Independent Contractor or Employee?
Independent Contractor or Employee? Art Martin Interim Chief Financial Officer El Paso ISD
Ann Patton Managing Compensation Consultant TASB
What’s the Issue? • IRS and DOL investigations • Paying individuals as “independent contractors” when they should be paid as employees
Enforcement Agencies Internal Revenue Service Defines who qualifies as an independent contractor (IC) – Unpaid Taxes • Income Tax • FICA (for Social Security District • Medicare
– Fines and Penalties
Enforcement Agencies Department of Labor (DOL) • Unpaid overtime • Minimum wage compliance • Unemployment Insurance • Workers Compensation
Government Agencies • Immigration and Customs Enforcement – I-9 enforcement
Audited Documents • List of reports by calendar year – All payroll records, journals, - all other compensation paid – Chart of accounts – General ledger – Cash disbursement journal/check register – Forms w-2, w-3, w-4 – Forms 1099, 1096 and w-9 – Annual financial report
More…. • Contracts with each contractor • List of all people who district paid rent for equipment or property • List of all vehicles (other than law enforcement), names of employees who used each vehicle, policy usage • Policy of business expense reimbursement • Copy of employee handbook • Copy of Section 125 cafeteria plan • Vendor listing file
And yet more….. • Retirement health savings plan information • Statement identifying the official with authority • Information on all fringe benefits provided to employees – – – –
Health and life insurance Retirement Loans, prizes, incentives Stipends
Administrative Interpretation • DOL issued Administrative Interpretation on July 15, 2015. (No. 2015-1) • Broader definition of an employee vs. independent contractor
Economics Realities Factor • •
Suffered or permitted to work District’s “suffer or permit” an individual work if, as a matter of economic reality, the individual is dependent on the district.
Is the employee economically dependent on the employer or truly in business for him or herself?
Is the work an integral part of the district’s business? • • •
Special Education Fine Arts Police/security
Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? • • • • •
Hire others Purchase materials and equipment Advertise Rent space Manage timetables
How does the worker’s relative investment compare to the employer’s investment? •
Worker needs to make some investment
Does the work performed require special skill and initiative? •
A worker’s business skills, judgment and initiative, not his technical skills will aid in determining whether the worker is economically independent
Is the relationship between the worker and the employer permanent or indefinite? •
Work on a specific project versus working continuously or repeatedly for an employer
What is the nature and degree of the employer’s control? •
Should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent business person.
•
Work on a specific project versus working continuously or repeatedly for an employer
DOL ‘s Conclusion •
“most workers are employees under the FLSA’s broad
definitions. The broad definition of employment under the FLSA as ‘to suffer or permit to work’ and the act’s intended expansive coverage for workers must be considered when applying the economics realities test…”
IRS Targets • Employees allowed to take home vehicles – Should be taxed as a benefit
• Other districts with similar practices – IRS agent wanted the names of other districts who hired these jobs as independent contractors
• District provided uniforms • Other taxable benefits
Strategies to minimize risk • Consider only hiring independent contractors that are incorporated and, as a result have been assigned a federal tax ID number. – Code in General ledger as “x” agency, “y” company
• Develop a list of payments made directly to individuals not on payroll. – Monitor accounts payable
• Keep IC files separate from employee files. Manage these files the same as any other vendor.
Strategies to minimize risk • Refrain from having IC’s complete standard new hire paperwork. Do not provide them with an employee handbook. • Avoid having IC’s work side-by-side with employees performing the same tasks. – Look for independent contractors who perform the same job as those you have on staff. They probably do not meet the guidelines.
Strategies to minimize risk • Develop a contract that reflects – – – –
Agreement limited to a specific term or project IC will determine how task to be accomplished IC not prohibited from working at other entities IC not covered by district’s liability, health or worker compensation insurance.
Strategies to minimize risk • Require the IC’s submit invoices for services prior to processing payment. • Collect documentation that supports the IC status. – Business cards – Yellow page listings – Marketing materials
Contractors to Employees • Employees who were contractors being paid through the payroll process – – – – –
Unemployment tax Workers compensation Medicare/social security (if applicable) No health insurance No TRS
Resources • Administrative Clarification • http://www.dol.gov/whd/workers/Misclassificatio n/AI-2015_1.htm • IRS 20 Factor Control Test – http://www.irs.gov/pub/irs-utl/x-26-07.pdf – http://www.twc.state.tx.us/news/efte/appx_e_twc_ic_ test.
