1. The Employer & Employee Relationship Heather Williams FPC, CPP, MIS February 6, 2016

2. Importance of the Determination The first most important question that must be answered when an employer is hiring a worker(s) Is if he/she is an Employee or Independent Contractor The answer to this question greatly affects the entire relationship between the employer and the worker.

3. If an Employee-Employer Relationship – the following obligations, plus others, may include: Income and Employment Tax Withholding Unemployment Insurance Contributions Workers’ Compensation Premiums If an Independent Contractor Relationship – obligations dependent upon the Common Law Test. This is the test the IRS looks to FIRST to determine employment status. The results of this test is KEY! Importance of the Determination

4. Importance of Determination If an Employee-Employer Relationship – under the Internal Revenue Code(IRC), employer must withhold: Federal Income, Social Security, and Medicare Taxes and employer must match the amount withheld for Social Security and Medicare taxes from the employee. Under the Federal Unemployment Tax Act(FUTA), employer must pay a percentage of employee’s wages to support federal and state unemployment insurance programs. State and local obligations also apply. See Section 1.1 for more information.

5. Independent Contractor Less expensive for the service use of an IC. No federal, social security or Medicare taxes withheld. No employer obligation to pay. Employee benefits not offered or paid. Reporting Requirement - IC must provide valid TIN(Tax Identification Number) and will receive Form 1099M if paid $600 plus for services rendered the entire year(Jan – Dec). If TIN not provided, ER must withhold 28% backup withholding tax. ***Failure to withhold can result in costly penalties.

6. Common Law Test Under Payroll Laws, there is no uniform definition of an employee, however IRS HIGHLY relies on the Common Law Test to determine employment status. Right to control is the KEY The right to control what work will be done and how it will be done. If employer determines, it’s an employer- employee relationship. IRS looks to identify KEY control factors in three MAIN categories: Behavioral Control Financial Control Type of Relationship

7. Behavioral Control Right to direct and control the detail and means by which the worker performs the work. Level of Instruction - Detailed instructions about when, where and how to work. i.e. requires that employee reports to work Monday thru Friday at 8am – 5pm. Level of Training - business provides periodic or ongoing training regarding particular procedures to be followed and methods to be used in performing work. i.e. requires that employee attends Excel Training Classes as this training will help employee with tasks given. **

8. Financial Control Does the business have the right to direct and control the economic aspects of the worker’s job regarding: Unreimbursed Business Expense – IC usually have more unreimbursed expenses than employees Substantial investment in the work – IC often have significant financial investment Services being available to the public – IC can and does offer his/her services to the public at large How the worker is paid – IC usually paid by the hour or job Whether the worker can realize a profit or incur a loss – IC can make a profit or suffer a loss for work done

9. Type of Relationship Regarding the right to direct and control the manner and means of the worker’s activities. Written agreement – i.e. Written contract given Employee-type benefits provided – i.e. Employer provides benefits(paid vacations, health and life insurance, etc.) Term of the relationship – i.e. Will relationship continue indefinitely(per se), or for a specific period or project. Worker’s services are an important aspect of the business’ regular operation – i.e Worker job duties essential to the business regular activity.

10. Common Law Test Important Note: The following is not important, per IRS, in making worker classification determinations: 1. Part-time or full-time work 2.Location of work 3.Hours of work Refer to the examples on pages 1-4 & 1-5

11. Reasonable Basis Test **Important Note** Although worker may be defined as an employee under Common Law Test, worker may be treated as an Independent Contractor if a ‘reasonable basis’ for doing so is determined by Section 530 of the Revenue Act of 1978

12. Safe Harbor Rules §530 Section 530 of the Revenue Act of 1978 was enacted to prevent the assessment of employment taxes against the employer in the event of an IRS reclassification of the worker from independent contractor to employee, if the following requirements were met: 1. All required information returns (e.g., Forms 1099) were filed 2. Employer treated all workers in similar positions the same 3. Employer had a reasonable basis for treating the workers as independent contractors.

