Good day, ladies and gentlemen, and welcome to your IRS Webinar on Worker Classification. At this
time, it is my pleasure to turn the floor over to IRS Representative, Mildred. Ma'am, the floor
is yours. Mildred Welcome to the Internal Revenue Service's Federal, State, & Local Presentation
on Worker Classification. My name is Mildred. Billy And my name is Billy. We're excited to bring
you this webinar, which will help report payments to individuals who provide services to you.
Mildred In this presentation, which isn't official guidance, we'll discuss the definition of an
employee and how to describe whether a worker is an employee or independent contractor. We can't
provide specific answers to your individual situations, because worker classification
determinations are made on a case by case basis, depending on specific facts and circumstances.
Billy We can't determine if an individual is entitled to benefit. This presentation only
discusses whether amounts paid to an individual for services should be reported on a Form W-2 or
Form 1099. We'll look at the specifics of: who are employees; Form SS-8; Classification
Settlement Agreements; if the individual is an employee, what do you do? Mildred There's no
formal definition of the term Independent Contractor. Generally, an Independent Contractor is an
individual who performs services for an entity. But the entity controls only the result of the
work, not the means and methods of accomplishing the result. Billy Let's look at the definition
of an employee. Most workers fall under the general Common Law Rules. In some cases, a federal
statute indicates whether an individual is an employee. In other cases, a Section 218 Agreement
mandates certain groups must be treated as employees. We'll review Section 218 situations before
we get into the Common Law Rules. A Section 218 Agreement is a voluntary contract between each
State and the Social Security Administration. Section 218 Agreements bring employees in
designated positions in a state or local government under Social Security coverage. These
agreements vary by state and entity. If a Section 218 Agreement covers a position, then the
worker is likely an employee. For more on Section 218 Agreements, go to Publication 963
Federal-State Reference Guide. If you have questions about Section 218 Agreements contact your
State Social Security Administrator listed on the link shown on the slide. Now, let's talk about
elected and appointed officials. Mildred The IRS regulations state elected and most appointed
officials are considered employees for income tax withholding purposes under Internal Revenue
Code Section 3401(c). These workers therefore can't be considered self-employed. In general, if
elected and most appointed individuals perform services as an official of a government entity and
their salaries are paid from government funds, they are employees. Therefore, their wages are
subject to applicable federal employment taxes. Examples of public officials include Governor,
Mayor, County Commissioner, Judge, Justice of the Peace, Sheriff, Registrar of Deeds and Board
Members. Billy Now that we've discussed Worker Classification Rules related to Section 218
Agreements, and elected and appointed officials, let's move on to law that affects most other
workers in the public sector. Generally, under Treasury Regulation 31.3121, an employer-employee
relationship exists when the person for whom services are performed has the right to direct and
control the individual who performs the services, not only as to the result, but also as to the
details and means. The right to direct and control is the key, it is not necessary that the
entity direct or control the way the services are performed. It's enough if the entity has the
right to do so. Mildred IRS Revenue Ruling 87-41 contains factors, commonly referred to as the 20
Common-Law Factors that assesses whether an entity has the right to direct and control the
actions of the worker. Although this revenue ruling is still valid, the IRS has grouped the more
relevant factors into 3 main categories of evidence that show whether a worker is an employee or
independent contractor: behavioral control, financial control, relationship of the parties.
