Transcript Employee or Independent Contractor

Connecticut Employment Tax Issues
CBIA’s
Connecticut Business Tax Conference
May 20, 2011
John Biello
Ray Casella
Tax Division Chief, Audit Unit
Connecticut Department of
Revenue Services
860-297-5962
Tax Attorney
Shipman & Goodwin LLP
860-251-5808
Typical Issues
Arising In Employment Tax Audits
1. Under withholding
2. Unremitted tax
3. Unreported wages
4. Deposit and reporting compliance
5. Worker Misclassification
#1 Under-Withholding
 What the auditors will do
 They will ensure that you are withholding pursuant to
your employees’ Forms CT-W4
 They will review your Forms CT-W4
 They will review your payroll records
 If you didn’t withhold the amount required by the Form
CT-W4, you will have to pay the difference to the DRS
+ Interest and Penalties
#1 Under-Withholding
 What you should do
 Make sure you have a valid Form CT-W4 from each
employee
 A Form CT-W4 that claims an exemption from
withholding is only valid for one year
 Make sure you withheld (and are withholding) in
accordance with each employee’s Form CT-W4
 Obtain a Form CT-W4NA from nonresident
employees who work within and outside of CT
#2 Unremitted Tax
 What the auditors will do
 They will ensure that the money you are withholding
from your employees’ paychecks is being paid to the
DRS.
 Failing to pay withheld tax to the DRS can result in:
 100% Responsible Person Penalty
 Criminal Prosecution (fines and jail)
#2 Unremitted Tax
 What you should do
 Keep good records
 Payroll records
 Accounting records
 Bank records
 Review the work of your payroll personnel to ensure
that they are properly remitting withheld taxes
#3 Unreported Wages
 What the auditors will do
 They will look for evidence of the following:
Paying workers in cash
Paying personal expenses of workers
Providing, but not reporting, taxable fringe
benefits
#3 Unreported Wages
 What you should or should not do
 Do not pay employees in cash
 Do not pay personal expenses of employees
 Review all benefits provided to employees and make
sure that taxable benefits are included in the
employees’ wages
 Develop and require substantiation procedures for
reimbursing for employee business expenses
#4 Deposits and Reporting
 What the auditors will do
 Review tax deposits for timeliness
 Review payroll tax returns and statements for
accuracy and timeliness
 Review filings for compliance with the
electronic filing requirements
#4 Deposits and Reporting
 What you should do
 Understand your deposit and reporting
requirements
 Understand the electronic filing requirements
 Keep copies of all payroll tax deposits, payroll
tax returns, and information returns provided
to workers
#5 Worker Classification
 What the auditors will do
 They will review your accounting records to locate
payments to independent contractors
 They will analyze the level of control you have over
these workers to determine if these workers are really
misclassified employees
 THIS IS A BIG ISSUE WITH THE DRS & THE IRS
#5 Worker Classification
 What you should do
 Review your relationships with independent
contractors
 Apply to those relationships the old 20-factor test for
determining if a worker is an employee or an
independent contractor
 Do this now, this is a big issue with the IRS & DRS
#5 Worker Classification
 Common misclassification situations
 Part-time workers
 Temporary workers
 Seasonal help – summer help – holiday help
 Family members
 Retirees rehired as contractors
 Consultants who – over time – end up spending all or
most of their time providing services to you.
The Classification Process
 Who Are Employees?
 This is the hard question
 Must follow the Classification Process
 Who are Independent Contractors?
 This is the easy question
 They are workers who are not employees.
The Classification Process
 Employees include the following workers:
 Corporate Officers
 Statutory Employees
 Common Law Employees
The Classification Process
 Common Law Employees
 A worker is an employee under the
common law if the employee/employer
relationship exists between the service
provider and the service recipient.
The Classification Process
 The Common Law Employee/Employer
Relationship
The employee/employer relationship exists
when the service recipient has the right to
control and direct the service provider, not only
as to the result to be accomplished by the work
but also as to the details and means by which
that result is accomplished.
The Classification Process
 The Common Law Employee/Employer
Relationship
An employee is subject to the will and control of
the employer not only as to what shall be done
but how it shall be done.
The Classification Process
 The Common Law Employee/Employer
Relationship
It is not necessary that the employer actually
direct or control the manner in which the
services are performed; it is sufficient if he has
the right to control.
The Classification Process
 The Common Law Employee/Employer
Relationship
 The 20 Factor Test

20 factors have been developed to help determine if
an employee-employer relationship exists.

