Whether a worker is classified as an employee or as an independent contractor makes a big difference for Federal income and employment tax purposes. A company must withhold income taxes and payroll taxes (FICA and Medicare), pay the employer’s share of FICA taxes on the wages plus FUTA tax, and often provide an employee with fringe benefits it makes available to other employees. The business simply sends an independent contractor a Form 1099-MISC showing how much he was paid for the year. With the employer health care shared responsibility penalty coming in 2015, the distinction between employee and independent contractor is more important than ever.

1. BIZGROWTH
STRATEGIES
Special
Health Care
Reform
Edition
Article reprinted from Winter 2014
IDEAS TO HELP GROW YOUR BUSINESS
Tax & Accounting
Looming Shared Responsibility Penalty Magnifies Worker Classification Issues
W
reduced payment to cover back taxes. Refer to our Tax Alert,
IRS Expands Relief Program for Employers with Misclassified
Workers, for more information on the VCSP.
Originally set to start in 2014, the Affordable Care Act (ACA)
imposes a nondeductible excise tax (the “shared responsibility
payment”) on large employers who do not offer minimum
essential health coverage at an affordable rate through an
employer-sponsored plan, providing minimum value to 95% or
more of their full-time employees. A full-time employee is one
who on average works 30 or more hours per week. In July,
the IRS delayed implementation of the employer reporting
requirements and the shared responsibility payment until 2015.
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hether a worker is classified as an employee or as
an independent contractor makes a big difference
for Federal income and employment tax purposes.
A company must withhold income taxes and payroll taxes
(FICA and Medicare), pay the employer’s share of FICA taxes
on the wages plus FUTA tax, and often provide an employee
with fringe benefits it makes available to other employees.
The business simply sends an independent contractor a
Form 1099-MISC showing how much he was paid for the
year. With the employer health care shared responsibility
penalty coming in 2015, the distinction between employee
and independent contractor is more important than ever.
Behavioral Control looks at facts showing whether the
business has the right to direct or control how the worker
performs the specific tasks they were hired to do. Factors
considered include instructions given, training received and/or
other means of behavioral control.
Generally, a large employer is one who employed
an average of at least 50 full-time employees and fulltime equivalent employees during the preceding calendar
year. Workers who are properly classified as independent
contractors will not count toward the 50-employee threshold
that triggers the shared responsibility payment requirement
imposed on large employers. In addition, these independent
contractors will not factor into the calculation of either of
the excise taxes. The excise taxes are calculated based upon
the number of full-time employees. As a result, employers
may be tempted to reclassify workers currently classified as
employees to independent contractors or, when adding workers,
to hire independent contractors rather than employees. The
consequences of misclassifying employees as independent
contractors have always been severe – additional payroll taxes,
interest and steep penalties. The shared responsibility excise
tax makes the consequences even more costly.
The IRS and the states are well aware of these issues
and are aggressively investigating worker classification issues.
In an attempt to increase compliance in this area, the IRS
in late 2011 launched an amnesty program – the Voluntary
Classification Settlement Program (VCSP). The VCSP allows
employers to voluntarily reclassify workers in exchange for a
our
business is growing yours
So, how does a business determine who is an employee
and who is an independent contractor? Unfortunately, the
answer to this question is complex and there is no “black
and white” answer. Historically, the IRS had developed a
list of 20 factors based on “common law” rules to make its
classifications. Because the common law factors change over
time, however, the IRS now focuses on three main categories
to determine the degree of control an employer exercises over
a worker:
Financial Control looks at whether the business has a
right to direct or control factors such as significant investment,
unreimbursed expenses, services available to the relevant
market, method of payment and opportunity for profit or loss.
Relationship of the Parties looks at evidence to determine
how the parties involved perceive their relationship. This
includes intent of parties/written contracts, employee benefits,
discharge or termination, permanency and regular business
activity.
A business must analyze all three factors, weighing
any individual category or factor based on the facts and
circumstances basis. Court cases on the issue have resulted
in different outcomes, providing little guidance. Ultimately,
there is no litmus test for exactly how many of these factors
must be satisfied, nor are these factors uniformly applied. The
key to successfully classifying workers correctly is to factually
document and support your position.
Using independent contractors can be an effective way
to control costs by reducing payroll taxes, benefits costs
and the shared responsibility excise tax. Misclassifying
employees as independent contractors, however, can be
disastrous. Contact a tax professional to discuss whether
your workers are classified properly.
RON PRICE
CBIZ MHM, LLC • Minneapolis, MN
612.339.7811 • rprice@cbiz.com