Next, we'll look at each of these factors in more detail. Billy First, let's look at behavioral
control. Behavioral control applies to how an outcome is achieved. The key issues for behavioral
control are instructions in training. When we talk about types of instruction, we mean when and
where to do the work, what tools or equipment to use, what workers to hire, or to help with the
work, where to purchase supplies and services. What work must be performed by a specified
individual, what order or sequence to follow when performing the work. The degree of instruction
means that the more detailed the instructions, the more control the entity exercises over the
worker. The amount of instruction needed varies among different positions. More detailed
instructions indicate that the worker is an employee. Less detailed instructions reflect less
control, indicating that the worker is more likely an independent contractor. Even if no
instructions are given, in some circumstances, enough behavioral control may exist, that the
entity has the right to control how the work results are achieved. The next factor is the
evaluation system. If an evaluation system measures the details of how the work is performed,
then these factors will point to an employee. If the evaluation system measures just the result,
then this can point to either independent contractor or an employee. And finally, there's
training. Training means explaining detailed methods and procedures to be used in performing a
task, if the entity provides the worker with training or how to do the job? This indicates if
the entity wants the job done in a specific way. This is strong evidence the worker is an
employee. Periodic or ongoing training about procedures and methods is even stronger evidence of
an employer-employee relationship. Mildred As we said earlier, when looking at behavioral control,
the key factor consider is whether the entity retains the RIGHT to control the worker and the
details of how the services are performed, regardless of whether the entity actually exercises
that right. Control as a matter of degree and is rarely absolute. Even in the clearest case of an
independent contractor, the worker may be constrained in some way. For example, you might tell a
construction worker he can't start a construction project until school ends. However, he can
still be an independent contractor. On the other hand, employees may have independence in some
areas. For example, your employees may have flexible work hours, or be allowed to work from home
some days. That doesn't make them contractors. An entity may lack the knowledge to instruct some
highly specialized professionals. In other cases, the task may require little or no instruction.
For instance, a physical therapist hired by a school district requires no training from the
school. The worker already has the education and training prior to being hired. The school
probably isn't qualified to train the worker. In this example, providing instruction and
training aren't important. They become a neutral factor in determining whether the worker is an
employee or an independent contractor. All of the facts would be need to be considered to make
the final determination. It is important to know when analyzing common law employment you must
look at the entire relationship. Indicators of employee status and independent contractor status
may be seen in almost every case. You can't setup column and tally the number of employee
aspects compared to the contractor aspect. It doesn't work that way. The entirety of the
relationship and all factors must be looked at to come to a determination, various factors weigh
differently for different positions and relationship. The final determination is based on the
facts and circumstances of each situation. Billy Now, the second category, financial control
focuses on whether the entity has the right to direct in control the economic aspects of the
workers' activity. Let's talk about several different ways an entity exercises financial control.
First, is the worker making an investment and incurring risk? An independent contractor often
has a significant investment and purchasing equipment, materials and supplies needed to perform
the services. It can also include an investment in advertising, staff, training or systems.
However, in many occupations, such as construction workers spend hundreds of dollars on the tools
and equipment they use, and are still considered to be employees. There aren't precise dollar
limits that must be met to have a significant investment. Furthermore, a significant investment
isn't necessary for independent contractor status, as some types of work simply don't require
large expenditures. Next are expenses, employers are more likely to reimburse employees for their
job expenses, while entities usually don't reimburse independent contractors for expenses.
However, employees may also incur expenses that aren't reimbursed. Mildred An example of an
employee not being reimbursed for expenses would be:A teacher buys erasers, posters, and other
minor supplies throughout the year. The teacher isn't reimbursed for these expenses. But minor
expenses incurred by an employee don't indicate an independent contractor relationship, the
teacher is an employee. Billy The opportunity to make a profit or loss is another important
factor. If a worker has a significant investment in the tools and equipment used, and has
unreimbursed expenses, he has a greater opportunity to lose money. That is his expenses will
exceed his income from the work. Having the possibility of incurring a loss indicates the worker
is an independent contractor. Another important factor is whether the worker makes his or her
services available to the public. Independent contractors often advertise maintain a visible
business location and are available to the relevant market. Also, an independent contractor is
generally free to seek out business opportunities, evidence of liability insurance or other
certificate to verify their legal status as a business should be requested. An uninsured
individual may not be in the business, it may be deemed an employee. Finally, the method of
payment must be considered. An employee is generally paid an hourly wage or salary with little
direct correlation to their productivity in the short run. Furthermore, if a worker continues to
be paid during downtime, this is evidence they are an employee, an independent contractor might
be paid a flat fee according to contractual completion and send the invoice to the entity for
payment. Again, just as with behavioral control there is no one factor that takes precedence over
the others. It's a matter of looking at the whole relationship and seeing where the
preponderance of evidence lies. Mildred The third category is to look at some of the elements that
may be present in the type of relationship between the 2 parties. Is there a written contract?
