Efforts Increase to Eliminate Independent Contractor Misclassifications

Posted on September 21, 2011 by jill

The US Department of Labor (DOL) is stepping up efforts to crack down on the misclassification of workers as independent contractors rather than as employees. According to its press release, the DOL, in partnership with the IRS, has signed memorandums of understanding (MOU) with agencies or officials in 11 states (Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington, Hawaii, Illinois, and Montana, and New York.) The intent is to provide better information sharing as well as enforcement efforts aimed at employers that misclassify workers.

There is a strong financial motivation for employers to hire independent contractors rather than employees in the avoidance of a number of expenses: social security and Medicare taxes, unemployment and workers’ compensation premiums, overtime pay and employee benefits. Yet, classifying workers as independent contractors should always be done carefully, particularly in light of heightened scrutiny. There are somewhat different standards related to the Fair Labor Standards Act (FLSA) and used by the IRS. Under the FLSA, courts have looked at the following factors:

1.    The extent to which the services rendered are an integral part of the principal’s business.
2.    The permanency of the relationship
3.    The amount of the alleged contractor’s investment in facilities and equipment.
4.    The nature and degree of control by the principal.
5.    The alleged contractor’s opportunities for profit and loss.
6.    The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7.    The degree of independent business organization and operation.

The IRS looks at the degree of control and independence the worker has related to the following three categories:
1.    Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2.    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 and supplies, etc.)
3.    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?

Employers would be well-advised to review both sets of standards in relation to its hiring of independent contractors. Further guidance is available at IRS.gov and DOL.gov.

IRS – 2010 Tax Calendar Ready for Pre-Order

Posted on October 21, 2009 by admin

The complimentary 2010 IRS Tax Calendar for Small Businesses and Self-Employed is now available for pre-order. This 12-month wall calendar is filled with useful information on general business taxes, IRS and SSA customer assistance, electronic filing and paying options, retirement plans, business publications and forms, and common tax filing dates. Each page highlights different tax issues and tips that may be relevant to small business owners with room on each month to add notes, state tax dates, or business appointments.

If you order now, the English version of the 2010 Tax Calendar will be shipped on November 1, and the Spanish version will be shipped December 1.

Pre-Order Free 2010 Tax Calendar for Small Businesses and Self-Employed (English)

Pre-Order Free 2010 Tax Calendar for Small Businesses and Self-Employed (Spanish)

Get Additional Help with COBRA Subsidy

Posted on May 29, 2009 by admin

If you are struggling with some issues on the Cobra Subsidy Provision of the recent American Recovery and Reinvestment Act, this may help. The Internal Revenue Service (IRS) has compiled a list of 58 questions and answers including involuntary termination, assistance eligible individual, and payments to insurers. For guidance on these issues and more simply Click Here.

To get more help on COBRA and other HR related issues check out the HR Made Simple Kit powered by HRSentry.

2009 IRS Optional Standard Mileage Rates

Posted on January 2, 2009 by admin

The Internal Revenue Service has issued the following 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

55 cents per mile for business miles driven
24 cents per mile driven for medical or moving expenses
14 cents per mile driven in service of charitable organizations

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

Independent Contractor vs Employee

Posted on October 20, 2008 by admin

Over the past few years the IRS has been noticing a significant increase in the hiring of independent contractors. With looser tax and payment regulations over independent contractors, this can be seen as a cheaper alternative to hiring as an employee. Many of these cases put “independent contractors” in a position to essentially be employees, just called a contractor. These cases of misclassified workers lead to fines, payment of back taxes, and increased workplace monitoring.

A new bill slowly making its way through Congress would amend and modify the IRS rules relating to the treatment of individuals as independent contractors or employees, and for other purposes. In addition it would also direct 30% of all IRS resources to auditing the recent surge in hiring Independent Contractors vs employees as well as toughening the punishment for misclassified workers.

Taxpayer Responsibility, Accountability and Consistency Act of 2008: Amends the Internal Revenue Code to:

(1) require reporting to the Internal Revenue Service (IRS) of payments of $600 or more made to corporations.

(2) set forth criteria and rules relating to the treatment of workers as employees or independent contractors.

(3) increase penalties for failure to file correct tax return information or comply with other information reporting requirements.

It also Requires the Secretary of the Treasury to issue an annual report on worker misclassification. Read more about the Taxpayer Responsibility, Accountability and Consistency Act of 2008 here.

When you hire an independent contractor, keep documents to prove that the contractor really isn’t an employee.

If you hire an independent contractor (IC), you must be vigilant to ensure that government agencies never re-classify that IC as an employee — which could subject you to back taxes and penalties. That vigilance must begin even before the IC walks in the door. If you plan to hire an IC, here are two things you can do to make sure you get the relationship off to the right start.

Independent Contractor Questionnaire

When you meet with a prospective IC for the first time, you should have the IC complete an independent contractor questionnaire. You should design this questionnaire to elicit the sort of information that will establish that the IC is a separate business entity, not merely an employee in IC’s clothing. Here is some information you’ll want to know:
• whether the IC has a fictitious or assumed business name
• how the IC’s business is structured (for example, sole proprietorship, partnership, corporation, limited liability company)
• the IC’s business address and phone number
• the number of people employed by the IC, if any
• any professional or business licenses the IC holds
• contact information for other companies for whom the IC has worked as an independent contractor
• how the IC markets her business (for example, Yellow Pages, advertising)
• whether the IC has an office separate from his home
• a description of the business equipment and facilities that the IC owns
• whether the IC has his own business cards, professional stationery and invoice forms, and
• a list of all of the types of insurance that the IC carries.
None of the answers to these questions will provide conclusive evidence that a worker is
an employee or an IC. But taken together, this information will help you decide whether
the worker is an independent businessperson whom you can safely treat as an IC.

Note: Do not ask an IC to complete one of your standard employment applications.
Government agencies can use the mere fact that the IC filled out an “employment”
application as evidence that the IC is actually an employee.

Gather Documents

Before hiring an IC, make sure that the IC has the sort of documents that will enable you to establish that the IC is a separate business entity, should the government ever decide to audit you. Make copies of all such documents and keep them in your files along with the questionnaire described above.

The documents you should request include the following:

• copies of the IC’s business cards and stationery
• copies of any advertising that the IC has done, including advertising in the Yellow Pages
• a copy of the IC’s White Pages business listing, if there is one
• if the IC is operating under a fictitious or assumed business name, a copy of the fictitious or assumed business name statement or application
• copies of any business or professional licenses
• certificates showing that the IC has insurance, including general liability insurance and workers’ compensation insurance if the IC has employees
• a copy of the invoice form that the IC uses to bill for his services
• if the IC rents business space, a copy of the office lease
• if the IC has employees, a document containing the IC’s unemployment insurance number
• copies of IRS Form 1099-MISC that other hiring firms have issued to the IC, and
• if the IC is a sole proprietor and will agree to hand them over, copies of the IC’s tax returns for the previous two years showing that the IC has filed a Schedule C, Profit or Loss From a Business (which will show that the IC has been operating asan independent business).

Get more tips and resources including the 20 factor test for identifying an independent contractor at HRSentry.