Pub.1 2019-2020 Issue 3

Bruce L. Olson is a shareholder of the law firm Ray Quinney & Nebeker P.C., and for- mer chair of its Tax Section. Mr. Olson is a leader in Utah in organizing and advising nonprofit and tax-exempt organizations, including some of the largest private foundations, universities, health care institutions, and charities in the State, as well as small exempt organizations. He prepares organizational documents, helps secure tax exemption from the IRS and provides advice on charitable solicitation matters, Board member duties and State and Federal tax matters. employee status, and although most are similar, a ruling by one agency does not bind other agencies. For example, for purposes of determining entitlement to unemployment benefits in Utah, State law presumes that a paid or contracted worker is an employee unless the putative employer can demonstrate that the worker (i) is independently established in work of the same nature and (2) has been free from control or direction over the means of performing the work. On the other hand, the IRS relies upon the three general categories of behavioral control, financial control and the relationship of the parties to determine worker status. Like most tests, these IRS factors relate to how much control a business has over a worker. Behavioral control addresses whether the business has a right to direct and control how workers perform the tasks for which they are hired. In general, anyone who performs services is an employee if the employer can control what will be done and how it will be done, even if the employee has freedom of action. Such details include: • When and where to do the work • What tools or equipment to use • What workers to hire or to assist with the work • Where to purchase supplies and services • What work must be performed by a certain person • What order or sequence to follow Financial control looks at whether a worker has the ability to effect financial decisions. Does the worker have a significant investment in assets or tools? Are there unreimbursed expenses that the worker must bear? Are the worker’s services available to the public? What is the method of payment? Does the worker get paid whether the work is done or not or get paid only if the job is finished? (Independent contractors and generally not employees can realize a profit or loss on a job). Can the worker make business decisions that affect his bottom line? Relationship of the parties looks to whether or not there is a contract between the worker and business and how it is worded; whether the worker gets any type of benefits – vacation and sick pay, pension plan and health or life insur- ance; and the permanency of the relationship such as continuing indefinitely or only for a specific purpose or period. Also, does the worker have his own business which he markets to others? Let the IRS Decide? Because the distinction between employee and inde- pendent contractor necessarily involves distinct facts and circumstances in each case, the employer or worker can request the IRS to make a binding determination whether a specific worker is an independent contractor or an employee by filing Form SS-8. It would be best that this step be pursued after obtaining advice of a professional. Although the IRS conclusion may have persuasive effect on other federal and state agencies, they are not required to follow the IRS determination. What if You are Out of Compliance? A 1978 tax law known as “Section 530” provides relief from misclassification of a worker if an employer, among other requirements, has classified the worker as an independent contractor for all periods; did not treat any other similar workers as employees; filed all Forms 1099 required with respect to the worker; and has a “reasonable basis” for treating the worker as an independent contractor. Ask your tax advisor if Section 530 relief may help avoid a potential misclassification issue. Also, the IRS has instituted the “Voluntary Classification Settlement Program” (“VCSP”) to assist employers who have misclassified employees as independent contractors. This program allows employers who meet certain conditions and are not under IRS or Dept. of Labor investigation to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. Regarding previous misclassification, the employer pays the IRS a very small percentage of the compensation paid to reclassified workers. In addition, the employer will not be liable for interest or penalties on the payments under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the classification of the workers. If you believe that the VCSP would be appropriate for your office or business, you may apply for its benefits using IRS Form 8952. The savings under this program can be substantial. On the other hand, some employers are reluctant to enter the VCSP “amnesty” program for fear of liability under other state and federal laws that do not grant similar leniency, and with a concern that workers might make retroactive claims for previous lost benefits, subjecting the employer to greater liability. The IRS offers a similar, though less generous, program called the Classifica- tion Settlement Program, or CSP, for taxpayers who, during pendency of an IRS audit, agree to properly classify misclassified workers. Ensuring Compliance The following are steps business owners and managers can take to ensure proper classification of workers: 1. If a worker is classified as an independent contractor, be sure to issue a Form 1099 to the worker and encourage payment of taxes. Moreover, whenever you withhold employment taxes from workers classified as employees, always pay the taxes timely to the IRS to avoid steep penalties. 2. Be aware that workers, alone or as a class, can file a whistleblower complaint against you if they believe they have been misclassified. They can also file Form 8919 to report to the IRS the failure to withhold Social Security taxes (and thus increase their retirement benefits). Also, be advised that an employer can be held civilly liable for a workplace injury to a worker improperly classified as an independent contractor instead of as an employee. 3. Use IRS Form SS-8 as an internal checklist to help determine worker sta- tus and, after weighing the benefits and drawbacks, consider filing Form SS-8 with the IRS for a binding determination in uncertain cases. 4. Consider the safe harbor “Section 530” defense, which offers potential relief from misclassification if certain criteria are satisfied. 5. As circumstances warrant, use VCSP or CSP vehicles to reduce potential liability for misclassification. Remember that other state and federal agen- cies may not agree with the IRS characterization and vice versa. 6. Seek professional assistance as classification questions arise and don’t risk taking a position that lacks adequate support. Financial control looks at whether a worker has the ability to effect financial decisions. 25 UP DATE