23rd Annual Illinois Statewide APA Conference Bolingbrook, IL General Federal Employment Tax Issues IRS Resources for Payroll Professionals Wage Reporting, Payroll and Employment Tax Form Topics, Adjustments and Claims Mike Mudroncik August 26, 2016

Worker Classification: Employee or Independent Contractor?

A Note Before We Begin … This presentation is designed to provide information – not specific determination for any situation. Worker classification determinations are made on a case by case basis, depending on specific facts and circumstances.

Worker Classification Workers you hire may be: – Independent contractors – Employees Determination IRS Resources

Basic Definitions Employee - Individual who performs services for you who is subject to your control regarding what will be done AND how it will be done. Independent Contractor - Individual who performs services for you – but you control only the work result.

Employee vs. Independent Contractor Categories of Evidence: 1.Behavioral control 2.Financial control 3.Type of relationship of the parties

Behavioral Control Type of instruction given Degree of instruction Evaluation systems Training provided by the business

Key fact to consider is whether business retains the RIGHT to control worker regardless of whether the business actually exercises that right Behavioral Control

Financial Control Significant investment Unreimbursed expenses Opportunity for profit or loss Services available to the market Payment method

Type of Relationship Written contract Employee-type benefits provided Relationship Permanency Key business activity provided by services

Determination File Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with IRS Six-month processing time

Form 8919 Misclassified workers report their share of Social Security and Medicare on Form 8919, Uncollected Social Security and Medicare Tax on Wages Replaces Form 4137 for misclassified workers

Officer Compensation Officers are defined as employees for FICA, FUTA and income tax withholding Officers are not considered employees if they: – Perform no services or only minor services – Are not entitled to remuneration (direct or indirect)

Officer Compensation Distributions Loans to shareholders Payments of personal expenses Excessive rent payments Management fees Fringe benefits

Zero (or very small) wages paid and significant distributable income Officer performs significant services Employment taxes reduced or eliminated Case study: Watson FROM OID 191 Wage Rptg, Payroll & Employment Tax Form Topics Compliance Focus 1120S Officers’ Compensation

Business connection - Reg. §1.62-2(d) Substantiation - Reg. §1.62-2(e) Return of excess - §1.62-2(f) Compliance issues: – Travel reimbursements – Tool reimbursements Compliance Focus Accountable Plans

Next Steps: Independent Contractor Contractor completes Form W-9 – Social Security Number or Employer Identification Number required File Form 1099-MISC if $600 or more paid for services during year – See instructions for exceptions

Form 1099-MISC

System for electronic filing of any of Form 1099s and other information returns, except W-2 Later due dates for electronically filed forms Visit IRS.gov, search Keyword “FIRE” Assistance – Call (866) – Filing Information Returns Electronically

Next Steps Employee completes Forms I-9 & W-4 Employer – Withholds income tax, FICA – Completes Form W-2 at year end – Files Form W-2 with Social Security Administration – Visit SSA.gov/employer for free online Form W-2 filing & SSN verification service.gov/employer

Next Steps - Employer (Cont’d.) Responsible for depositing federal income tax withheld, FICA and FUTA taxes Deposit taxes using EFTPS Report wages, taxes by filing returns: – Form 941 or Form 944 for income tax, FICA – Form 940 for FUTA

Taxable Wages May be paid in cash or any other form Non-cash measured by fair market value Includes salaries, fees, tips, bonuses and commissions

Misclassification of Workers Determination Section 530 relief

§530 - Relief Requirements Reasonable basis Substantive consistency Reporting consistency

§530 - Reasonable Basis Judicial precedent Prior audit Industry practice Other reasonable basis

Treat all workers in similar positions the same (substantive consistency) File all required returns – for example, Form 1099-MISC (reporting consistency) §503 Consistency Requirements

Resources Visit IRS.gov, search Keywords – “worker classification” – Handout containing worker classification URLs – Pub Independent Contractor or Employee – Form SS-8, Determination of Worker Status – Pub 1976, Section 530 Relief Requirements

irs.gov Resources – Employment Taxes

irs.gov Resources – Businesses with Employees

irs.gov Resources – Hiring Employees

irs.gov Resources – Hiring Foreign Workers

irs.gov Resources – Worker Classification (Independent Contractor or Employee)

irsvideos.gov Resources

irsvideos.gov Resources – Hiring Workers

irsvideos.gov Resources – Employment Taxes/Hiring Workers

irsvideos.gov Resources – Worker Classification

IRS Resources for Payroll Professionals

Bullet (28 pt.) – Bullet (28 pt.) Bullet (28 pt.) Search “Payroll Professional” IRS.gov

Bullet (28 pt.) – Bullet (28 pt.) Bullet (28 pt.) Payroll Professionals Tax Center

Bullet (28 pt.) Local Meetings and Seminars

IRS Video Portal

Conduct business with the IRS electronically Available only to approved IRS business partners Available 24/7 Register online For assistance after registering contact the e-Help Desk at E-Services

Receive e-file messages affecting e-file transmitters, software developers and authorized IRS e-file providers Four categories: 1.Alerts 2.Technical 3.General notifications 4.General IRS e-file Service Center messages Stay Informed with QuickAlerts

