9/17/2015. Independent Contractor or Employee. David Smith AASBO September 2015

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1 David Smith AASBO September

2 If you are a business owner (school district) hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Businesses & Self Employed/Independent Contractor Self Employedor Employee IRS and Department of Labor Audits Governmental entities including school boards Why? 1099 reporting compliance ACA compliance Benefits for workers W2 reporting Social Security and Medicare tax payments Consequences of Treating an Employee as an Independent Contractor If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. Definition Independent Contractor Employee Common Law Rules Misclassification of Employees Examples/Questions 2

3 Independent Contractor People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Businesses & Self Employed/Independent Contractor Self Employed or Employee Employee (common law employee) Under common law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. Statutory employee Businesses & Self Employed/Statutory Employees Statutory nonemployee Businesses & Self Employed/Statutory Nonemployees In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered Businesses & Self Employed/Independent Contractor Self Employed or Employee 3

4 Common Law Rules Facts that provide evidence of the degree of control and independence fall into three categories: Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial: Are the business aspects of the worker s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Behavioral Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done as long as the employer has the right to direct and control the work. Type of instructions given Degree of instruction Evaluation systems Training When, What and Where!!!!! Financial Financial Control The financial control factors fall into the categories of: Significant investment Unreimbursed expenses Opportunity for profit or loss Services available to the market Method of payment 4

5 Type of Relationship The factors, for the type of relationship between two parties, generally fall into the categories of: Written contracts Employee benefits Permanency of the relationship Services provided as key activity of the business? Do they have a business license? Are they incorporated or have an EIN number? Do they carry liability Insurance? Do they do work for other entities or advertise? Do they have employees? Do they furnish their own material and equipment?? IRS 20 point checklist notable points: 1. IC can realize a profit or suffer a loss; not just risk of not getting paid 2. IC offers their services to more that one firm 3. IC generally provides his own tools, materials and supplies 4. IC can t be fired without subjecting Board to risk of breach of contract lawsuit 5. IC can t simply quit without being subjected to risk of breach of contract lawsuit 5

6 If it is still unclear! The IRS will review the facts and circumstances and officially determine the worker s status. Common Issues for School Districts Small maintenance projects Summer Workers Temp Services Athletic Events Retired Employees Instructional Services Coaches Aides Questions Paint Project School district bids outs painting of elementary school. Awards contract (lump sum) to low bidder Requires license and insurance Give timeline for completion of work Picks paint colors Independent contractor or employee? 6

7 Questions Paint Project Principal hires one of his teacher s college students to paint some classrooms over the summer. Pays him and his friend $10 per hour. School furnished paint and material Has custodian supervise their work? Independent contractor or employee? Questions Tutor School contracts with retired teacher to provide tutoring service in after school program. Independent contractor or employee? True or False? You can never have both a W 2 and a 1099 Misc from the same company (Board). 7

8 There is more to the answer: It is very unusual for an employee to also correctly receive a 1099 from his employer, but it might be legally possible. To qualify all of the following must exist: The individual has a legitimate independent business He/she has other clients not connected to the employer The work as an IC is not the identical, or similar, to what he does as an employee. When doing the 1099 work he must meet the common law test as an IC If you do this be sure to clearly document and save your evidence, because when a worker receives both a W 2 and a 1099 from the same business in the same year, it is a red flag to the IRS. The odds are very high you and the worker will be contacted to explain how this happened. You will need to prove you are right. Duck Test!!!!! Duck Test If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. 8

9 Duck Test Well, it could be a rabbit in disguise. When in doubt make them W2 employee. Resources Businesses & Self Employed/Independent Contractor Self Employed or Employee contractor or employee 9

10 David Smith AASBO September