The Employer – Employee Relationship

Independent Contractor (IC) Valid Taxpayer Identification Number (TIN) required New hire reporting required by some states Employee benefits are not required to be funded, paid, or administered Social security taxes and Medicare taxes Not withheld Not paid by the business Watch out for state requirements for withholding and unemployment Business provides Form 1099-MISC after the end of the year

Common Law Test Usage: Determination of employee vs. independent contractor Right to Control - What work will be done and how work will be done Behavior Control – Level of instructions and level of training provided Financial Control – Does worker have unreimbursed expenses? Right to direct and control economic aspects of worker’s job Services available to the public? How worker is paid – can they have a profit or loss? Type of Relationship – Is there a written agreement or are there benefits provided? How worker and business perceive the relationship to each other Intent regarding right to direct and control manner of worker’s activities

Reasonable Basis Test Revenue Act of 1978 – Section 530 Relief Requirements Reasonable Basis Court Case or IRS Audit IC based on significant segment of industry standardization Advice of business lawyer / accountant Substantive Consistency Performed services for a tax exempt organization Worker is not treated as an employee for purposes of employment taxes Reporting Consistency Filed all required federal tax returns including informational returns

Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Status determination made by IRS Code Determined by a series of questions Extent of employer’s right to control the result Extent of the means of the work performed Can several weeks or up to six months Worker can request for a determination of status Common Law / Reasonable Basis Test do not apply Waiting for determination – treat worker as an employee If IRS finds worker to be an IC – no refund of employment tax available

Statutory Employees Categories - DISH Agent Drivers / Commission Drivers Full time Life Insurance Salespersons Traveling / City Salespersons Homeworkers – goods and services provided by Employer Not employees but subject to certain taxes NOT SUBJECT to federal income tax withholding SUBJECT to social security and Medicare tax withholding

Statutory Employees Employer must pay General Requirements Employer’s portion of social security and Medicare taxes Federal Unemployment Tax (FUTA) depending on the situation General Requirements Agreement that all services are performed personally by worker No substantial investment in business equipment / facilities Part of a continuing relationship with employer Not a single transaction

Statutory NonEmployees Categories – REDS Qualified Real Estate Agents Direct Sellers NOT SUBJECT to federal income tax withholding NOT SUBJECT to social security and Medicare tax withholding NOT SUBJECT to FUTA

Statutory NonEmployees General Requirements Compensation directly related to sales / other work output Not number of hours worked Work performed under written contract States worker not treated as an employee for payroll tax purposes

Temporary Help Agency Employees Hires, screens, and trains Sole right to hire / fire Responsible for payroll compliance Responsible for benefits and human resources requirements Business: Pay agency as directed by contract Assure that you are dealing with a financially solid temp agency to avoid your company having to assume liability in case of the agency’s financial failure

Leased Employees Leasing Company: Business: Hires, screens, and trains Responsible for payroll compliance Responsible for benefits and human resources requirements Business: Covers cost of payroll, benefits, etc. Right to hire / fire Set Wage Levels Supervise work and performance level

Professional Employer Organizations a/k/a PEO Must have PEO certification Provides to business Human resources Payroll Benefits Management Potential cost saving through Benefits rate or Unemployment rates Suggested co-employers of the employee PEO contracts to employ employees at business’ worksite PEO assumes certain employer rights, responsibilities, and risks IRS Certified: PEO treated as employer during life of contract (CPEO)

Payer Agents Designate an agent to perform the acts required of employers under IRC §3504 Form 2678 Employer / Payer Appointment of Agent Generally appointed to act with respect to federal income tax withholding, social security taxes and Medicare taxes

Other 3rd Party Arrangements Payroll Service Providers (PSP) Reporting Agencies (RA) Prepare / file employment tax returns under employer’s Employer Identification Number (EIN) Employer Responsibilities: All duties Employment tax liability related to wages paid to employees

Fair Labor Standard Act (FLSA) Broad characterization: An employee as any individual who works for an employer US Department of Labor’s Wage and Hour Division Definition: Employer – employee relationship where worker is “economically dependent” on the employer Regulates: Minimum wage rates Overtime pay Child labor Equal pay

Joint Employer Status Employee hours worked for both employers for the workweek must be compiled and considered as 1 employment when determining any overtime due Horizontal Joint Employment Employee has employment relationship with 2 or more employers. Employers are related with respect to the employee Vertical Joint Employment Employee has employment relationship with 1 employer. Dependent on another employer for work i.e. temporary agency workers

State Wage Hours Laws State Income Tax Withholding Laws State Unemployment Insurance Laws ABC test Determines independent contractor status for over ½ of the states Absence of Control Business is unusual and/or away Customarily independent contractor State Disability Insurance Laws

Worker Misclassification IRS Penalties Unintentional Misclassification No federal income tax withheld = 1.5% of wages paid No informational return filed = 3% of wages paid No social security or Medicare tax withheld = 20% of employee’s portion No informational return filed = 40% of employee’s portion Intentional Misclassification Federal income tax withheld = Full amount due Social security and Medicare taxes = 100% of employee + employer portion Additional penalties for not filing information returns State and local penalties also apply

Classification Settlement Programs a/k/a CSP Audit ongoing 25% assessment of employment tax liability Business agrees to treat worker as an employee going forward Voluntary Settlement (VCSP) Available when employer is not under audit Optional Allows reclassification with limited tax liability Reclassification can cause retroactive benefits Can cause additional tax liability on state / local jurisdictions

Proof of Right to Work in U.S. Form I-9 Employment Eligibility Verification New Employees complete on date of hire or when accepting position Form I-151 (green cards) no longer valid proof of immigrant status, identity or employment eligibility Record Retention: At least 3 years from date of hire or 1 year from date of termination whichever is later

Employment Eligibility Verification Required documentation Document from List A or one each from List B and List C List A Proves identity and work authorization List B Proves identity only List C Proves work authorization only Expired documents are not acceptable from any list

E-Verify Verification against Social Security Administration (SSA) and Department of Homeland Security (DHS) databases Program is voluntary and free Federal contractors: Required to use On-line enrollment RIDE (Records & Information from DMV for E-Verify) Validates driver’s license authenticity, driver permits, and state ID cards Matches dates of birth and driver’s license in state DMV records

New Hire Reporting Personal Responsibility and Work Opportunity Reconciliation Act of 1996 Employer must provide the following information: Employee’s name, address, and social security number Date the employee first performed service for pay (date of hire) Employer’s name, address and federal EIN Report due within 20 calendar days of hire Federal new hire reporting requirement Several states have expanded their new hire reporting requirements to include reporting of independent contractors. See Section 1.9 “Newly hired” includes an employee who was previously employed by the employer but has been separated from prior employment for at least 60 consecutive days

DO YOU KNOW??? 4 categories of statutory employees? 2 categories of statutory nonemployees? 3 parts of the ABC test? Form I-9 uses? When must employers report newly hired employees under the federal new hire reporting requirements? Form used to request employment status on a worker? Form used to report wages to an independent contractor after the end of the year?