Independent Contractors, Employees, and the General Welfare Doctrine. Presented by Sandy Abalos, CPA, MA Corrine Wilson, CPA

Transcription

1 Independent Contractors, Employees, and the General Welfare Doctrine Presented by Sandy Abalos, CPA, MA Corrine Wilson, CPA

2 Introduction Sandy Abalos, CPA, MA Delegate to 1995 White House Conference on Small Business Sponsored #1 issue recommendation clarifying the definition of independent contractor Drafted legislation with House and Senate Testified before Congress in 1996 Worked with IRS to revise its worker classification audit training manual Honored as SBA s 1996 National Accountant Advocate of the Year

3 Introduction Corrine Wilson, CPA Over 15 years with CPA firms performing audits for tribal governments, businesses and gaming facilities More than 14 years as financial officer with various Native American tribes Prior NAFOA Board member: participated in developing two major audit & accounting guides Founding committee of National Inter-Tribal Tax Association

4 What We Intend to Accomplish W-2 versus 1099 Why Worker Classification is an Issue Employee or Independent Contractor The Determining Factors Independent Contractor 1099 Filing Compliance Overview of 1099 requirements for tribal activities General Welfare Doctrine New Legislation and IRS Revenue Procedure

5 Why Workforce Classification Matters Reclassification Exposure 15.3% FICA/Medicare tax Federal income tax withholding Health insurance 401K and profit sharing The Federal tax gap W-2 vs compliance Affordable Care Act (ACA) Considerations

6 IRS Employment Tax Examination Program : IRS performed 11,380 audits Reclassification of 483,000 workers $751 million in tax assessments

7 Employee Classification Defined The employer has the right to direct and control the individual who performs the services, not only as to the result to be accomplished, but as to the details and means by which the result is accomplished.

8 20 Common Law Factors IRS Ruling factors that may indicate whether the employer can exercise enough control to establish an employeremployee relationship.

9 The IRS Applies an Updated Approach Behavioral Control Financial Control Type of Relationship

10 Behavioral Control Instructions the business gives the worker When, where and how the work is to be done What training the business gives the worker What tools or equipment to use

11 Behavioral Control (continued) Where to purchase supplies and services What order or sequence to follow What work must be performed by specific individuals

12 Financial Control Extent to which the worker has unreimbursed business expenses Extent of the worker s investment Extent to which the worker makes his or her services available to the market

13 Financial Control (continued) How the business pays the worker Extent to which the worker can realize a profit/loss

14 Type of Relationship Permanency of the relationship Extent to which services performed by the worker are a key aspect of the regular business of the company Whether the business provides the worker with employee-type benefits, such as insurance, pension plan, vacation pay or sick pay

15 Type of Relationship Written contracts may help in determining the status, but this is not a single defining factor. Contracts need to be carefully written with consideration of the 20 common law factors and in conjunction with Behavioral and Financial controls.

16 Type of Relationship Examples of Contract Terms: Services are essential to tribe s obligations Must work under the direction of a department Must produce a written report Fees paid hourly Reimbursed for out-of-pocket expense Must personally perform services

17 Type of Relationship Contract Terms Support an Employer-Employee Relationship

18 Worker Classification Pop Quiz Take out a sheet of paper Write numbers 1-20 Independent Contractor write C Employee write E

19 20 Common Law Factors Instructions Employer tells the worker where they need to be, what time they need to work, and how they need to do the work. Sounds like EMPLOYEE

20 20 Common Law Factors (cont d) Training Worker must attend on-the-job training to learn how to use certain machinery or software. Integration Services are a regular necessary function of the business operations. Sounds like - EMPLOYEE

21 20 Common Law Factors (cont d) Services Rendered Personally Contractor agreement states the worker must personally perform the services. Sounds like EMPLOYEE

22 20 Common Law Factors (cont d) Hiring, Supervising, and Paying Assistants Worker can hire, supervise and pay assistants. Sounds like CONTRACTOR

23 20 Common Law Factors (cont d) Continuing Relationship Worker performs services for a year on a part-time basis. Sounds like EMPLOYEE OR CONTRACTOR

24 20 Common Law Factors (cont d) Set Hours of Work Employer requires fixed hours of work. Full-time Required Sounds like - EMPLOYEE

25 20 Common Law Factors (cont d) Doing Work on Employer s Premises Sounds like EMPLOYEE OR CONTRACTOR

