Tax Exempt &

Government Entities

Federal, State, and Local Governments

Employee or Independent Contractor?

www.irs.gov

Why?

• Workers comp. providers

• Department of Labor

• State governments

• Social Security Administration

• Millions misclassified

• Prevent future liability

• Employers fail to deposit their full share

• Workers miss out on benefits

Objectives

• Define an employee under the Internal Revenue

Code

• Determine whether a worker is an employee or

independent contractor

• Report payments to workers

• Get assistance using Form SS-8

• Correct for misclassifications (VCSP)

Define “Employee”

• Internal Revenue Code & Treasury Regulations:

Common law

• Specific tax statute

• Section 218 defined

Public Officials

• Mayor• Legislator or elected representative• County commissioner• Judge/justice of the peace• County/city attorney, marshal, sheriff, constable• Registrar of deeds• Tax collector or assessor• Road commissioner• Board members

Common-Law Employee

An employer-employee relationship exists when the

person for whom services are performed has the

right to control and direct the individual who

performs the services, not only as to result, but also

as to details and means.

Control Test

• Worker subject to control over:

• What is to be done

• How it is to be done

Common Law Factors

Revenue Ruling 87-41

20 Factors

Categories of Control

Common law recognizes 3 categories of evidence

to consider when making a determination of

employee status:

1. Behavioral control

2. Financial control

3. Relationship of the parties

Behavioral Control

• Indicators:

• Instruction

• Training

• Location of work

• Work Schedule

• Meetings

• Reports

• Providing services personally

Financial Control

• Indicators:

• Equipment, tools, or facilities

• Unreimbursed expenses

• Profit motive

• Frequency and timing of pay

• Liability coverage

Relationship of the Parties

• Indicators:

• Benefits

• Discharge/termination rights

• Permanency

• Integral function

Example

Independent Contractors may retain:

•Right to hire

•Right to manage & direct workers

•Right to substitute

•Right to pay substitute

Example

Employees may retain right to:

•Permanence

•Benefits

•Quit

Form SS-8

• If you’re unsure of worker status?

• Complete Form SS-8 for IRS determination

• Information requested from worker and payer

• Not an audit

Employee

• Forms and Filing Requirements:

• Secure W-4 before paying employees

• File Form W-2 and W-3

• Form 941 for Employment Tax Withholding

Independent Contractor

• Forms and Filing Requirements:

• W-9 info. before vendor payment

• File Form 1099-MISC and 1096

• Form 945 for Backup Withholding

Recap

1. Define an employee

• the right to control and direct the individual

2. Determine whether a worker is an employee or

independent contractor

• three broad categories of evidence

3. Report payments to workers

• W2 Wages or 1099-Misc

4. Need Help?

• Use Form SS-8

Mayor & Council Member

• How to report their compensation?

• Each receive $100 per month

• Currently reported on Form 1099-Misc

• Elected officials specifically identified as employees in

tax law

• Employment taxes and W-2 required

Monday Public School District

• Additional Duties & Control Relationship

• Full time duties in principal’s office

• Occasional duties for athletic director

• Currently receives W-2 & 1099-Misc

• Additional duties do not change school district’s control

as employer

• Employment taxes and W-2 required

Voluntary Classification Settlement Program

• Partial relief from federal employment taxes with

reclassification:

• Certain eligibility requirements apply

• Form 8952, Closing Agreement

• See Announcement 2012-45

• www.irs.gov “Voluntary Classification Settlement

Program”

Resources

• Revenue Ruling 87-41; Twenty Common Law Factors

• Form SS-8

• Publication 963

• Publication 15-A

• Publication 1779

Resources

• To find an FSLG specialist in your state • www.irs.gov Keyword Search: FSLG Newsletter

• Pre-recorded IRS Webinars • www.irsvideos.gov/Governments

• Voluntary Classification Settlement Program (VCSP):• www.irs.gov/Businesses/Small-Businesses-&-Self-

Employed/Voluntary-Classification-Settlement-Program

• To find your State Social Security Administrator:• http://www.ncsssa.org/statessadminmenu.html

24

Department of the Treasury

Internal Revenue Service

www.IRS.gov

Thank you!

www.IRS.gov