Understanding Employee vs. Contractor Designation

This came directly from the IRS website. Since, this has become such a critical issue with the IRS and they are taking a much closer look at the Employee vs. Independent Contractor Designation. I thought it was a good idea to pass this on to all business owners out there.

https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

FS-2017-09, July 20, 2017

The Internal Revenue Service reminds small businesses of the importance of understanding and correctly applying the rules for classifying a worker as an employee or an independent contractor. For federal employment tax purposes, a business must examine the relationship between it and the worker. The IRS Small Business and Self-Employed Tax Center on the IRS website offers helpful resources.

Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. Small businesses should consider all evidence of the degree of control and independence in the employer/worker relationship. Whether a worker is an independent contractor or employee depends on the facts in each situation.

Help with Deciding

To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.

Behavioral Control:  A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:

  • Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
  • Degree of instruction, more detailed instructions may indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
  • Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
  • Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:

  • Significant investment in the equipment the worker uses in working for someone else.
  • Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
  • Opportunity for profit or loss is often an indicator of an independent contractor.
  • Services available to the market. Independent contractors are generally free to seek out business opportunities.
  • Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

  • Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
  • Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
  • The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
  • Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

Consequences of Misclassifying an Employee

Classifying an employee as an independent contractor with no reasonable basis for doing so makes employers liable for employment taxes. Certain employers that can provide a reasonable basis for not treating a worker as an employee may have the opportunity to avoid paying employment taxes. See Publication 1976, Section 530  Employment Tax Relief Requirements for more information.

In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.

The IRS can help employers determine the status of their workers by using Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer’s Supplemental Tax Guide, is also an excellent resource.

Workers who believe an employer improperly classified them as independent contractors can use Form 8919 to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.

The IRS Small Business and Self-Employed Tax Center provides a multitude of resources for small businesses as well as self-employed independent contractors.

Additional Resources:

 

“Are they an Employee or Are they an Independent Contractor” that is the Question. As a Small Business Owner you should understand the difference and the IRS rules.

Why do business owners want to have Independent Contractors?

If a business can classify a person performing work for them, what are the advantages to the business owner?
One of the main reasons is a tax savings as they do not have to withhold payroll taxes and do not have to pay the employer match on payroll taxes. Another reason is they do not have to offer the independent contractor health insurance, workmen’s compensation, or 401K plans. Independent contractors are also not covered by minimum wage and hour laws as the business owner does not have to pay downtime or over time to the independent contractor.
Why does the IRS want individuals to be classified as Employees?

The major reason it is easier to collect taxes from an employer for Social Security, Medicare and Federal Income Taxes from a business than collecting Self-Employment Taxes from and independent contractor. Self Employment Taxes are the equivalent of the Social Security and Medicare taxes. Self employed individuals also can reduce the amount of taxes paid with business deductions. Where employees pay and withhold Social Security, Medicare and Income taxes based on their gross salaries.
What are the rules that determine whether and individual is an Employee or an Independent Contractor?

1. Instructions:

A worker who is required to follow the instructions of another person about how, when, and where the work is to be done is ordinarily an employee. The control factor is present; if the person for whom the services are being performed has the right to set required compliance with instructions for the person performing the services.

2. Training:

Requiring the worker to be trained by an more experienced employee, requiring them to attend meetings, or by using other methods of training to perform the work using a particular manner indicates that this person should be classified as an ordinary employee.

3. Integration:

It is when the integration of the workers services into the business’s operations and the worker is subject to direction and control of the business. When the success or continuation of the business depends to an appreciable degree upon the performance of certain services the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.

4. Services Rendered Personally:

If the services must be rendered personally, presumably by the person or persons for who the services are performed are interested in the methods used to accomplish the work as well as in the results.

5. Hiring, Supervising, and Paying Assistants:

If the business owner or owners for whom the services are performed hire, supervise, and pay assistants, that fact generally shows control over the workers on the job. However, if one of the workers hires, supervises, and pays the other assistants in performance of a contact under which the worker agrees to provide materials and labor, and under which the worker is responsible only for the attainment of a result, this fact indicates this worker to be classified as an independent contractor.