13. Reasonable Basis Test The term “reasonable basis” means the employer relied on one of the following: a)Court decisions, published IRS rulings, IRS technical advice sent to employer or a private letter ruling from IRS b)Past IRS audit of employer c)Longstanding, recognized practice of employer’s industry of treating workers in similar situations **Consistent treatment is a must! Refer to Section 1.2.2 for more detailed information.

14. Other Reasonable Basis Test Key Information Employer must actually rely on the Safe Harbor in making classification decision. Notice of Section 530 must be provided by IRS. IRS Auditors must be “liberal” in applying Section 530. Schools may treat exam proctors as independent contractors. IRS’s role is strictly limited by law. Section 530 not for federal agencies. See page 1-9 for Section 530 Relief Requirements. IRS Form SS-8 makes the status determination. Employer disputes against the IRS can be heard by Tax Court.

15. Employment Status Determined The status of some workers is determined by the Internal Revenue Code(IRC). Statutory Employees – workers who are not employees under common law, but are treated as employees for employment tax purposes. *** Not subject to federal income tax withholding, but are subject to withholding for social security and Medicare taxes. Employer must pay its share of social security and Medicare taxes and in some cases federal employment tax (FUTA).

16. Statutory Employees Four Categories of Statutory Employees Agent-drivers or commission drivers Full-time life insurance Homeworkers Traveling or city salespersons

17. Statutory Employees General Requirements that must be met before qualifying as a Statutory Employee: 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( other than transportation) Work must be part of a continuing relationship with employer, rather than a single transaction.

18. Statutory Nonemployees Statutory Non-employees - although workers may qualify as employees under Common Law Test is treated, under the IRC, as Independent Contractors for Federal Income Tax withholding, Social Security, Medicare and FUTA taxes purposes. Earnings are not subject to federal income tax withholding, social security, Medicare or FUTA taxes Two categories of Statutory Non-employees *Qualified Real Estate Agents *Direct Sellers

19. Statutory Non-employees General requirements that must be met before their earnings are considered exempt from payroll taxes. Most of their compensation must be directly related to sales or other work output rather than the number of hours worked. Work performed under a written contract providing the individual will not be treated as an employee for Federal, Social Security, Medicare and FUTA Tax purposes.

20. Temporary Help Agency Employees *Helps meet short-term staffing needs* Hired, screened and trained by the temporary help agency, and has the sole right to hire and fire. Employees of the temp agency. Agency is responsible for complying with any payroll, benefits and HR requirements. *Client company only obligation – pay agency fee for temporary workers’ services according to agency contract.

21. Temporary Help Agency Employers should make sure they are dealing with a financially secure and reputable agency. The agency’s financial failure could lead to the client company becoming liable for any withholding or employment taxes that remain unpaid.

22. Leased Employees - PEO Professional Employer Organizations *Also meets the need of short-term staffing needs* Leasing Arrangement Leasing company hires, trains, and qualifies workers for a client. Client company pays fee to leasing company to cover the cost of payroll, benefits, etc. Workers are employee’s of the leasing company, who are responsible for all withholding and employment taxes, administration and funding of benefits it provides.

23. Leased Employees - Continued *** Special Note - If an employee worked as an employee 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 the employee. Wage bases restart with leasing agreement.

24. Benefits of Leased Employees Small companies (100 or less) reap most of the benefits – they often find it costly to obtain low group health insurance, staff their own payroll, hire a payroll service provider, etc. Larger businesses, however, may also take advantage of employee leasing – setting up new facilities in new locations or when hiring a specialized group of workers. States may have different rules. Check the state rules before negotiating a lease agreement.

25. Leased Employees - Continued Employers should make sure that the leasing company they are dealing with is financially secure and reputable before entering into a contract. As this could result in the client company becoming liable for any withholding or employment taxes that remain unpaid.

