Off-Duty Programs and the IRS: Protecting Your Department Against Unexpected Payroll Taxes William F. Becker Jr., CPA Partner Cherry Bekaert LLP

Law enforcement officer works for an agency on a full time basis, but also performs off-duty work for a third party. The Question How is the payment to the officer by the third party treated for employment tax purposes? The Issue

1. The officer is an independent contractor and the payment of wages is treated as self-employment income to the officer. 2. The officer is an employee of the 3 rd party and the payment is treated as wages from the 3 rd party. 3. Officer is an employee of the agency and the payment is treated as additional wages. Options

Determining worker’s status:  In determining a worker’s status, the primary inquiry is whether the worker is an independent contractor or an employee under the common law standard. Under common law, the treatment of a worker as an independent contractor or an employee originates from the legal definitions developed in the law of agency - whether one party, the principal, is legally responsible for the acts or omissions of another party, the agent, and depends on the principal’s right to direct and control the agent. Independent Contractor or Employee: The Common Law Standard

Right to Direct and Control:  An employer-employee relationship exists when the employer has the right to direct and control the worker who performs the services.  This control refers not only to the result to be accomplished by the work, but also the means and details by which that result is accomplished. Independent Contractor or Employee: The Common Law Standard

What Makes a Worker Independent?

Control Behavioral Control: The right to direct or control how the worker performs the specific tasks for which he or she is hired.  Type of Instructions  Degree of Instructions  Source of Instructions  Nature of the Work  Training

Financial Control: The right to direct or control the financial aspects of the worker’s activities.  Significant investment by the worker  Unreimbursed expenses  Services available to the relevant market  Method of payment  Opportunity for profit or loss Control

Control of wages Where the person for whom services are performed does not have legal control over the payment of wages, then the person actually controlling the payment of wages assumes the withholding responsibilities of an employer (Reg. § (d)-1) Control

The Relationship of the Parties: The parties’ agreements and actions with respect to each other.  Intent of parties/written contracts  Employee benefits  Discharge/ Termination  Regular business activity (whether services performed are part of the service recipient’s regular business activities): Control

 Prior to focusing on the three aspects of control, the IRS used twenty factors derived from case law and rulings to determine worker status.  While not explicitly used today, the IRS still considers these factors to assess control. Control

The Twenty Factor Test 1.Is there a requirement that a person required to adhere to instructions about when, where, and how to work ? 2.Employee training 3.Integration of the person’s services in business operations 4.Requirement that services be performed personally 5.Hiring, supervising and paying of assistants 6.A continuing relationship between worker and person for whom services are performed 7.Established working hours by employer 8.Is the worker required to their devote full time to the business of employer 9.Where is the work performed? 10.Requirement to perform services in a particular order

11.A regular oral or written reports required to be given to employer 12.Frequency of pay 13.Reimbursement of expenses 14.Ownership and responsibility for providing tools, materials and supplies 15.Investment required by worker in facilities used to perform services 16.Ability to realize profit or loss from performance of services 17.Services performed for multiple employers or firms at the same time 18.Services available to the general public 19.The right and ability to discharge workers 20.Right to terminate the relationship at any time without incurring liabilities The Twenty Factor Test

Court Rulings

Case Law  Jeffrey S. Kaiser and Gail F. Kaiser v. Commissioner, USTC 72 T.C.M. 1357, T.C. Memo , (Nov. 27, 1996);  William E. March and Carla March v. Commissioner, USTC,, 42 T.C.M. 283, T.C. Memo ;  Tracy Lee Milian v. Commissioner, USTC, 78 T.C.M. 738 : T.C. Memo ;

Case Law  Damon C. Cicciari v. Commissioner., U.S. Court of Appeals, Eleventh Circuit, 85 T.C.M. 1515; T.C. Memo ;  Jonathan C. and Shamane C. LaDue v. Commissioner., USTC, T.C. Summary Opinion (“LaDue”).

Case Law The one common factor in each of these cases is that the IRS prevailed against the officer in court. Unfortunately…………

Case Law The Service argued that the officer was self employed.

What Prompts and Employment Tax Audit?

Beginning with the 2007 tax year, the IRS developed a new form to be filed by employees that believe they were misclassified as an independent contractor. Misclassified Workers

Form 8919:  Filed with employee’s individual income tax return  Employee must pay their share of Social Security and Medicare Tax  Must meet certain criteria to use

Remedies for Relief

Voluntary Classification Settlement Program  Allows employers to voluntarily change the prospective classification of their workers and obtain relief from previous payroll taxes that may have been due in the past.  Changes on a prospective basis  Only address federal employment tax liability

Voluntary Classification Settlement Program Eligibility Requirements  Employer must have consistently treated workers as non-employees  All required Forms 1099 must have been filed for the previous 3 years  Cannot currently be under audit for employee classification issues

Negotiated Settlement  Not a formal program  Specific to Employer  Generally the result of an audit

Section 530 relief was created to help businesses understand their rights under the law when the IRS questions their classification of workers as independent contractors. Section 530 provides businesses with relief from federal tax obligations by preventing individuals from being reclassified as common-law employees for employment- tax purposes if certain requirements are met. Section 530 Relief

To be relieved of certain federal tax obligations under Section 530, a business must have:  Had a reasonable basis for not treating workers as employees  Been consistent in its treatment of any similar workers as contractors, and  Consistently filed required information returns with the IRS

In determining if section 530 is applicable in a particular situation, the IRS uses both a consistency and a reasonable basis test. Section 530 Relief

Questions?