 

 

6. Continuing Relationship:

A continuing relationship between the worker and the business owner(s) for whom the work is performed indicates that and employer-employee relationship exist. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.

7. Set Hours of Work:

The setting of specific work hours by the business owner(s) for whom the work is performed is a factor in indicating control.

8. Full time required:

If the worker must devote full time to the business of the business owner(s) for whom the services are performed then the business owner(s) have control over the amount of time the worker spends working and restricts the worker from doing other gainful work. An independent contractor on the other hand is free to work when and for whom they choose.

9. Doing work on the business owner(s) premises:

If the work performed on the premises of the business owner(s) for whom the work is performed, that suggests control over the worker, especially if the work could be done elsewhere.

Rev. Rul. 56-660, 1956-2 C.B. 693. Work done off the premises of the business owner(s) receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer’s premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.

 

 

 

10. Order or sequence set:

If a worker must perform services in the order or sequence set by the business owner(s) for whom the services are performed, then that is a factor that shows the worker is not free to follow the worker’s own pattern of work, but must follow the established routines and schedules of the business owner(s) for whom the services are performed. Sometime because of the nature of the occupation, the business owner(s) for whom the services do not set the order of the service or set the order infrequently. It is sufficient to indicate control if the business owner(s) retain the right to do so.

11. Oral or written reports:

A requirement that the worker submit regular or written reports to the business owner(s) for whom the services are performed indicates a degree of control.

12. Payment by the hour, week, month:

Payment by the hour, week, or month generally points to an employer-employee relationship, provide that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on straight commission generally indicates that the worker is an independent contractor.

13. Payment of business and/or traveling expenses:

If the business owner(s) for whom the services are preformed ordinarily pay the worker’s business and –or traveling expenses, those worker(s) is ordinarily an employee. If the employer is able to control expenses generally retains the right to regulate and direct the worker’s business activities.

14. Furnishing of tools and materials:

If the business owner(s) for whom the services are performed furnish significant tolls, materials and other equipment tends to show the existence of an employer-employee relationship.

 

15. Significant investment:

If the worker invest in facilities that are used by the worker in performing services and are not typically maintained by the employees (such as the maintenance of an office rented at fair value from and unrelated party) this tend to indicate that the worker is an independent contractor. However, the lack of investment in facilities indicates a dependence on the business owner(s) for whom the services are being performed for such facilities and indicate the existence of an employer-employee relationship.

16. Realization of Profit or Loss:

A worker who can realize a profit or suffer a loss as the result of the workers services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor.

Rul. 70-309. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor. The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risk to support treatment as an independent contractor.

17. Working for more than one business at a time:

If the worker performs more than the minims services for a multiple of unrelated businesses at the same time that would generally indicate the worker is an independent contractor.

Rev. Rul. 70-572, 1970-2 C.B. 221. However, a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.

18. Making services available to the general Public:

If a worker that makes their service available to the general public on a regular and consistent basis indicates an independent contractor relationship.

 

 

19. Right to work discharge

The right to discharge a worker can indicate that the worker is an employee and the business owner(s) possessing the right is an employer.
If an employer exercises control through the threat of dismissal, cause the worker to obey the employers instructions. An independent contractor cannot be fired so long as the independent contractor produces results that meet the contract specifications.

20. Right to terminate:

If the worker has the right to end their relationship with the business owner(s) for whom the services are performed at any time they wish without incurring, liability, that factor indicates and employer-employee relationship.

 

 

 

 

 

What happens if individuals are classified incorrectly?

The IRS has the right to audit 3 years and the consequences for misclassifying and individual can be over 10% (of compensation paid) in tax for 3 years plus penalties and interest. This could put smaller business in the hole they can never climb out of.
Be sure to always file form 1099 to be eligible for any of the three relief methods available.
Section 530 refers to section 530 of the Revenue Act of 1978.