• Taxable Benefits – http://www.irs.gov/pub/irstege/fringe_benefit_fslg.pdf
Contact information Art Martin Interim Chief Financial Officer El Paso ISD
Ann R. Patton Managing Compensation Consultant Texas Association of School Boards [email protected] 1.800.580.7782
How do you know who is an IC? • Level of Behavioral Control – Facts that show if the district has a right to direct and control the worker
• Amount of Financial Control – Facts that show if the district has the right to control business aspects
• Type of relationship – Facts that show the type of business relationship
Let’s Play 20 questions… 1. Is the individual’s work vital to company’s core business? 2. Did the district train the individual on specific tasks? 3. Does the district instruct the individual as to when, where, and how work is performed? 4. Does the district control the sequence or order of work to be performed?
20 questions 5. Does the district set the hours of work? 6. Does the district require the individual to perform the work personally, or can the individual contract out work to others? 7. Can the district prohibit the individual from hiring, supervising and paying assistants? 8. Does the individual perform regular and continuous service?
20 Questions 9. Does the individual provide services on a substantially full time basis to the district? 10.Is the district the sole or major source of income to the individual? 11.Is the work performed on district property? 12.Does the district require the individual to submit regular reports, either oral or written?
20 Questions 13.Does the district pay the individual by the hour, week or month (daily rates count, too)? 14.Does the district pay the individual’s travel and business expenses? 15.Are tools and equipment furnished for the individual? 16.Does the individual have a significant investment in facilities, tools or equipment?
20 Questions 17.Can the individual realize a profit or loss from their services to the district? 18.Does the individual make their services available to the general public? 19.Can the individual terminate the relationship without liability? 20.Does the district have the right to discharge the individual at any time?
What are the risks? • Fines • Penalties • Taxes – Employee’s federal income tax – Employee’s and employer’s share of Medicare Tax • FICA (if social security district)
– Federal Unemployment Tax (FUTA) – Plus interest
• Benefits to eligible employees • Unpaid overtime
Ann Patton Managing Compensation Consultant TASB
What’s the Issue? • IRS and DOL investigations • Paying individuals as “independent contractors” when they should be paid as employees
Enforcement Agencies Internal Revenue Service Defines who qualifies as an independent contractor (IC) – Unpaid Taxes • Income Tax • FICA (for Social Security District • Medicare
– Fines and Penalties
Enforcement Agencies Department of Labor (DOL) • Unpaid overtime • Minimum wage compliance • Unemployment Insurance • Workers Compensation
Government Agencies • Immigration and Customs Enforcement – I-9 enforcement
Audited Documents • List of reports by calendar year – All payroll records, journals, - all other compensation paid – Chart of accounts – General ledger – Cash disbursement journal/check register – Forms w-2, w-3, w-4 – Forms 1099, 1096 and w-9 – Annual financial report
More…. • Contracts with each contractor • List of all people who district paid rent for equipment or property • List of all vehicles (other than law enforcement), names of employees who used each vehicle, policy usage • Policy of business expense reimbursement • Copy of employee handbook • Copy of Section 125 cafeteria plan • Vendor listing file
And yet more….. • Retirement health savings plan information • Statement identifying the official with authority • Information on all fringe benefits provided to employees – – – –
Health and life insurance Retirement Loans, prizes, incentives Stipends
Administrative Interpretation • DOL issued Administrative Interpretation on July 15, 2015. (No. 2015-1) • Broader definition of an employee vs. independent contractor
Economics Realities Factor • •
Suffered or permitted to work District’s “suffer or permit” an individual work if, as a matter of economic reality, the individual is dependent on the district.
Is the employee economically dependent on the employer or truly in business for him or herself?
Is the work an integral part of the district’s business? • • •
Special Education Fine Arts Police/security
Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? • • • • •
Hire others Purchase materials and equipment Advertise Rent space Manage timetables
How does the worker’s relative investment compare to the employer’s investment? •
Worker needs to make some investment
Does the work performed require special skill and initiative? •
A worker’s business skills, judgment and initiative, not his technical skills will aid in determining whether the worker is economically independent
Is the relationship between the worker and the employer permanent or indefinite? •
Work on a specific project versus working continuously or repeatedly for an employer
What is the nature and degree of the employer’s control? •
Should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent business person.
