Check System
Send us your comment!

Your comment will be read by our web staff, but will not be published.

Please do not enter any personal information. Your comment is voluntary and will remain anonymous, therefore we do not collect any information which would enable us to respond to any inquiries.

However, provides a How to Contact the IRS page where you will find guidance on where to submit specific questions.

Share this presentation
Copy and paste the following URL to share this presentation
To email a link to this presentation, click the following:
This program writes a small 'cookie' locally on your computer when you set a bookmark.
If you want to utilize this feature, check the following checkbox. Otherwise, bookmarks will be disabled.
This is an IRS
audio presentation.

To view this page, ensure that Adobe Flash Player
version 10 or greater is installed.

Get Adobe Flash player

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 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.