusive benefit rule noncompliance could cause
  plan disqualification
• Relief from plan disqualification
• Termination option
• Conversion option

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Leased Employees (PEOs Professional Employer
Organizations)

• Small companies reap most of the benefits
• Larger businesses may also take advantage of
  employee leasing
• States may have different rules

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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

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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

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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.

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Non-Resident Employees

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

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Proof of Right to Work in U.S.

• Immigration Reform Control Act of 1986 (IRCA)
• Illegal 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 November 6, 1986
• Form I-9
• Employers will not be penalized if they act in
  good faith under the IRCA
• Employees complete Section 1 of Form I-9 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

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Proof of Right to Work in U.S

• Document Changes
• In December 2008, USCIS issued an interim final
  rule stating expired documents will no longer be
  acceptable to prove identity or work authorization

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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), that contains a
  photograph, fingerprint and signature of the
  bearer
• 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

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Proof of Right to Work in U.S.

• List B Proof of Identity
• State issued drivers license or state ID with
  photo
• 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

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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

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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
  DS-1350
• 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)

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Proof of Right to Work in U.S.

• I-9 DOES NOT need to be completed for persons who
  are
• Hired before November 7, 1986 who are continuing
  their employment
• Employed for casual domestic work in private
  homes on a sporadic, irregular or intermittent
  basis
• Independent contractors or
• Providing labor to you who are employed by a
  contractor providing contract services (ex.
  Employee leasing or temporary agencies)

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Proof of Right to Work in U.S.

• Section 1 Form I-9
• Have the employee complete Section 1 by the time
  of hire by filling in the correct information and
  signing and dating the form
• Ensure that the employee prints the information
  clearly
• If the employee needs assistance, have the
  employee sign or mark the form in the appropriate
  place. The preparer or translator must complete
  the Preparer/Translator Certification block on
  the form

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Proof of Right to Work in U.S.

• Section 2 I-9
• The employee must present an original document or
  documents that establish identity and employment
  authorization within 3 business days of the date
  employment begins
• Examine the document(s) and them fully complete
  Section 2
• Watch Out An employer participating in the
  E-Verify Program may only accept List B documents
  that have a photograph
• Receipt indicating that an individual has applied
  for initial work authorization or for an
  extension of expiring work authorization is no
  acceptable proof of employment eligibility on
  Form I-9

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Proof of Right to Work in U.S.

• Minors (individuals under age 18)
• If a person under 18 cannot present a List A
  document or identity document from List B, Form
  I-9 should be completed in the following way
• Parent or guardian must complete Section 1 and
  write Individual under age 18
• Must complete Preparer/Translator Certification
• Employer should write Individual Under 18 in
  Section 2, List B
• Minor must present List C document

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Proof of Right to Work in U.S.

• Employees with disabilities (special placement)
• If a person with disability, who is placed in a
  job by a nonprofit organization or as part of a
  rehabilitation program, cannot present a List A
  document or an identity document from List B, For
  I-9 should be completed as follows
• Representative, parent or guardian must complete
  Section 1 and write Special Placement in space
  for the employees signature
• Representative, parent or guardian must complete
  the Preparer/Translator Certification
• Employer should write Special Placement in
  Section 2, List B
• Employee with a disability must present a List C
  document

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Proof of Right to Work in U.S.

• Future expiration dates may appear on the
  employment authorization document of aliens,
  permanent resident and refugees.
• The existence of future expiration date
• Does not preclude continues employment
  authorization
• Does not mean that subsequent employment
  authorization will not be granted
• Should not be considered in determining whether
  an alien is qualified for a particular position

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Proof of Right to Work in U.S.

• Reverifying employment authorization for current
  employees When an employees work authorization
  expires, the employer must reverify his/her
  employment eligibility.
• Use Section 3, or if Section 3 has already been
  used, use a new Form I-9. When using a new form,
  write the employees name in Section 1, complete
  Section 3, and retain the new form with the
  original.

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Proof of Right to Work in U.S.

• Reverifying or updating employment authorization
  for rehired employees
• When rehiring an employee the employer must
  ensure that he/she is still authorized to work
• Employers may do this by completing a new Form
  I-9 or by reverifying or updating the original
  form

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Proof of Right to Work in U.S.

• Reverifying or updating employment authorization
  for rehired employees
• The reverify, the employer must
• Record the date of rehire
• Record the document title, number and expiration
  date
• Sign and date Section 3
• When verifying on a new Form I-9 write the
  employees name in Section 1

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Proof of Right to Work in U.S.

• To update the employer must
• Record the date of rehire
• Sign and date Section 3 and
• When update on a new Form I-9, write the
  employees name in Section 1
• Form I-9 is available in English and Spanish

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Proof of Right to Work in U.S.

• Special rules for alien enlistees by the Armed
  Forces
• Any person lawfully enlisted in the US Armed
  Forces has employer-specific work authorization
  to serve in the Armed Forces.
• Employer-specific work authorization is for those
  aliens who do not otherwise have work
  authorization that would permit enlistment,
  either because they do not have work
  authorization at all, or because their work
  authorization is employer-specific for an
  employer other than the Armed Forces
• The I-9 form is modified

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Proof of Right to Work in U.S.

• Penalties for knowingly hiring unauthorized
  aliens
• 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

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Proof of Right to Work in U.S.

• Penalties for knowingly hiring unauthorized
  aliens
• 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
  jail

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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

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E-Verify Program

• 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
• Participation in voluntary in most instances and
  free to participating employer
• Falls under the jurisdiction of USCISs
  Systematic Alien Verification for Entitlements
  (SAVE) Program

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E-Verify Program

• E-Verify is available of the Internet using
  Web-based accessed method
• Once enrolled, registered its users, completed
  the Web-bases tutorial, can immediately begin
  using the program.

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E-Verify Program

• E-Verify offers
• Employers enroll on the Internet
• Internet training
• User types
• View and print reports
• Internet resources
• E-Verify Employer Agent

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E-Verify

• Photo Matching Tool Available
• Occurs automatically for a new employee who
  presents an Employment Authorization Document
  (EAD) or Permanent Resident Card (green card) to
  prove work authorization
• Allows employers to compare identical photos
  against the images stored in USCISs databases
• Enhanced to allow photo matching of US Passports
  and Passport Cards

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E-Verify

• Drivers License Information Matching Pilot
  Program
• RIDE Records and Information from DMVs for
  E-Verify
• Helps validate the authenticity of drivers
  licenses used by employees as Form I-9 identity
  documents
• Matches the dates of birth and the drivers
  license numbers in state DMV records

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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

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E-Verify Program Rules

• No employer cost
• Equipment required
• PC with modem and touch tone line with a single
  originating phone number

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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

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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

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New Hire Reporting

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

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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

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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

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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
  apart)
• States can establish the time frames but they can
  not be longer than the federal rules

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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

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New Hire Reporting

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

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New Hire Reporting

• Reporting format and method
• Form W-4 or equivalent
• 1st class mail, fax, magnetically, or
  electronically
• 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!

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New Hire Reporting

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

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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
  Directory

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Contact Info

• Kim Childress
• chicago_chapter_apa_at_hotmail.com