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Are you looking to classify your workers as independent contractors?

As a follow-up to our last blog about when to obtain Form W-9, an equally important question is “who qualifies as an independent contractor?” The wrong answer can lead to a painful assessment from the IRS.

It is important you understand the independent contractor definition. An easy way to do so is to review an independent contractor test and independent contractor vs. employee checklist.

Even if an employer correctly followed the independent contractor rules and issued a 1099-MISC, that employer will face a withholding tax liability equal to 1.5% of the payments made to such employee if the employer “misclassified” the employee. Additionally, the employer will face a Social Security tax in the amount of 20% of the employee’s FICA tax liability.

If the employer did not follow all the correct reporting requirements for an independent contractor, the withholding tax doubles to 3% of the payments and the Social Security tax doubles to 40% of the employee’s share of FICA tax liability.

If the IRS disagrees with an employee’s classification, the employer must pay the tax, no matter how much effort went into determining the correct classification.

The employer may not be totally out of luck, though. Read on!

The taxpayer may subsequently bring an action to recover those taxes under Section 530 of the Revenue Act of 1978, which may provide tax relief to the employer only after it has both:

1. established that it has filed all the required returns consistent with treating the worker as an independent contractor, and
2. shown that it did not treat any other worker performing the same duties as an employee.

Once these two requirements are met, the employer may be entitled to relief from the federal employment tax liability under Section 530’s statutory requirements, but the employer must show it had a “reasonable basis” for not classifying the worker as an employee.

The employer must show that:

1. a judicial precedent, published rulings, technical advice, or a letter ruling to the taxpayer (employer) exists, or
2.  
   1. the IRS previously audited the taxpayer
   2. the IRS determined that the taxpayer’s workers were independent contractors
   3. the workers, subject to the prior audit, are similar to the workers at issue, and
   4. the taxpayer treated the two groups of workers in a similar fashion, or
3. there is a long-standing practice of a significant segment of the industry in which the individual was engaged.

Even if a taxpayer does not meet the above statutory safe harbor categories of Section 530, courts may be willing to provide relief to employers that put in a reasonable effort to determine the proper classification of its employees.

Note: Section 530 only applies to tax relief. It does not address whether the classification of that employee is correct. Even if an employer successfully receives tax relief, it may still have to classify its workers as employees.

If you have questions about classification, contact Donovan & Limroth for assistance. And for more resources on this topic, visit the IRS website.

Our recommendation? Before you make a payment to anyone outside the company.

Form W-9 is a request for Taxpayer Identification Number (TIN) and Certification and will:

• Help you to determine who should receive a Form 1099.
• Provide you with the necessary information to complete Form 1099, when required, such as name, address and Social Security or tax identification number.
• Relieve you from liability if the payee does not complete the form properly.
• Help you to avoid penalties for filing late or failing to file 1099s.

In general, your business must issue a 1099 to any person outside the company that you have paid $600 or more to during a tax year. This includes payments for rents, services (including parts and materials), prizes and awards, or other income payments. Payments to corporations are exempt from this reporting requirement, except in the case of payments made for legal services. The exemption from reporting payments made to corporations does not apply to payments made to attorneys. The 1099 requirements for payments for legal services apply regardless of how the payee’s entity is organized or what their filing status is with the IRS.

Do form W-9s need to be renewed each tax year? The short answer is that there is no requirement to do so. The payee should report to you any changes in their information. Because that may not happen, you can request that vendors complete a new form W-9 at any time.

Donovan & Limroth advises clients not to wait till year end to obtain the W-9 from payees.  This is now even more important because the IRS has moved the 1099 filing deadline up from February 28 to January 31.

The easiest strategy is to require a vendor to complete a W-9 before issuing payment. It is reasonable and customary to make this request, so don’t hesitate to make this a requirement before making payment.

To ensure that your records are properly maintained, contact Donovan & Limroth if you have questions regarding W-9 and 1099 forms. A current version of form W-9 can be found on the IRS website.

Now, small employers are allowed to offer health reimbursement arrangements (HRAs) to reimburse employees for health insurance and other medical expenses without penalty.

The 21st Century Cures Act, signed by President Barack Obama, took effect on January 1, 2017. It allows for Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) for reimbursing employees for health insurance premiums.

To qualify, an eligible small employer must employ less than 50 full-time employees, including full-time equivalents. The employer and arrangement must also meet the following criteria:

• Employer must not offer group health insurance to any of its employees
• Arrangement must be funded solely by the eligible employer; no salary reduction contributions may be made under the arrangement
• The amount of payments and reimbursements for any year do not exceed $4,950 for individuals, $10,000 for families in the case of an arrangement that provides reimbursement for family coverage (with amounts to be adjusted for inflation)
• Employer must offer HRA benefits on the same terms to all eligible employees, with certain exclusions (e.g., part-time and seasonal employees)

In 2013, the IRS imposed a penalty of $100 per day against employers who directly paid or reimbursed their employee’s health insurance premiums. The reason was that HRA employee reimbursement for individual health insurance policies violated the terms of the Patient Protection and Affordable Care Act (PPACA).

With this IRS regulation gone, HRAs are now an option. Small employers can create HRA health plan opportunities for their employees, creating benefits that have the potential to be a win for both.  

If you consider offering QSEHRAs to employees, they must be properly set up. Donovan & Limroth can assist you with the setup and provide you with sample plans and employee notification documents. When tax season comes around, you will avoid the worry and the rush to make sure your records are in order.

If you’re an employer in the U.S., it’s mandatory to maintain a properly completed Form I-9 for every individual you hire for employment in the U.S. It’s federal immigration law.  

Form I-9, which verifies identity and employment authorization, has changed. As of January 22, 2017, it is mandatory to use the updated form. As of this date, all previous versions of the form are invalid.

When must Form I-9 be completed and signed? At the time of hire. You might feel relieved to have the selection of a new hire behind you, but now the onboarding process begins.

Put tools in place to ensure compliance and make the process efficient. New-hire paperwork is time-consuming and tedious. Errors, oversights and non-compliance have severe consequences and can result in costly fines.  

Payroll software is available that allows new hires to fill out Form I-9 and more online.  Donovan & Limroth recommends payroll software packages based on your needs, including GUSTO, ADP and others. GUSTO, for example, offers an employee onboarding checklist and tools to help you track and maintain critical employee information.

Our payroll software solutions allow you to keep federal and state tax documents, direct deposit forms and other company documents in your system electronically — all before your new hire’s first day on the job. This improves compliance and ensures easy maintenance for you.

These robust systems not only offer payroll solutions but benefits tools as well. You’ll save time by having one place to log in and one secure place for valuable employee data and access to updated forms.

Set yourself up for recordkeeping success and schedule an appointment with one of our payroll advisors. Now that you’re not juggling forms, there’s more time to focus on training and development to maximize the investment in your new hire.