26. Professional Employer Organizations (PEOs) aka co-employers Entity that provides comprehensive HR, payroll and benefits management services Contracting to employ EE’s at the client’s worksite and assume employer rights, responsibilities and risks. IRS Regulations and IRC(Internal Revenue Code)have no references for PEOs or co-employers. Tax Increase Prevention Act of 2014 includes provisions for PEOs rights and responsibilities. If PEO certified by IRS as PEO then will be treated as employer and able to assume liability.

27. Payroll Service Providers Reporting Agents Prepare and file employment tax returns under client’s EIN(employer identification number) Employer remains fully responsible for all duties and liabilities regarding the employment taxes for wages paid to its employees.

28. Fair Labor Standards Act(FLSA) aka Federal Wage-Hour Law Broadly characterizes an employee as any individual who works for an employer. The Act provisions and related regulations are enforced by the U.S. Department of Labor (DOL), Employment Standards Administration, Wage and Hour Division. (DOL enforces the Act). Regulates Minimum Wage Rates Overtime Pay Child Labor Equal Pay

29. State Income Tax Withholding Laws General Guidelines States that require withholding of state income tax follow the Common Law Test used by the IRS in determining whether an employer-employee relationship exists. Non Resident Employees – E mployees who live in one state and work in another Some states have reciprocity agreements – require employers to withhold only for their employee’s state of residence. Check income tax withholding requirements of the state you do business with.

30. State Unemployment Insurance Laws While many states use the Common Law Test to determine employee status under FUTA, more than half use the ABC Test Under ABC Test, a worker is an independent contractor if: Absence of Control – worker is free from control or direction in performing the work Business is usual and/or away – work is performed outside the usual course of the company’s business or away from any of employer’s facilities Customarily independent contractor – worker is customarily engaged in an independent trade, occupation or business

31. Worker Misclassification: IRS Penalties For not withholding federal income tax - tax assessed is 1.5% of wages paid; doubled to 3% if the employer failed to file Form 1099-MISC. For not withholding the employee’s share of social security & Medicare tax – tax assessed is 20% employee’s share ; doubled to 40% if the employer failed to file Form 1099-MISC. If employer intentionally misclassifies the worker as an independent contractor – the employer is liable for the FULL AMOUNT of federal income tax and 100% of the employer’s share of Social Security and Medicare Taxes.

32. Worker Misclassification: Penalties ****Important Note**** Failure to withhold and pay state income taxes due to a worker misclassification will result in back tax assessments and penalties at the state level as well.

33. Proof of the Right to Work in the US After employee is hired must prove identity and the right to work in the United States Immigration & Reform Control Act of 1986 (IRCA) Illegal to knowingly hire or continue to employ an unauthorized worker Employers must comply by verifying the identity and right to work of all employees hired after November 6, 1986

34. Proof of the Right to Work in the U.S. Form I-9 - Employers will not be penalized if they act in good faith under the IRCA if unauthorized worker with fraudulent documents. Employer protected if: Employees complete Section 1 of Form I-9 on first day of work Employees provide original documentary evidence of identity and authorization within 3 business days of hire date Documents are kept for 3 years from date of hire or 1 year from date of termination Employer complying with I-9 requirements Employee can provide any number of unexpired documents listed on the I-9 document(one from List A or one from both List B and C )

35. Proof of the Right to Work in the U.S. ***Important Note*** Old Green Cards (Form I-151) are no longer valid proof of immigrant status, identity and employment eligibility. Lawful permanent resident aliens should have (Form I-551), which has the bearer’s photo, signature and fingerprint.

