Internal Revenue Service Federal State & Local Government FSLG Free Phone Forum Welcome! Lori.a.stieber@irs.gov 1
Employee or Contractor? Who are employees? Lori.a.stieber@irs.gov 2
Types of Employees Common law or specific tax statute Identified as an employee under a Section 218 Agreement Identified as employee under state or local law Statutory employee Lori.a.stieber@irs.gov 3
Employment Under the Internal Revenue Code IRC Sec. 3121(d)(2) Common law test IRC Section 3121(d)(3) Other employees by statute IRC 3401(c) Officer, employee, or elected official of government Reg. 1.1402(c)-2(b) Holder of public office is not self-employed Lori.a.stieber@irs.gov 4
Examples of Public Officials Mayor Legislator or elected representative County commissioner Judge/justice of the peace County or city attorney, marshall, sheriff, constable Registrar of deeds Tax collector or assessor Road commissioner Board members Lori.a.stieber@irs.gov 5
Fee-Based Public Officials Individuals who receive their income solely from fees received directly from the public are subject to selfemployment tax and are not employees If fees are received by government and paid over to the official, they are considered wages paid to an employee Lori.a.stieber@irs.gov 6
Other Workers Paid volunteers are employees Volunteer firefighters are employees Election Workers and Officials Exempt from income tax withholding May be subject to social security and Medicare based on an annual threshold Refer to Section 218 Agreement & state statute Lori.a.stieber@irs.gov 7
Other Workers Road Commissioners Usually elected or appointed official Animal Control Officer Elected or appointed position is generally an indication of employee status. Lori.a.stieber@irs.gov 8
Common-Law Employee Reg. Sec. 31.3121(d)-1(c) Generally the employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to result, but also as to details and means. Lori.a.stieber@irs.gov 9
Control Test Worker subject to control as to: What is to be done How it is to be done Employer may allow broad freedom, but retains right to control Lori.a.stieber@irs.gov 10
Tests Under Common Law The IRS recognizes three categories of facts to consider when making a determination of employee status: Behavioral control Financial control Relationship of the parties Lori.a.stieber@irs.gov 11
Behavioral Control Facts that indicate whether entity has a right to direct and control how work is performed Instructions provided Training provided Government identification (i.e., badge) Nature of occupation Evaluation systems Lori.a.stieber@irs.gov 12
Financial Control Facts that indicate whether entity controls business and financial aspects of worker activities Significant investment in equipment, tools, or facilities Unreimbursed expenses Offers service to general public Method of payment (by job vs. by hour, etc.) Opportunity for profit or loss Part-time vs. full-time status Worker has corporate status Lori.a.stieber@irs.gov 13
Relationship of the Parties Facts to consider in determining how the parties view the relationship Can refuse payment for nonperformance Provide fringe benefits Discharge/termination rights Permanency Regular business activity Work is integral to business Lori.a.stieber@irs.gov 14
Employees A`n Employee might Wear I.D./Uniform Work hours/days determined by payor Trained by the payor Use supplies & equipment & staff provided by payor Inclined to quit without obligation Follow internal policy/procedures Lori.a.stieber@irs.gov 15
Independent Contractors An Independent Contractor might Make own schedule Provide staff Buy own products Have business telephone Furnishes supplies & equipment Have business liability insurance Seeks a profit and risks loss Lori.a.stieber@irs.gov 16
If Payment Made To An Employee Forms and Filing Requirements: Secure W-4 before paying employees File Form W-2 and W-3 Form 941 for Employment Tax Withholding Lori.a.stieber@irs.gov 17
If Payment Made To An Independent Contractor Forms and Filing Requirements: Secure W-9 before payments to any Vendor File Form 1099-MISC and 1096 Form 945 for Backup Withholding of Tax Lori.a.stieber@irs.gov 18
Section 530 Refers to Section 530 of the Revenue Act of 1978 (not an IRC provision) Originally one-year provision, extended indefinitely May terminate taxpayer s employment tax liability with respect to an individual not treated as an employee Lori.a.stieber@irs.gov 19
Section 530 Requirements Reporting consistency Substantive consistency Reasonable basis Lori.a.stieber@irs.gov 20
Reporting Consistency Filing all 1099 s Employers that do not timely file Forms 1099-MISC cannot receive section 530 relief for those workers for that year Lori.a.stieber@irs.gov 21
Substantive Consistency Employer treated all workers in similar positions the same (yes) Similar duties are consistently performed by staff OR by contractors resulting in W-2 s &1099 Misc furnished for the same type of work (no) Lori.a.stieber@irs.gov 22
Reasonable Basis Business must have reasonably relied on one of the following-- Prior audit Judicial precedent Industry practice researched Other reasonable basis like advice from professional advisors Lori.a.stieber@irs.gov 23
Form SS-8 Not sure whether a worker is an employee or independent contractor? Complete Form SS-8 for IRS determination Information requested from worker and payer Not an audit Lori.a.stieber@irs.gov 24
Voluntary Classification Settlement Program VCSP is allows reclassification to employee status for future tax periods with partial relief from federal employment taxes. Certain eligibility requirements apply Form 8952, Closing Agreement Announcement 2012-45 Lori.a.stieber@irs.gov 25
VCSP Eligibility Announcement 2012-45 (2012-51 IRB) Voluntary prospective classification Consistent prior treatment Filed all required Forms 1099 three years prior Audit status change Lori.a.stieber@irs.gov 26
Resources www.irs.gov Search VCSP VCSP Frequently Asked Questions Form 8952, Application for Voluntary Classification Settlement Program and instructions Announcement 2012-45 Lori.a.stieber@irs.gov 27
Thank You! Lori.a.stieber@irs.gov 28