Although a contract may state that the worker is an employee or an independent contractor, this
isn't enough to determine the worker status. The IRS isn't required to follow a contract stating
the worker is an independent contractor responsible for paying his or her own self-employment
tax. How the parties work together determines whether the worker is an employee or an independent
contractor? Are there employee-type benefits provided? Employee benefits include things like
insurance, pension plans, paid vacation, sick days and disability insurance. Entities generally
don't grant these benefits to independent contractors. However, the lack of these types of
benefits doesn't necessarily mean the worker is an independent contractor. Billy How permanent is
the relationship? If you hire a worker with the expectation that the relationship will continue
indefinitely rather than for a specific project or period, this is generally considered evidence
that the intent was to create an employer-employee relationship. Mildred Also, are the services
providing a key activity of the entity? If the success or viability of the business depends on
the services provided by a worker, then it is more likely the worker is an employee. For
example, if a law firm hires an attorney, it is likely that it will present the attorneys' work
as its own, and wouldn't be able to function successfully without the work of the attorney. This
would indicate an employer-employee relationship. Another example would be a school in the
business of education. When the school hires a teacher, that teachers work is an integral part
of the school's business, the teacher is likely to be considered an employee of the school by the
IRS. Billy So what do you do if you're not sure if you have an employee or independent
contractor? You can file Form SS-8, determination of worker status for purposes of federal
employment taxes and income tax withholding. After reviewing these 3 categories of evidence, if
you're still unsure whether a worker is an employee or an independent contractor, a Form SS-8 can
be filed with the IRS. The form may be filed by either the entity or the worker in the IRS will
request the same information from both the worker and the entity. The IRS will review the facts
and circumstances and officially determine the worker's status. Submitting this form to the IRS
isn't an examination nor can it change the results of an examination already conducted. You can
also use the form to ask pertinent questions, which will help in making a determination. The IRS
doesn't charge a user fee for an SS-8 determination, and it may take at least 6 months to receive
a response. Mildred Another important point for employers to be aware of is Section 530 of the
Revenue Act of 1978. This isn't a section of the Internal Revenue Code, but it is important for
employers to be aware of it. Section 530 provides employers with relief from federal employment
tax obligations if all 3 of the following requirements are met: reasonable basis, substantive
consistency and reporting consistency. We'll explain each one. Billy First, reasonable basis. You
may satisfy the reasonable basis requirement. If you can show, you relied on a related court case
about federal taxes or a ruling issued to you by the IRS at the time you made the payments. If
you had a previous IRS audit, at a time when you treated similar workers as independent
contractors in the IRS didn't reclassify those workers as employees, you may satisfy reasonable
basis. However, you may not rely on an audit commenced after December 31, 1996, unless the audit
included an examination for employment tax purposes, whether the individual involved or the
individual holding a substantially similar position should be treated as your employee. You may
satisfy reasonable basis, if you can show that at the time you treated the workers as independent
contractors, you relied upon documented knowledge that a significant segment of your industry
treated workers similarly or you relied on some other basis, for example, the advice of a
business attorney or accountant who knew the facts of your business. If you don't have a
reasonable basis for treating workers as independent contractors, you don't meet Section 530
relief. Mildred Substantive consistency is satisfied when you can show that all workers that are
doing the same kind of work are treated the same way. If you have administrative staff, you treat
as employees and you have other paid workers who perform the same functions as administrative
staff, but are not treated as employees, then there is no substantive consistency. Billy
Reporting consistency refers to how the earnings of the workers are reported to the IRS. For
example, all the workers treated as independent contractors and paid $600 or more in a calendar
year must have had the correct Form 1099 filed and furnished. Relief isn't available for any
year and for any worker for whom you did not file the required information returns. Mildred
