Transcript 1099 or W-2? - OCS

Or
Is He / She an Employee or a
Contractor?
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According to Jackson Lewis
International Tax Avoidance
Wage Issues
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Misclassification – Employee or Contractor
Misclassification – Exempt or Non Exempt
Underpayment - Overtime
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Jackson Lewis – Seminar “The Texas 8-Step: Compliance
Issues for Law Abiding Employers” October 19, 2012
Texas Workforce Commission “Especially for Texas
Employers” 3rd Edition – pages 12–21
BNA, Inc. Vol. 10, Issue 125 July 1, 2010 “Ten Tips for
Drafting Independent Contractor Agreements”
United States Small Business Administration
http://www.sba.gov/content/hire-contractor-or-employee
IRS Pub 1779 Independent Contractor or Employee?
IRS Publication 15-A (2012) Employee or Independent
Contractor?
US Supreme Court - United States v Silk, 331 U.S. 704 (1947)
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Texas has adopted the previous IRS 20 factor
test, which the IRS replaced with their current 3
factor test
20 Factor Test
1.
2.
Is the service provided by the individuals essential
to, and an integral part of, the service the employer
provides to the public?
What opportunity for profit or risk of loss is there for
the worker? What kind of investment, other than
time, does the worker have in the enterprise?
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1. Names and Titles
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How the parties use labels is a fundamental
indicator of intent. An agreement should state
unequivocally that the person is performing services
as an independent contractor, not an employee.
Similarly, the agreement should be labeled as an
independent contractor agreement or consulting
agreement. Avoid employee-sounding
nomenclature.”
Example – DO NOT fill out form I-9 which requires
address of “Employer”, “Date Employment Began”,
etc.
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What is the compensation arrangement? Is the
compensation negotiated or imposed by the
employer?
Does the individual provide his services to the
public at large? Does he advertise his services
in newspapers, the Yellow Pages, or specialized
Journals?
Is there a non-compete agreement?
Does the worker provide his services on a
continuous basis?
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Is the worker required to provide services
under the employer’s name? Does she
represent herself to the public as being an
employee of the employer? On whose behalf
are the services provided?
Cash Flow – how does the money get from the
customer or client to the worker?
Rent – employer normally provides the
employee with everything necessary to do the
job
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Hours of Work – is the time the work
performed according to a deadline or the hours
set by the employer?
Assignments – contractor receives assignments
from a contract, employees receive assignments
from an employer
Insurance – who provides the liability
insurance protection – the contractor or the
employer?
Advertising and Listings -
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Benefits – vacation, sick leave, health
insurance, worker’s compensation insurance,
Termination of the relationship
Employers may terminate employees at any time
 Employees may quit at any time
 Contractors must fulfill contract or be liable for
“Breach of Contract” lawsuit and vice versa
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Economic Reality Test
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The degree of control exercised by the alleged
employer
The extent of the relative investments of the alleged
employee and employer
The degree to which the “employee’s” opportunity
for profit and loss is determined by the “employer”
The skill and initiative required in performing the
job
The permanency of the relationship
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The Courts have considered many facts in
deciding whether a worker is an independent
contractor or a employee.
These relevant facts fall into three main
categories:
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Behavioral Control
Financial Control
Relationship of the Parties
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A worker is an employee when the business
has the right to direct and control the worker
Instructions – If, you receive extensive
instructions on how the work is to be done, this
suggests that you are an employee.
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How, when, or where to do the work
What tools or equipment to use
What assistants to hire to help with the work
Where to purchase supplies and services
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Significant Investment – if you have a
significant investment in your work, you may
be an independent contractor.
Expenses – if, you are not reimbursed for some
or all business expenses, then you may be an
independent contractor, especially if your
unreimbursed expenses are high
Opportunity for Profit or Loss – if you can
realize a profit or incur a loss, this suggests that
you are in business for yourself and that you
may be an independent contractor
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Employee Benefits
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If, you receive them, you are an employee
If, you don’t, you could be either
Written Contracts
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Scope of services, expected completion date,
standards, total willing to pay – indicates a contract
relationship
Lack of Written contract – especially hourly pay
versus contract pay indicates an employee /
employer relationship
Right to Terminate Relationship – usually indicates
an employee / employer relationship
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Joe the lawn boy
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Offers to mow your lawn every week for $50
Contractor – you may terminate or renew the
contract based upon performance
Bill the lawn boy
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You tell Bill – you want you lawn mowed every
Saturday between 8 and 10
You will pay bill $25 per hour
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Once an employee arrives at work, if, the work
involves multiple locations and the employee
must move to a new location to continue work,
the transport time is considered “on the clock”
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General Rules
Pay
You pay employees with a check written to them
personally, or cash
 You pay a contractor to a business name
 If, you pay by a time unit, it will be considered
employee
 If, you pay by the job, it is considered contract
(except when paying piece rate under FLSA)
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Contractor
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Uses business name
Has their own employees
Maintains separate
business checking account
Invoices work completed
Has more than one source
of income
Has own tools
Sets own hours
Keeps business records
(Income / Expense)
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Employee
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Performs duties dictated
or controlled by others
Works for only one source
of income
Is given training in how to
do the work
Uses tools / equipment /
supplies provided
Is paid in time increments
Is instructed when to
work
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If found guilty of misclassification – could put
you out of business
Back pay
 Back benefits
 Penalties (IRS)
 Social Security
 Medicare
 FUTA / SUTA
 Overtime
 15 – 30% reward to employee who reports you
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