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Independent Contractor vs. Employee Part 1 Employee and Independent Contractor Relationships and Potential Tax Liabilities Your webinar will begin shortly.

Tanya Baber

Tax Edge

Independent Contractor vs. Employee Part 1 Employee and Independent Contractor Relationships and Potential Tax Liabilities

Tanya Baber, EA, CTRS Tax Edge, Inc.

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Employee or Independent Contractor? ● This course is two parts ● Serve as a comprehensive guidebook ○ Part One - Defining the Employee and Contractor, + Proper Classification, and VCSP options ○ Part Two - Understanding Mis-Classification, IRS and Court Factors, + Court Cases, Safe Harbors and SS-8 Determinations

Course Manual - www.TaxEdge365.com/Canopy

Course Overview ● Employees and Independent Contractor Defined ● Advantages and Disadvantages of Both ● Misclassification Liability and Penalties ● Memorandum of Understanding ● Statutory and other classifications ● IRS VCSP Program

Overview

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Employer Requirements

Employer Costs

Outsourcing

● Wages

● Dollars

● Reduced Costs

● Taxes

● Time

● Flexibility

● Laws

● Risk

● Not paying idle time

● Benefits ● Workers Comp

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Overview ● Independent Contractors ○ Works out as long as they really are contractors ○ Significant risks if not + IRS audit / reclassification risk + Back Taxes & Penalties + Burdensome - can lead to closure + Injury / Workers Compensation issues + Investigation / Costs + Unemployment Filing / Investigations

Employees and Independent Contractors Defined

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

What is an Employee? Definition from Black’s Law Dictionary + Works in service of another + Under express or implied contract of hire + Employer controls details of work performance

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

What is an Employee? ● Direction and Control ○ Employment Tax Regulations ○ Right to control & direct work ○ Doesn’t matter if there are outside “contract labor” agreements ● Pay Structure ○ Usually a specific amount of pay per time worked ○ Could be Hourly, Salary, or piece rate ● Employment Agreements

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

What is an Independent Contractor? ● Definition from Black’s Law Dictionary ○ Contracts to do work according to their own methods ○ Not subject to another’s control ○ Except what is specified under mutually binding agreement ○ For specific job

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

What is an Independent Contractor? ● Direction and Control ○ Terms by written or oral contract ○ Often not in same line of work as business that hires them ○ Provide services to others in the community ● Pay Structure ○ Usually paid by the job ○ Without regard to time involved ● Contract or Agreement ● Common Law Standard

Poll Question

Advantages & Disadvantages

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Advantages/Disadvantages of HIRING an independent contractor

●

Cost Savings - Benefits, Taxes, Not paying for

●

unneeded hours

Less Control - Actual individuals may vary, right to fire only in agreement

●

Flexibility - Specific needs, times, and skills

●

Liabilities - Spreading liability to others

●

Payments - Potential flat fees to control project

●

Commitment - May lack loyalty to your business

costs, extended payment terms

●

Ownership - May not own rights/copyrights to

●

●

business as well as employee

Others - Don’t usually form unions, or cause discrimination issues

Business Knowledge - May not understand your

created works ●

Audits & Risks

●

Increased IRS, Labor, OSHA, others

●

Confidentiality & privacy

●

Injured / Workers Compensation investigation & potential liability

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Advantages/Disadvantages of BEING an independent contractor

Control - free to set own rules, limited only by their bargaining

●

Job Security - lack of, loss of a couple clients can have significant effect

power/skills

●

Payment - might not get paid, or timely payment

●

Ownership of work - Opportunity to be boss, not answer to supervisor

●

Taxes - subject to Self-Employment tax, more complex return, sales

●

Potential - Build / lead their own organization with potentially unlimited

●

taxes possibly

earnings

●

Liabilities - personally liable for business debts

●

Duplication - Can teach others to do their work and accomplish more

●

Benefits - must cover costs themselves, no unemployment, workers

●

Ownership - copyrights, patents, rights to created works

●

Flexibility - Work schedule, pricing, work from home, part time

●

Business Deductions - More flexibility than as employee

●

Retirement - may be able to put more aside in tax deferred retirement

compensation ●

Recordkeeping - accounting, bank accounts, own reporting requirements, mileage

●

Expenses - increased costs, insurance

●

Can make bad decisions and lose money

●

Must market themselves as well as do the actual work

Poll Question

Misclassification Liabilities and Penalties

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Misclassification ● Liability of Misclassification ○ Federal + Intentional + Full portion (Employer + Employee share) FICA + Cannot deduct or recover from employee + Also Federal Unemployment + All with added interest / penalties as applicable

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Misclassification ● Liability of Misclassification ○ State Penalties + Vary state to state + Often Department of Labor division + CO as example + Employees / contractors have right to file complaint + Penalties + Back taxes + $5,000 (first offense) or + Back taxes + $25,000 (second or subsequent offense)