36. Proof of the Right to Work in the U.S. Special Note: Specific documents cannot be demanded by employer(social security card, driver’s license or passport) List A – Documents proving Identity & Work Eligibility U.S. Passport or U.S. Passport Card Permanent Resident Card or Alien Registration Receipt Card (Form I-551), that contains a photograph, fingerprint and signature of the bearer List B – Documents Proving Identity Only State issued drivers license or state ID with photo ID card issued by government agency with photo School ID card with photo Voter’s registration card

37. Proof of the Right to Work in the U.S. List C – Documents Proving Work Eligibility Only U.S. 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 (see page 1-25 for complete list)

38. Proof of the Right to Work in the U.S. Form 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 Election workers Independent contractors Providing labor to you who are employed by a contractor providing contract services (ex. Employee leasing or temporary agencies)

39. Proof of the Right to Work in the U.S. Section 2 of Form I-9 The employer or representative must physically examine the original document(s) and fully complete Section 2 within 3 business days of date employment begins. Person who examines documents must be the person who signs Section 2, and employee must be physically present. Special Note: An employer participating in the E-Verify Program may only accept List B documents that have photo. A receipt, in lieu of a listed document, is accepted if presented by employee. It must indicate that the 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. Never accepted if employment lasts less than 3 business days.

40. Proof of the Right to Work in the 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 in the space for employee signature Parent or Legal guardian must complete Preparer/Translator Certification block Employer should write Individual Under 18 in Section 2, List B space after Document # Minor must present List C Document

41. Proof of the Right to Work in the 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, Form I-9 should include: 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

42. Proof of the Right to Work in the 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 continuous 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

43. Proof of the Right to Work in the U.S. Reverifying employment authorization for current employees – when an employee’s work authorization expires, the employer must reverify his/her employment eligibility. Use Section 3 of Form I-9, or if Section 3 has already been used, use a new Form I-9. When using a new form, write the employee’s name in Section 1, complete Section 3, and retain the new form with the original.

44. Proof of the Right to Work in the 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. Lawful enlistment requirement – regulations do not provide work authorization to any alien who is falsely or fraudulently enlisted through error or misrepresentation of the qualifying status under 10 U.S.C. §504. The I-9 form is modified for the Armed Forces Employers – Military ID Card accepted as a List B Document only.

45. Proof of the Right to Work in the U.S. Penalties Employers that knowingly hire or continue to employ unauthorized aliens face civil penalties: Penalties for knowingly hiring unauthorized aliens 1 st offense - $375 to $3,200 per employee 2 nd offense - $3,200 to $6,500 per employee 3 rd offense - $4,300 to $16,000 per employee Failure to comply with verification requirements $110 to $1,100 per person Pattern and practice of violating hiring and verification $3,000 and/or 6 months in jail

46. E-Verify: How does it work? 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 USCIS’s Systematic Alien Verification for Entitlements (SAVE) Program

47. E-Verify: How does it work? E-Verify is available on the Internet using a Web- based accessed method Once enrolled, registered users will complete the Web-based tutorial and then can immediately begin using the program E-Verify offers easy registration and training via internet, defined user types of the program, accessibility to review and print reports

48. E-Verify: How does it work? Photo Matching Tool Available launched in 2007 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 USCIS’s databases In 2010, enhanced to allow photo matching of U.S. Passports and Passport Cards

49. E-Verify: How does it work? Driver’s License Information Matching Pilot Program – 2011 RIDE – Records and Information from DMV’s for E- Verify Helps validate the authenticity of driver’s licenses used by employees as Form I-9 identity documents RIDE matches the dates of birth and the driver’s license numbers in state DMV records to that of FORM I-9 and E-Verify processes

50. E-Verify: Program Rules E Verify tries to block fraudulent SSNs. Late in 2013, new process implemented to “lock” social security numbers that appear to be obtained fraudulently. If an employee tries to use a “locked” SSN, a tentative nonconfirmation (TNC) is received by the employer. If employee does not contest the TNC, it will become a final nonconfirmation. If employee does not correct or employer received final nonconfirmation, employer can terminate employee **Federal ER must also use E-Verify**

51. E-Verify: Program Rules A Memorandum of Understanding (MOU) with the SAVE Program and SSA New Hires to be verified must have their Form I-9 completed prior to the employer initiating a query online Form I-9 requirements remain the same, except all ‘List B’ identity documents must contain a photo and employee must provide his/her social security number. Verify within 3 days of hire All employees subject to verification

52. New Hire Reporting Under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 - employers were required to comply with a federal new hiring requirement beginning October 1, 1997. Information used to: a) Facilitate child support collection b)Undercover fraud c)Undercover unemployment abuse, worker’s compensation and pubic assistance (welfare benefits) All states have laws mandating the reporting and procedures to be followed.

