Section 1:
The Employer/ Employee
Relationship
Kimberley Childress, CPP
February 1, 2014
Benefits of an Independent
Contractor 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
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
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
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 worker’s 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
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
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
• Service’s 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
Common Law Test
• Factors not important in the determination:
– Part time vs. full time work
– Location of work
– Hours of work
– Length of employment
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
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
Reasonable Basis Test
• Technical Services Specialists
– Tax Reform Act of 1986 – excludes ‘3 party’
arrangement technical service specialists
• Worker/ technical service firm/ firm’s client
– Status determined by common law test
– Includes: engineers, drafter, designers, computer
programmers, and systems analysts
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
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
– Employer’s share of Social Security and Medicare
taxes, and FUTA if applicable
Statutory Employees
• Four categories of statutory employees:
– Agent-drivers or commission drivers
– Full-time life insurance salespersons
– Home workers
– Traveling or city salespersons
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
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
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
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
Leased Employees (PEO’s –
Professional Employer Organizations)
• Enter into a leasing arrangement
• Leasing company hires, trains, and qualifies workers
for a client
• Workers are employee’s of the leasing company
• Leasing company is responsible for all withholding &
employment taxes, administration and funding of
benefits
Leased Employees (PEO’s –
Professional Employer Organizations)
Watch Out
The leasing company’s treatment as the employer of
the leased employee’s stems from its control over the
payment of the employee’s 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.
Leased Employees (PEO’s –
Professional Employer Organizations)
• Wage bases restart with leasing agreement – Leasing
company provides employees to a client company, &
those same employee’s worked as employee’s 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.
Leased Employees (PEO’s –
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
Leased Employees (PEO’s –
Professional Employer Organizations)
• Small companies reap most of the benefits
• Larger businesses may also take advantage of
employee leasing
• States may have different rules
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
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
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.
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
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
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
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
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
– Voter’s registration card
– US Military or military dependent ID card or draft
record
– US Coast Guard Merchant Mariner card
– Native American tribal documentation
Proof of Right to Work in U.S.
• List B – Proof of Identity
– Canadian Driver’s License
– For persons under age 18
• School record or report card
• Clinic, doctor, or hospital record
• Day care or nursery school record
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)
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)
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
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
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
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
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
Proof of Right to Work in 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, 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.
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
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 employee’s
name in Section 1
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
employee’s name in Section 1
– Form I-9 is available in English and Spanish
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
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
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
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
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 USCIS’s
Systematic Alien Verification for Entitlements
(SAVE) Program
E-Verify Program
• E-Verify is available of the Internet using Webbased accessed method
• Once enrolled, registered its users, completed
the Web-bases tutorial, can immediately begin
using the program.
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
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 USCIS’s databases
– Enhanced to allow photo matching of US
Passports and Passport Cards
E-Verify
• Driver’s License Information Matching Pilot
Program
– RIDE – Records and Information from DMV’s for EVerify
– Helps validate the authenticity of driver’s licenses
used by employees as Form I-9 identity
documents
– Matches the dates of birth and the driver’s license
numbers in state DMV records
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
E-Verify – Program Rules
• No employer cost
• Equipment required
– PC with modem and touch tone line with a single
originating phone number
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
New Hire Reporting
• Personal Responsibility and Work Opportunity
Act of 1996
• Facilitate collection of child support
• Uncover fraud and abuse
– Unemployment Compensation programs
– Worker’s Compensation Programs
– Public Assistance (Welfare) benefit programs
New Hire Reporting
• Reporting Requirements
– Employee name, address, and social security
number
– Employer name, address, and FEIN
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
New Hire Reporting
• Multistate – reporting in one state
– Notify Secretary of Health and Human Services
• HHS form, letter, fax or e-mail
• Information required:
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–
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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
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
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
New Hire Reporting
• General Reporting Requirements
– Rehired, Leave of Absence
• Temporary help firms
• Unions and hiring halls
– Employees
– Individual referred for employment
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, employee’s date of birth,
etc. Do not alter the original Form W-4!
New Hire Reporting
• Penalties
• Civil penalty of up to $25
• $500 maximum if the result of a conspiracy
between the employer and employee
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
Contact Info
Kim Childress
chicago_chapter_apa@hotmail.com