Internal Revenue Code Section 3509 provides reduced rates for federal income tax withholding, and
the employee's share of Social Security and Medicare tax if an employer failed to withhold
employment taxes by reason of treating employees as non-employees. Section 3509 applies to worker
classification adjustments only. It does not apply to wage adjustments. Billy If IRC Section 3509
applies, the offset provisions of IRC Section 3402(d) and Section 6521 don't apply. Application
of Section 3509 is mandatory if the criteria are satisfied. Mildred The IRS and other federal and
state agencies are encouraging employers to correctly determine the proper employment tax
relationship between the affected parties. The IRS has implemented a Voluntary Classification
Settlement Program or VCSP, to help correct worker classification issues. This voluntary program
provides an opportunity for employers to reclassify their workers as employees for future tax
periods with partial relief from past federal employment taxes on compensation paid to those
workers in prior periods. IRS Announcement 2012-45 provides notice and information about the
revised program. Billy To participate in this program, the employer must meet certain eligibility
requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary
Classification Settlement Program. As we said, an entity participating in the VCSP will agree to
prospectively treat the class or classes of workers as employees for future tax periods. In
exchange, the taxpayer will pay 10% of their employment tax liability that would have been due on
compensation paid to the workers for the most recent tax year, determined under reduced rates,
not be liable for any interest and penalties on the amount, and not be subject to employment tax
audits for prior years with respect to the worker classification of the workers being
reclassified under the VCSP. Participation in the program will often require a closing agreement
between the taxpayer and the IRS. Mildred This program applies to taxpayers currently treating
their workers or a class or group of workers as independent contractors or other non-employees
and ones who prospectively treat the workers as employees. A taxpayer must have consistently
treated the workers as independent contractors or other non-employees and must have filed all
required Forms 1099 for the workers the previous 3 years to be reclassified under the VCSP.
Additionally, the taxpayer can't be under an IRS employment tax audit or an audit by the
Department of Labor or a state government agency concerning the classification of the workers.
The IRS or the Department of Labor has previously audited a taxpayer concerning the
classification of the workers, the taxpayer will be eligible only if the taxpayer has complied
with the results of the audit and if not currently contesting the classification in court.
Exempt organizations and government entities may participate in the VCSP if they meet all the
eligibility requirements. Billy Now, let's look at what the entity needs to do for an employee.
If a determination has been made, that the person being paid is an employee, verify that he or
she is legally eligible to work in the U.S. by having them complete a Form I-9, Employment
Eligibility Verification. Employers can obtain the I-9 form from the U.S. Citizenship and
Immigration Services at 888-464-4218 or online at www.uscis.gov. Also have the employee fill out
a Form W-4, Employee Withholding Allowance Certificate. The employer needs a Form W-4 from each
employee to determine how much income tax to withhold based on marital status and the number of
withholding allowances claimed. Employees can get help figuring out how many withholding
allowances to claim by using the withholding calculator at the link shown on the slide. Keep the
Form W-4 in your records. At the end of the year, the employer completes Form W-2 Wage and Tax
Statement. A copy of this form must be given to the employee by January 31 of the following
year, whether you file using paper forms or electronically, both Forms W-2 and W-3 are to be
filed with SSA by January 31 of the following year. Mildred Here are some additional resources
you can go to for more information on worker classification. In summary, the status of a worker
as either an independent contractor or an employee must be determined accurately to ensure that
entities and workers can anticipate and meet their tax responsibilities timely and accurately.
This session was intended to raise your awareness of the worker classification issue by going
over the factors used to weigh classification questions, how to report payments, what forms to
file, how to get help from the IRS by using Form SS-8, and the Voluntary Classification
Settlement Program. This webinar will be available for viewing on the IRS video portal's soon.
Thank you for attending. Operator Ladies and gentlemen, thank you. This does conclude today's
webinar. We thank you for your participation. Have a great day.