The Employer & Employee
Relationship
Ron Nakie CPP
Heather Williams FPC, CPP
February 7, 2015
The Employer-Employee Relationship
The most basic decision an employer must make when
hiring a worker(s) is to determine if he/she is an
employee. The employer’s determination affects the
entire relationship between the employer and the
worker.
• The employee-employer relationship bring obligations
that may include, but is not limited to:
• Tax Withholding
• Unemployment Insurance Contributions
• Workers’ Compensation Premiums
Importance of Determination
Under the Internal Revenue Code(IRC),
employer must withhold
• Federal, Social Security, and Medicare Taxes
(and ER must match the amount withheld for Social
Security and Medicare taxes with its funds)
• Under the Federal Unemployment Tax Act(FUTA), the
employer must pay a percentage of employee’s wages
to support federal and state unemployment insurance
programs.
Importance of Determination
• Other possible related employee benefits
• Vacation and sick pay
• Retirement plans
• Health Insurance
The above is not an exhaustive list. See page 1.2
for more employer obligations.
Independent Contractor
Employer obligation and expenses are decreased:
• None of the taxes need be withheld or paid by
the employer
• Reporting requirements: With a valid TIN(Tax
Identification Number) - Form 1099 Misc. is given
(if contractor was paid over $600 for services
rendered for the entire year)
• Employee benefits do not have to be funded,
paid or administered
• Misclassification of workers can be costly to
employers and agencies
Common Law Test
Under Payroll Laws, there is no uniform definition of
an employee.
• Classified by applying the Common Law Test
• 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 employeremployee relationship.
• IRS looks to identify KEY control factors grouped in
three categories:
• Behavioral
• Financial
• Type of relationship
Behavioral Control
• Right to direct & control the detail & 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 - If 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.
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Financial Control
• Does the business have the right to direct and control
the economic aspects of the worker’s job in
• 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
Type of Relationship
• Several factors that generally indicate how the
worker and the business perceive their relationship
• 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.
Common Law Test
Important Note: IRS factors that are not as not
important in the determination of worker classification:
part-time or full-time work, the location of work, and
hours of work.
Refer to the examples on pages 1-4 & 1-5
Reasonable Basis Test
**Important Note**Although worker may be defined as
an classify as 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
• Reasonable Basis Test – consist of one of the
following and any other reasonable basis
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
Reasonable Basis Test
• Safe Harbor – in order to take advantage of “safe
harbor” (refer to page 1-9 for more information)
• Consistent treatment is a must; treatment must be
consistent since 1978 by
• Application was clarified by Small Business Job Protection
Act beginning after December 31, 1996
• Failure to file Form 1099-MISC in one year no bar for relief
in later years
• Employer must 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
• Section 530 not for federal agencies
Reasonable Basis Test
• Important Items To Note:
• Technical Services Specialists get special treatment
• Use Form SS-8 for a definitive ruling from IRS on newly
hired employee status; whether the worker is an
employee or an independent contractor
• Employer should treat the workers in question as
employees, with all appropriate wages and taxes
reported and/or withheld
• Schools may treat exam proctors as independent
contractors
• IRS’s role is strictly limited by law
Reasonable Basis Test
• Important Items To Note Cont’d:
• 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. The employer is the
ONLY party that can seek review by the Tax Court.
Employees and third parties cannot.
Employment Status Determined
The status of some workers is determined by
the Internal Revenue Code( IRC).
• Some of the workers who would be considered
Independent Contractors under one of the tests
(common law or reasonable basis test) are really
“Statutory Employees”
• Some of the workers who would be considered
Employees under one of the tests (common law
or reasonable basis test) are treated as
“Statutory Nonemployees”
Statutory Employees
Although not employee, under Common Law Test,
employer treats as an employee for certain tax purposes
• Payments made by employer to statutory employees
are NOT subject to Federal Income Tax withholding,
but are subject to Social Security and Medicare Taxes
• Employers must pay their share of Social Security
and Medicare Taxes, and in some instances, Federal
Unemployment Tax( FUTA)
Statutory Employees
Four Categories of Statutory Employees
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Agent-drivers or commission drivers
Full-time life insurance
Homeworkers
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( other than transportation)
• Work must be part of a continuing relationship with
employer, rather than a single transaction.