Section 530 provides businesses with relief from federal employment tax obligations if certain conditions are met. Businesses may be relieved of their obligations both retroactively and prospectively if these conditions are met.
Section 530 was originally enacted as a response to taxpayer complaints that the IRS was too aggressive with respect to worker reclassification issues.
In its training materials the IRS states that Section 530 is a relief provision that should be considered as the first step in any case involving worker reclassification.
Section 530 allows businesses to treat workers as independent contractors if they meet the following conditions:
• Complied with the Form 1099 reporting requirements with respect to compensation paid the workers (reporting consistency)
• Consistently treated the workers (and similarly situated workers) as independent contractors (substantive consistency)
• Had a reasonable basis for treating the workers as independent contractors
The classification settlement program establishes procedures for settlement in cases where a taxpayer does not qualify for section 530 relief.
Generally the situations in question would be where a taxpayer meets the reporting consistency requirement and only one of the two remaining requirements (substantive consistency and reasonable basis).

Under the classification settlement program, the taxpayer will have to agree to treat the workers as employees on a prospective basis.
The IRS also has a program in which businesses can voluntarily reclassify individuals formerly classified as independent contractors as employees in the future for a fraction of the penalty that would be paid if caught.
HOW TO GUARD AGAINST RECLASSIFICATION

Business owners make sure you meet the requirements of section 530 relief for reporting consistency (making sure Forms 1099 are filed timely), substantive consistency and reasonable basis.
Business owner(s) do sign contracts with independent contractors that specifically state they will be treated as independent contractors. These contracts would ideally have ending dates as opposed to being open ended.
Do not allow independent contractors to participate in any employee benefit packages.
Have independent contractors carry their own workman’s compensation policies.
Do not give independent contractors employee manuals or instructions so detailed as to show control by the business.
Have the independent contractor submit bills for services rendered. Include in the independent contractor’s file any advertisements and business cards or anything else showing that they are holding themselves out as independent contractors.
Here is the link to the IRS website to gain further information:
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

Lord Buddha explains how to handle insult and maintain compassion

Just thought this was interesting and quite fitting coming into the New Year.

One day Buddha was walking through a village. A very angry and rude young man came up and began insulting him. You have no right teaching others, he shouted. You are as stupid as everyone else. You are nothing but a fake.

Buddha was not upset by these insults. Instead he asked the young man Tell me, if you buy a gift for someone, and that person does not take it, to whom does the gift belong?

The man was surprised to be asked such a strange question and answered, It would belong to me, because I bought the gift.

The Buddha smiled and said, That is correct. And it is exactly the same with your anger. If you become angry with me and I do not get insulted, then the anger falls back on you. You are then the only one who becomes unhappy, not me. All you have done is hurt yourself.

If you want to stop hurting yourself, you must get rid of your anger and become loving instead. When you hate others, you yourself become unhappy. But when you love others, everyone is happy.

The young man listened closely to these wise words of the Buddha. You are right, O Enlightened One, he said. Please teach me the path of love. I wish to become your follower.

The Buddha answered kindly, Of course. I teach anyone who truly wants to learn.

Payroll Tax Updates for 2018 Overview

Payroll Tax Updates

Here’s the latest on what’s changing for 2018. We’ve updated our service to incorporate the items below, so you don’t have to worry.

Social Security wage base is changing – The 2018 Social Security wage base will increase to $128,400.

Additional Medicare Tax – Wages in excess of $200,000 will continue to be subject to an extra 0.9% Medicare tax in 2018.

Credit reduction states – If you pay wages in California, you will pay more in federal unemployment tax (FUTA) when you file your Form 940 for 2017. Visit the IRS website for more information.

New W-2 and 1099 filing deadlines – In an effort to combat fraud, The Protecting Americans from Tax Hikes (PATH) Act of 2015 was passed by Congress and signed by President Obama in December 2015. One key provision revises the filing deadline for Form W-2 and certain types of Form 1099.

The deadline for both employee and agency copies is January 31, 2018.

Is Your Bookkeeping Up-to-Date?

B Meyer Bookkeeping Solutions, LLC

Why is it critical to keep your bookkeeping up-to-date? Bookkeeping is one of those chores most business owners really do not want to do. However, it is critical to the success or failure of your business.