IRS2Go app YouTube Tumblr Facebook Podcasts IRS Social Media

Monthly payroll industry calls First Thursday of each month 1:00 p.m. Eastern Payroll Industry Calls

Wage Reporting, Payroll and Employment Tax Form Topics, Adjustments and Claims

At the end of this learning experience, you will be able to explain to your clients current hot topics in employment tax including BMF e-file, third party sick pay, HR 5771 legislative impact, independent contractor vs. employee, and VCSP. Objective

Overview Tips vs. service charges COBRA Premium Subsidy Credit Voluntary Classification Settlement Program Additional Medicare Tax (AdMT) Modernized e-File system National Research Program Early Interaction Initiative (FTD Alerts) Provide overview of outsourcing payroll and third- party payers

Tip Reporting Guidance Rev. Rul , I.R.B Issued: July, 2013 Clarified long standing guidance on what constitutes tip vs. non-tip wages (IRC Section 3121) Reaffirmed that Rev. Rul , C.B. 215, should be applied

When Payments are Characterized as Tip Wages All factors must be met: Payment must be made free from compulsion Customer must have the unrestricted right to determine the amount Payment should not be the subject of negotiation or dictated by employer policy Generally, customer has the right to determine who receives the payment

Employment Tax Treatment of Service Charges Service charges or “auto-gratuities” distributed to an employee are FICA wages, not tips Must be reported as wages on Form W-2 Must be subject to all applicable withholding Do not qualify for the 45B credit

Distributed Service Charges Common examples: Banquet service fee Resort or cruise “added charge” Room service charge Large party / bottle service charge Contracted luggage assistance charge Mandated delivery charge – (Pizza/grocery/etc.)

COBRA Premium Subsidy Credit Very few employers remain eligible COBRA lines removed from Form 94X series for 2014 and forward To claim COBRA credit after 2013: – File original payroll return with no credit reflected – Wait two weeks – File amended employment tax return to claim credit

Voluntary Classification Settlement Program Simple application and eligibility process Audit protection for past years Taxpayer agrees to prospectively treat a class or classes of workers as employees Taxpayer must include a list of workers’ names and SSNs that are being reclassified Small payment required – just over one percent of compensation

VCSP Eligibility Eligible Businesses: Must have consistently treated workers as nonemployees Must have filed Forms 1099 for the class of workers for previous three years Must not be under employment tax examination by IRS, U.S. Department of Labor, or a state agency regarding worker classification Can be a tax-exempt organization or government entity

Additional Medicare Tax (AdMT) For Employers Applies to tax years beginning after December 31, 2012 Withhold 0.9 percent AdMT on wages or compensation paid to an employee in excess of $200,000 in the calendar year Line 5(d) for reporting AdMT withholding on Form 941 Amount withheld reported with regular Medicare tax on Form W-2, box 6

AdMT Takeaways Employees cannot request withholding of AdMT, but may request additional income tax withholding on Form W-4 Applies to tips if, when combined with wages, compensation is greater than $200,000 No employer match Form 8959 on Form 1040, line 62 – Reconcile AdMT liability – Reconcile AdMT withholding

Modernized e-File (MeF) File Forms 940, 941, and 944 in single transmission file Receive complete information regarding location and type of each error identified Receive acknowledgement of transmissions processed on receipt in real time File balance due returns and authorize electronic funds withdrawals or credit card payment Continue to sign returns with IRS-issued PINs

National Research Project Statistical sample of 2008 – 2010 returns Sample size: 6,000 Percent complete: 99 percent Issues identified – 1120S officers’ compensation – Fringe benefits – Delinquent Forms 1099 – Worker classification

Early Interaction Initiative Expansion/enhancement of FTD Alert program Address employment tax delinquencies sooner Keep delinquencies to a minimum Help employers comply

Early Interaction Initiative Earlier contacts – 5 th, 9 th and 13 th week More contacts – 4X the field contacts Different contacts – Recorded phone messages – Letters

Why Early Interaction Employment taxes = 2/3 of gross revenue Better taxpayer service More efficient use or resources Societal affect of non–compliance

Outsourcing Payroll Many employers outsource some or all of their payroll and related tax duties to third-party payroll service providers. Third-party payer services include: – Withholding Social Security, Medicare and income tax from wages – Timely submitting federal tax deposits – Preparation and timely filing of payroll tax returns – Preparation and timely filing of information returns

Third-Party Payer Arrangements Payroll service providers Reporting agents Section 3504 agents Professional employer organizations

Risks of Using Third-Party Payers In rare instances use of a third-party payer can expose a business to risk of: Payroll tax fraud Late or unfiled tax returns Underreported tax liabilities Late or undeposited tax payments Limited notification if a problem arises

Initiatives to Mitigate Risks of Using Third-Party Payers Dual Notice Initiative – Risks associated with address changes Electronic Federal Tax Payment System enhancements – Inquiry PINs – confirmation of scheduled payments

Initiatives to Mitigate Risks of Using Third-Party Payers Creation of Form 14157, Return Preparer Complaint – Used by taxpayers to report suspected fraudulent activity and abusive tax schemes Federal Tax Deposit Alerts – Early intervention initiatives Trust Fund Recovery Penalty - IRC § 6672

Name Mike Mudroncik Phone Number Address Contact Information (36 pt.)