26 20 Common Law Factors (cont d) Order of Sequence of Work Set Sounds like EMPLOYEE

27 20 Common Law Factors (cont d) Oral or Written Reports Required by a department to monitor what the worker is doing and his/her progress Sounds like EMPLOYEE

28 20 Common Law Factors (cont d) Payment by Hour, Week, Month Worker submits a monthly invoice month stating hours worked x agreed-upon hourly rate. Sounds like CONTRACTOR

29 20 Common Law Factors (cont d) Payment of Business and/or Travel Expenses Sounds like EMPLOYEE OR CONTRACTOR

30 20 Common Law Factors (cont d) Furnishing Tools and Materials Worker has own tools and machinery. Significant Investment Worker has a significant investment in providing the services: equipment, machinery, tools, facilities, education, licensing. Sounds like - CONTRACTOR

31 20 Common Law Factors (cont d) Realization of Profit or Loss Worker has exposure/liability for unreimbursed expenses. Sounds like CONTRACTOR

32 20 Common Law Factors (cont d) Working for More than One Company at a Time Making Service Available to the General Public Sounds like CONTRACTOR

33 20 Common Law Factors (cont d) Right to Discharge Employer may terminate the worker Right to Terminate Worker may quit at any time Sounds like EMPLOYEE

34 Question. Out of the 20 common law factor examples, how many sounded like a Contractor relationship? A. 7 B. 10 C. 12 D. 15

35 Board Member Example Board members meet periodically Set their own board member meetings Generally, report to the Tribal Council

36 Board Member Example (cont d) Services are an integral part of the business Reimbursed for out-of-pocket expenses Provided with medical and retirement benefits Sounds like EMPLOYEE

37 Board Member Example (cont d) Same fact pattern Tribal Council passes a resolution stating all Board Members are to be treated as independent contractors Sounds like EMPLOYEE

38 Worker Classification Red Flags Paying a worker as an employee (Form W-2) and contractor (Form 1099) in the same year Contractor payments to individuals No business name or federal identification number Significant contractor expenses and very few form 1099s filed

39 Worker Classification Red Flags (continued) When a worker disagrees with 1099 classification or receives both a W-2 and 1099? File form 8919 with their tax return Report name of employer, ID number, forms received File form SS-8 with IRS Worker does not need to pay 7.65% employer share of FICA and Medicare tax

40 Worker Classification Recommendations If in doubt, classify worker as an employee. Review contractor agreements for elements of behavioral and financial control. Determine whether contractor has an established business.

41 Worker Classification Recommendations (continued) What if we did it all wrong? Voluntary Classification Settlement Program Must not be under examination or have any IRS dispute Must have filed all required 1099s in last three years Must have consistently treated workers as contractors or employees Must agree to begin treating the class of workers as employees

42 Worker Classification Recommendations (continued) Section 530 Safe Harbor Employers that have historically treated a class of workers as contractors. Must have consistently filed forms 1099-MISC Must have consistently treated similarly situated workers as contractors Must have reasonable basis (industry standard, court case or judicial precedent) 42

43 Worker Classification Recommendations (continued) Ensuring Proper Classification and Compliance Conduct an internal review of classification practices and procedures Engage specialists to review employment classifications Establish consistent written policies, procedures and contracts for evaluating and engaging independent contractors 43

44 1099 Compliance 1099 MISCELLANEOUS COMPLIANCE General Workforce Council and Board Members General Welfare Benefit Plans Tribal Entity Transfers

45 When to File Form 1099-MISC Payments > $600 to an independent contractor including: Attorneys, medical and health care payments Contractors Individual, partnership or estate Rents and services

46 When to File Form 1099-MISC Payments > $600 to an independent contractor including: Prizes and awards Per capita payments not exempted per federal laws Payments made with back-up withholding

47 When 1099-MISC is Not Required Generally, payments to a corporation Payments to tax-exempt organizations Payments for utilities or merchandise purchased from retailers and similar items Wages/compensation reported on W-2s Business travel under accountable plans General welfare benefits to community members

48 Best Practices for 1099 Compliance Ensure W-9 forms on file. Cross-check 1099s to employees. Review process set-up of accounts payable for vendor payments; don t cut a check if no W-9. Ensure back-up withholding is completed. If no W-9, do backup withholding at 28%.