•
Work on a specific project versus working continuously or repeatedly for an employer
DOL ‘s Conclusion •
“most workers are employees under the FLSA’s broad
definitions. The broad definition of employment under the FLSA as ‘to suffer or permit to work’ and the act’s intended expansive coverage for workers must be considered when applying the economics realities test…”
IRS Targets • Employees allowed to take home vehicles – Should be taxed as a benefit
• Other districts with similar practices – IRS agent wanted the names of other districts who hired these jobs as independent contractors
• District provided uniforms • Other taxable benefits
Strategies to minimize risk • Consider only hiring independent contractors that are incorporated and, as a result have been assigned a federal tax ID number. – Code in General ledger as “x” agency, “y” company
• Develop a list of payments made directly to individuals not on payroll. – Monitor accounts payable
• Keep IC files separate from employee files. Manage these files the same as any other vendor.
Strategies to minimize risk • Refrain from having IC’s complete standard new hire paperwork. Do not provide them with an employee handbook. • Avoid having IC’s work side-by-side with employees performing the same tasks. – Look for independent contractors who perform the same job as those you have on staff. They probably do not meet the guidelines.
Strategies to minimize risk • Develop a contract that reflects – – – –
Agreement limited to a specific term or project IC will determine how task to be accomplished IC not prohibited from working at other entities IC not covered by district’s liability, health or worker compensation insurance.
Strategies to minimize risk • Require the IC’s submit invoices for services prior to processing payment. • Collect documentation that supports the IC status. – Business cards – Yellow page listings – Marketing materials
Contractors to Employees • Employees who were contractors being paid through the payroll process – – – – –
Unemployment tax Workers compensation Medicare/social security (if applicable) No health insurance No TRS
Resources • Administrative Clarification • http://www.dol.gov/whd/workers/Misclassificatio n/AI-2015_1.htm • IRS 20 Factor Control Test – http://www.irs.gov/pub/irs-utl/x-26-07.pdf – http://www.twc.state.tx.us/news/efte/appx_e_twc_ic_ test.
• Taxable Benefits – http://www.irs.gov/pub/irstege/fringe_benefit_fslg.pdf
Contact information Art Martin Interim Chief Financial Officer El Paso ISD
Ann R. Patton Managing Compensation Consultant Texas Association of School Boards [email protected] 1.800.580.7782
How do you know who is an IC? • Level of Behavioral Control – Facts that show if the district has a right to direct and control the worker
• Amount of Financial Control – Facts that show if the district has the right to control business aspects
• Type of relationship – Facts that show the type of business relationship
Let’s Play 20 questions… 1. Is the individual’s work vital to company’s core business? 2. Did the district train the individual on specific tasks? 3. Does the district instruct the individual as to when, where, and how work is performed? 4. Does the district control the sequence or order of work to be performed?
20 questions 5. Does the district set the hours of work? 6. Does the district require the individual to perform the work personally, or can the individual contract out work to others? 7. Can the district prohibit the individual from hiring, supervising and paying assistants? 8. Does the individual perform regular and continuous service?
20 Questions 9. Does the individual provide services on a substantially full time basis to the district? 10.Is the district the sole or major source of income to the individual? 11.Is the work performed on district property? 12.Does the district require the individual to submit regular reports, either oral or written?
20 Questions 13.Does the district pay the individual by the hour, week or month (daily rates count, too)? 14.Does the district pay the individual’s travel and business expenses? 15.Are tools and equipment furnished for the individual? 16.Does the individual have a significant investment in facilities, tools or equipment?
20 Questions 17.Can the individual realize a profit or loss from their services to the district? 18.Does the individual make their services available to the general public? 19.Can the individual terminate the relationship without liability? 20.Does the district have the right to discharge the individual at any time?
What are the risks? • Fines • Penalties • Taxes – Employee’s federal income tax – Employee’s and employer’s share of Medicare Tax • FICA (if social security district)
– Federal Unemployment Tax (FUTA) – Plus interest
• Benefits to eligible employees • Unpaid overtime