I have talked to business owners who check their bank balances everyday and as long as they have money in the bank they believe they are fine and all is well. Looks can be deceiving the balance in the bank account is only current deposits less cleared checks (those that have cleared through the bank) the balance does not reflect outstanding checks that have not cleared the bank. Therefore the bank account balance can be deceptive in making you believe you have more money in the bank that you actually have. Knowing if you’re are making or losing money is paramount to the success of your business.  B Meyer Bookkeeping Solutions, LLC is…

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Is Your Bookkeeping Up-to-Date?

Why is it critical to keep your bookkeeping up-to-date? Bookkeeping is one of those chores most business owners really do not want to do. However, it is critical to the success or failure of your business.

I have talked to business owners who check their bank balances everyday and as long as they have money in the bank they believe they are fine and all is well. Looks can be deceiving the balance in the bank account is only current deposits less cleared checks (those that have cleared through the bank) the balance does not reflect outstanding checks that have not cleared the bank. Therefore the bank account balance can be deceptive in making you believe you have more money in the bank that you actually have. Knowing if you’re are making or losing money is paramount to the success of your business.  B Meyer Bookkeeping Solutions, LLC is more than bookkeeping and payroll. We are partners in your success!

Cash flow is the king!

All you have to do is look up the statics from the SBA and see how many business fail in the first few years of business. Why is this happening? Most business owners are great at what they do; they are experts in their fields but they are not bookkeepers and may not totally understand what the numbers on their financial statements are telling them.

How do I as a business owner track my cash flow?

Keeping your books up to date is the starting point. First you need to make sure that all your customer invoices have been entered into the bookkeeping system so you can track who has paid you and who still owes you money (your accounts receivable).  The second step is to make sure you have entered all the bills from your vendors and independent contractors. You need to know who you owe, how much you owe and when the payment is due (accounts payable).

What are the steps to getting my books up to date?

First step is to select the correct accounting software for your business. We use and recommend QuickBooks accounting software either desktop or online; as we are QuickBooks experts. B Meyer Bookkeeping will work hand in hand with you to make sure we get all the data you have input into the accounting software we have determined is best for your business.

Next we have to review and/or revise your chart of accounts, items, products and/or services you offered, customer list, vendor list and employee list if you have employees. If you are already using QuickBooks then we will review the above with you to make sure they are accurate for your business needs. B Meyer wants to make sure you are able to extract the right financial information you need to run your business.

Once we have the basics in place then we start to input the data to makes sure your records are current this includes asset, expense, credit card and loans to build the Balance Sheet and to build in the accounts needed for an accurate Profit and Loss statement. Reconciling all the accounts in your current records with the new information and preparing financial statements are correct.

Scheduled Meetings:

Now that we have determined the bookkeeping is up-to-date and accurate and we have a good set of financial reports on your business we can move forward to helping you direct your business to reach your Goals. If you are a local business we will meet to arrange to meet to make sure you have an understanding of your financial statements. If you are out of the local area then we will meet online so that we can review the financial statements with you. When we meet will be determined by which level of service you have chosen in our first free consultation. B Meyer Bookkeeping Solutions will offer you several different service levels for you to choose from so that you will know how to budget for our services and to make sure you are getting what you need as the business owner to successfully run your business.

Keeping Current:

It is important to the success of your business to keep your bookkeeping current.  B Meyer Bookkeeping Solutions will do this for you by maintaining your books and keeping them up-to-date. We will make sure that all entries for vendor payments and customers invoicing are properly entered and make sure they match your bank and credit card accounts. We will look at your expenses to see what you are spending and where. We can also evaluate your customers with you to see who your best customers are. We will reconcile bank and credit card accounts for you which is part of all our packages. Keeping your bookkeeping up-to-date includes making sure you are able to file your tax returns and government filings on time so to eliminate costly fines and penalties.

When should we start?

If you are behind in your bookkeeping then the sooner we get started the better. Call now for a our free consultation so we can show you how we can benefit you and your business not only as bookkeeping and payroll services providers, but also as trusted advisors to help you reach your goals for your business and personal life.

Call 281-240-0326 or go to our website at www.bmeyerbookkeeping.com and fill out our contact us form.