49 W-9 - Ensure Federal Tax Classification is Complete!

50 Annual 1099 Reporting Careful review of LLC entities Unless the Box shows S or C for Corporation on W-9, a 1099-MISC should be filed. Electronic filing > MISC Forms Timely filing Due to payees: January 31 Paper forms to IRS: February 28 Electronic filing: March 31

51 When to File Form W-2G Gambling winnings, from wagers > $1,200 from slots or bingo > $1,500 net winnings from keno > $5,000 net winnings from poker tournament > $600 in other gambling winnings when payout is at least 300x the wager Use 1099 Misc when no wager

52 File Form 945 Annual report for nonpayroll withholding Forms W2G Forms 1099-MISC Due March 15

53 Revenue Ruling for Elected Council Members Payments to elected Indian Tribal Councils are on W-2s Council member compensation does not constitute wages for purposes of Social Security. Federal income tax is to be paid by the individual.

54 Revenue Ruling for Elected Council Members (cont d) On the W-2, check Box 14-Other, and note Revenue Ruling If Council member is also an employee in a different position, could have two W-2s.

55 What if Social Security or Two Options: Withholding was Paid? Individual Council members may file Form 843, Claim for Refund and Request for Abatement. Tribe can file Form 941-X for applicable quarters.

56 What About Board or Committee Members? Guidance is in IRS Regulation , and Publication 963 Federal-State Reference Guide Holders of public office are not in a trade or business and therefore are W-2 employees of the government. Public officials exercise government powers as created through a government constitution, law, or statute.

57 What About Board or Committee Members? (cont d) Other Government Control factors: Delegated powers Powers and duty defined by legislative authority Public office = Some permanency and continuity Public official may take an oath

58 Examples of Boards or Committees Examples of government boards: Legislative or elected committee representatives Board of commissioners School boards Utility district boards Zoning boards Boards of health

59 Different Rules for Election Boards or Committees Generally a W-2 and the following requirements: If payments < $600 in year, no W-2 is required; wages are not subject to FICA or FIT. For payments between $600 and $1,499, a W-2 is required; wages not subject to FICA and FIT. If payments > $1,500, a W-2 is required; wages subject to FICA, but not FIT.

60 Tribal Entity Transfers/Distributions Per the Indian Tribal Governmental Tax Status Act of 1982 and IRS Revenue Procedures and : Tribes and their subdivisions are recognized as tax-exempt entities. Tribes and their subdivisions are treated as states for federal tax purposes. See the IRS Tribal Government website, Revenue Procedure

61 What is a Political Tribal IRS Code 7871(d): Subdivision? a subdivision of an Indian Tribal government shall be treated as a political subdivision of a State if (and only if) the Secretary determines (after consultation with the Secretary of Interior) that such subdivision has been delegated the right to exercise one or more of the substantial governmental functions of the Indian tribal government.

62 Tribal General Welfare Doctrine Tribal General Welfare Exclusion Act passed Congress on Sept. 18, Builds upon IRS Revenue Ruling Provides guidelines and safe harbors that Tribes can follow to ensure certain general welfare benefits paid to members and their families are not taxable and no 1099 is required to be filed. 62

63 General Welfare Doctrine for Tribes Revenue Procedure requires written tribal programs and provides guidance and safe harbors for Tribes to meet general welfare benefit provisions. The payments cannot be compensation for services; those will remain as reported, either as a W-2 or 1099, as appropriate under the common law tests.

64 Compliance to Apply the General Welfare Doctrine. Payments made by tribal government programs qualify as non-taxable when: Made under a written tribal government program Available to any qualified person Does not favor members of the governing body Is neither lavish nor extravagant Is not compensation for services

65 Tribal Program Safe Harbor Guidelines Specific programs with guidance for safe harbor that, when followed, ensure payments are not taxable: Housing Education Elderly and Disabled Cultural and Religious Others, i.e., transportation

66 Other Legislative Highlights Tribes may go back to any year in which statute of limitation refunds are open Generally, 3 years from when the 1099 or W-2 was filed or the tax period, whichever is later; One more year if expiration date would have expired from the date of the legislation. Establish Tribal Advisory Committee Suspend IRS general welfare examinations Deference to Tribes for their GW programs and code ambiguities

67 IRS Guidance IRS Tribal Government website: Guides, Q&A s and contacts to assist you. NAFOA - General Welfare ALERT--Congress-Passes-Tribal-General-Welfare- Exclusion-Act.html?soid= &aid=IxIbYwi- GHM

68 Q&A Sandy Abalos CPA, MA Principal Corrine Wilson CPA Principal