53. New Hire Reporting “newly hired” - employee includes employee who was previously employed by the employer but has been separated from that prior employment for at least 60 consecutive days. Reporting Requirements Employee’s name, address and social security # Date the employee first performed services for pay Employer’s name, address, and federal Employer ID Nbr (EIN)

54. New Hire Reporting Employers operating in only 1 state Report new hire information to that state via paper, magnetically or electronically Employers with employees in 2 or more states May designate one state

55. New Hire Reporting Multistate – Reporting in one state Notify Secretary of Health and Human Services(HHS) Notification to the HHS can be addressed by downloading the Multistate Employer Registration (MSER) form and mailing or faxing it, or via the internet. Multistate – Required information 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

56. New Hire Reporting General Reporting Requirements Report within 20 calendar days of hire If submissions are processed magnetically or electronically, then 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 Federal government employees must report to the National Directory of New Hires; certain reporting exclusions apply based on defined state/federal agency(s)

57. New Hire Reporting General Reporting Requirements- cont’d Multistate employers report the required elements to only the state the employer has selected for new hire reporting purposes An employee’s date of hire is considered to be the first day services are performed for wages by the employee, and who work for as little as one day must be reported The federal reporting requirements do not apply to independent contractors, but some states do require such reporting

58. New Hire Reporting General Reporting Requirements – cont’d Temporary help agencies – if they initiate payment of wages, they are responsible for reporting employees new hires If agency refers individuals for jobs and are then paid by the client, the client is the employer and reporting must be addressed by them Labor unions and hiring halls must report their own newly hired employees, but not individuals who are referred for employment

59. New Hire Reporting Reporting format and method Information captured on Form W-4 or equivalent Employer can transmit via 1 st class mail, fax, magnetically or electronically(via Internet) CAUTION: If you use a Form W-4 for reporting, use a copy of the original when adding the employers name, employee’s date of birth, etc. Do not alter the original W-4 Form!

60. New Hire Reporting Penalties States have the option to set a civil penalty of up to $25 for failure to comply with the new hire reporting requirements $500 maximum if the result of a conspiracy between the employer and employee 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

61. Section/Chapter 1 Abbreviations Fair Labor Standards Act (FLSA) Internal Revenue Code (IRC) Federal Unemployment Tax Act (FUTA) Taxpayer Identification Number (TIN) Professional Employer Organization (PEO) Employer Identification Number (EIN) Payroll Service Provider (PSP) Reporting Agent (RA) Department of Labor (DOL) Worker Classification Settlement Program (CSP) Voluntary Classification Settlement Program (VCSP) Employment Tax National Research Program (ET-NRP) Memorandum of Understanding (MOU)

62. Section/Chapter 1 Abbreviations cont. Questionable Employment Tax Practice (QETP) Immigration Reform and Control Act of 1986 (IRCA) Immigration and Naturalization Service (INS) Bureau of Citizenship and Immigration Service (BCIS) U.S. Citizenship and Immigration Services (USCIS) Department of Homeland Security (DHS) U.S. Immigration and Custom Enforcement (ICE) Social Security Administration (SSA)

63. Section/Chapter 1 Forms Form I-9 Employment Eligibility Verification Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Form 2678 Employer/ Payor Appointment of Agent Schedule R (Form 941) Form 8952Application for Voluntary Classification Settlement Program (VCSP) Form 2848 Power of Attorney and Declaration of Representative

64. The Employer & Employee Relationship Heather Williams FPC, CPP, MIS Heatherbwms@gmail.com