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Misclassification Memo of Understanding (MOU) ○ Warning! Agencies talk with each other! ○ Since 2011 - agreement with USDOL / IRS + Majority of all states are on board, keep renewing as well + Extended to: + ESBA + OSHA + OFCCP + Office of Solicitor

Poll Question

Important Worker Classifications

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Statutory Employees Four Categories 1. Agent drivers / commission drivers 2. Full time life insurance salespersons 3. Home workers 4. Traveling or city salespersons Employees for FICA Tax (sometimes FUTA) but not Income Withholding

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Statutory Employees ● Must meet three basic requirements ○ Worker must perform substantially all work ○ Has no substantial investment in facilities (Other than transportation) ○ Continuing work relationship

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Other Worker Classifications ● Domestic Workers ○ Generally treated as employees ○ IRC § 3306 ○ Work done in home of employer - most likely employee + Especially if room/board provided ○ Generally reported on W-2 / 1040 Schedule H of employer + May have state withholding & state unemployment requirements as well

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Other Worker Classifications ● Corporate Officers, Owners, and Directors ○ Officers are specifically employees + IRC § 3121(d)(1) + Unless they do not provide services + Can examine all types of payments + Determine if should be reclassified as wages subject to additional taxes ○ Subchapter S Corporations + Reasonable Salary vs. Distributions

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Other Worker Classifications ● Corporate Officers, Owners, and Directors ○ Corporate Directors + NOT employee + May also receive W-2 / Employee + Compensation for services as Director + Require 1099

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

Common Professions ● Common independent contractor occupations ○ Accountant, Author, Barber/Stylist, Boxer, Courier, Court Reporter ○ Dry Cleaner, Engineering Consultant, Entertainer ○ Gardener/Lawn Care Worker, General Contractor, General Practitioner ○ Interpreter/Translator, Lawyer, Mason, Massage Therapist ○ Doctor, Nurse, Newspaper Carrier, Personal Trainer, Pool Maintenance Person ○ Private Investigator, Radio Presenter, Private Security, Pro Wrestler/Athlete ○ Real Estate Agent, Sales Rep, Stockbroker, Talent Agent, Tattoo Artist ○ Taxi/Limo Driver, Telephone Psychic, Tradesman, Truck Driver, Tutor/Instructor

Poll Question

VCSP (Voluntary Classification Settlement Program)

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

VCSP ● Announcement 2011-64 ○ Newer Revision - Announcement 2012-45 ● Voluntarily reclassify workers as employees ○ For future tax purposes ○ Limited tax liability for past non employee treatment

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

VCSP ● Eligibility ○ Currently treating workers as independent contractors ○ Want to treat the workers as employees moving forward ○ Must have consistently treated workers as nonemployees ○ Must have filed all required 1099 forms + Past three years

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

VCSP ● Eligibility ○ Cannot be currently under audit by the IRS ○ Cannot be currently under investigation for worker classification + Federal, State, or local agency ○ If previously audited for worker classification - not eligible + Unless they complied with results of that audit

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

VCSP ● Effect of VCSP ○ Treat as employees for future tax periods ○ Pay 10% of employment tax liability + Most recent year (under reduced rates of IRC §3509) ○ Not liable for interest / penalties on the liability ○ Not subject to employment tax classification audit for prior years ○ Agree to extend SOL for 3 years

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

VCSP ● Application Process ○ Obtain application - www.irs.gov ○ Review process + Determine eligibility + IRS will contact taxpayer or authorized representative + IRS keeps application process secret from other departments

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

VCSP ● Application Process ○ Acceptance + IRS has complete discretion to accept / deny application + If accepted - enter into closing agreement + Finalize terms of VCSP + Make full and complete payment of amounts due under agreement

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

VCSP ● Expanded via Announcement 2012-45 ○ Taxpayer under audit is eligible + Unless audit is employment tax related + Not allowed if part of affiliated group undergoing employment tax audit ○ Eliminate requirement to extend statute of limitations ○ Clarification - not eligible if contesting in court a classification of workers + From previous audit by government entity

Independent Contractor vs. Employee - Part 1 Tanya Baber, Tax Edge

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Tanya Baber [email protected] | 855-726-EDGE

INSTRUCTOR

Tanya Baber EA, CTRS Tax Edge Tanya has been an Enrolled Agent with the IRS since 2006 and received her Bachelor’s degree in Public Accounting and Business Administration from Colorado Mesa University. Tanya practices as a public accountant from her hometown of Grand Junction, CO, and also helps clients from the east coast to Hawaii and a few internationally. Since 1994, Tanya has guided clients in the areas of accounting and payroll, personal, business, and non-profit tax preparation, planning, consulting and representation as well as solving their complex tax problems.