Statutory Nonemployees
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. They are Statutory Non-employees.
• Earnings are not subject to Federal Income Tax,
Social Security, Medicare or FUTA
Two categories of Statutory Non-employees
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Qualified real estate agents
Direct sellers
Statutory Non-employees
• Requirements
• 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
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
Leased Employees - PEO
Professional Employer Organizations
Another avenue employers use to obtain
short-term staffing needs
• Enter into a 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
• Leasing company is responsible for all withholding
& employment taxes, administration and funding
of benefits
Leased Employees - Continued
• Wage bases restart with leasing agreement: If
employee 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 the
employee.
Leased Employees - Continued
• 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.
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.
Fair Labor Standards Act(FLSA)
aka Federal Wage-Hour Law
Broadly characterizes an employee as any individual
who works for an employer.
The Act is administered by the Employment
Standards Administration's Wage and Hour Division
within the U.S. Department of Labor
(DOL enforces the Act)
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Regulates Minimum Wage Rates
Overtime Pay
Child Labor
Equal Pay
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 – Employees 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.
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
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.
Worker Misclassification: Penalties
Important Note - Failure to withhold and pay state
income taxes because of a worker misclassification will
result in back tax assessments and penalties
at the state level as well.
Proof of the Right to Work in the US
Employee must prove 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
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. Protected if employer:
• Have employees complete Section 1 of Form I-9 on
first day of work
• Make sure employees provide original documentary
evidence within 3 business days of hire date
• Keep for 3 years from date of hire or 1 year from
date of termination
• 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
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
• 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 I94 or I-94A
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.
Proof of the Right to Work in the U.S.
List B – Documents Proving Identity Only
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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
U.S. Military or military dependent ID card or draft record
U.S. Coast Guard Merchant Mariner card
Native American tribal documentation
Canadian Driver’s License
For persons under age 18( school record or report card)
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
• Native American tribal document
• U.S. Citizen ID card I-197
• Employment authorization document issued by DHS
(other that I-766)
Proof of the Right to Work in the 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
• Election workers
• Independent contractors
• Providing labor to you who are employed by a contractor
providing contract services (ex. Employee leasing or
temporary agencies)
Proof of the Right to Work in the U.S.
Section 1 of 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
• To fully complete form, employee must present
original unexpired documents – one from List A or
one from both List B and C
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.
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
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
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
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.
Proof of the Right to Work in the U.S.
Recertifying 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
• The reverify, the employer must record the date of
rehire, the document title, number and expiration date
and sign and date Section 3.
• When verifying on a new Form I-9, write the employee’s
name in Section 1
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.
• 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 for the Armed Forces
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
• 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
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
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
• Employers can request that E-Verify apply to all their
hiring in each state where the program will take place or
be limited to hiring in one or more states or to one or
more places of hiring within a state.
E-Verify: How does it work?
• E-Verify is available on the Internet using a Webbased 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
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
E-Verify: How does it work?
Driver’s License Information Matching Pilot
Program – 2011
• 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
• RIDE matches the dates of birth and the driver’s
license numbers in state DMV records to that of
FORM I-9
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
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
E-Verify: Additional Info
Equipment required: PC with modem and touch tone
line with a single originating phone number
• Beginning 2009, 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
U.S.
• Consolidated Appropriations Act 2012 requires that
all federal employees E-Verify
• E-Verify Self Check option available to individuals
USCIS provides an online tool to check employment
eligibility status
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.
New Hire Reporting
The definition of a “newly hired” employee includes
an employee who was previously employed by the
employer but has been separated from that prior
employment for at least 60 consecutive days.
• Reporting Requirements
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Employee’s name , address and social security #
Date the employee first performed services for pay
Employer’s name, address, and federal employer id(EIN)
Employer provides the above to the state directory
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
• Report State of Designation
• Magnetically or electronically
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
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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
• 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)
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
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
New Hire Reporting
Reporting format and method
• Information captured on Form W-4 or equivalent
• Employer can transmit via 1st 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!
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
The Employer & Employee
Relationship
Heather Williams
Heatherbwms@gmail.com