The importance of each factor depends on the
occupation and the facts in each case.
The Classification Process
 The Evolution of the 20 Factor Test
The common law “20 Factor Test” has evolved
into three categories of evidence to use to
determine if the right to control the means by
which a worker accomplished the work.
The Classification Process
 Three Categories of Evidence:
 Behavioral Control Evidence
 Financial Control Evidence
 Relationship of the Parties Evidence
The Classification Process
 Behavioral Control Evidence
Behavioral control evidence includes facts
that show whether the business has a right
to direct and control how the worker does
the task for which the worker is hired
The Classification Process
 Financial Control Evidence
Financial control evidence includes facts
that show whether the business has a right
to control the business aspects of the
worker's job
The Classification Process
 Relationship of the Parties Evidence
Facts that show the parties‘ relationship include:
 Written contracts describing the intended relationship
 Whether the worker receives employee-type benefits
 The permanency of the relationship
 The extent to which services performed by the worker
are a key aspect of the regular business of the
company.
What to Do?
 Consult a Tax Advisor
 Perform a Self-Audit
 Contact the IRS for Help – Form SS-8
 Section 530 Relief – from IRS
A worker’s classification will be respected by the IRS if :
1.
2.
3.
Consistent Treatment
Consistent Reporting
Reasonable Basis
The DRS does not (formally) have a similar program
Multi-State Employees
 Connecticut residents working both in
Connecticut and in another state.
 Connecticut nonresidents working both in
Connecticut and in another state.
Multi-State Employees
CT resident working in CT and another state
General Rule:
All wages of a CT resident are subject to CT withholding,
even though some services are provided in another
state.
Modification:
If the employer is required to withhold income tax for
services in another state, the amount of CT withholding
can be reduced.
Multi-State Employees
CT resident working in CT and another state
Step 1:
Determine the other state’s actual withholding
Step 2:
Determine CT withholding as if all services
performed in CT (“Total CT Withholding”)
Prorate the Total CT Withholding between a
CT portion and a non-CT portion
Compare other state’s actual withholding to
non-CT prorated portion.
Withhold CT prorated portion plus the excess,
if any, of the non-CT prorated portion over the
other state’s actual withholding
Step 3:
Step 4:
Step 5:
Multi-State Employees
CT resident working in CT and another state
Example 1:
Connecticut Resident earns $1,000
Works 40% in CT & 60% in MA
Required MA withholding is $25
Multi-State Employees
CT resident working in CT and another state
Step 1:
Step 2:
Determine MA withholding = $25
Determine Total CT Withholding as if all
wages earned in CT
$1,000 X 5% = $50
Step 3:
Prorate Total CT Withholding
MA Prorated Portion $50 x 60% = $30
CT Prorated Portion $50 x 40% = $20
Multi-State Employees
CT resident working in CT and another state
Step 4: Compare other state’s actual withholding to non-CT prorated
portion:
MA prorated portion
MA actual withholding
$30
$25
Excess MA prorated portion
over MA actual withholding
$5
Multi-State Employees
CT resident working in CT and another state
Step 5: Withhold CT prorated portion plus the excess, if any, of the
non-CT prorated portion over the other state’s actual
withholding:
CT prorated portion
$20
Plus: Excess MA prorated portion
over MA actual withholding
$5
Equals: Required CT withholding
$25
Multi-State Employees
CT resident working in CT and another state
Example 2:
Connecticut Resident earns $1,000
Works 40% in CT & 60% in MA
Required MA withholding is $35
Multi-State Employees
CT resident working in CT and another state
Step 1: Determine MA withholding = $35
Step 2:
Determine Total CT Withholding as if all
wages earned in CT
$1,000 X 5% = $50
Step 3:
Prorate Total CT Withholding
MA Prorated Portion $50 x 60% = $30
CT Prorated Portion $50 x 40% = $20
Multi-State Employees
CT resident working in CT and another state
Step 4: Compare other state’s actual withholding to non-CT prorated
portion:
MA prorated portion
MA actual withholding
$30
$35
Excess MA prorated portion
over MA actual withholding
$0
Multi-State Employees
CT resident working in CT and another state
Step 5: Withhold CT prorated portion plus the excess, if any, of the
non-CT prorated portion over the other state’s actual
withholding:
CT prorated portion
$20
Plus: Excess MA prorated portion
over MA actual withholding
$0
Equals: Required CT withholding
$20
Multi-State Employees
CT resident working in CT and another state
Comparison
Actual MA Withholding
MA Prorated Portion
CT Prorated Portion
Example 1
25
30
20
Required CT Withholding:
CT Prorated Portion
20
Excess MA prorated over actual MA 5
Total required CT withholding
25
Example 2
35
30
20
20
0
20
Multi-State Employees
Nonresident working in CT and in another state
General Rules:
Wages paid to a nonresident for services rendered in CT are subject
to CT income tax withholding.
Employers must withhold CT tax on all wages paid to a nonresident,
unless the employer can properly determine (allocate) the wages
attributable to services rendered in Connecticut.
14-Day Exception:
Employers are not required to withhold CT income tax from wages
paid to nonresident employees for services performed in CT if the
employee is assigned to a primary work location outside of CT and
works in14 or fewer days during the year.
Multi-State Employees
Nonresident working in CT and in another state
Two methods to allocate wages to CT:
1. Form CT-W4NA Method
2. Adequate Current Records Method
Multi-State Employees
Nonresident working in CT and in another state
Form CT-W4NA Method

Form CT-W4NA - Employee’s Withholding Certificate
Nonresident Apportionment

Employer can obtain Form CT-W4NA from the
employee and rely on the estimated percentage of
services performed in Connecticut provided on the
Form CT-W4NA by the employee.
Multi-State Employees
Nonresident working in CT and in another state
Adequate Current Records Method
 If an employer maintains current records to determine
the amount of a nonresident’s wages paid for services
performed in CT, the employer can withhold CT tax
based on those records, whether or not the employee
filed a CT-W4NA.
Multi-State Employees
Nonresident working in CT and in another state
Determining the amount of CT tax to withhold:
 Form CT-W4NA Method
Determine the amount that would be withheld if all wages were
attributable to CT and multiple that amount by the percentage listed
on the CT-W4NA.
 Adequate Current Records Method
Determine the amount that would be withheld if all wages were
attributable to CT and multiple that amount a fraction the numerator
of which is the wages paid for services performed in CT and the
denominator is the total wages paid for the year wherever performed
by the percentage listed on the CT-W4NA.
What is New at the DRS
DRS Delinquency Initiative
 Taxes and taxpayers covered
 Tax periods involved
 Description of the program
 What it means to taxpayers