[font=Calibri]The Internal Revenue Service has recently issued severalstatements indicating that the classification of contractors vs. employees is one of their top priorities. In demonstrating their seriousness the Internal Revenue Service is offering a Voluntary Classification Settlement Program to encourage employers to come forward and voluntarily disclose relationships that do not meet the criteria for independent contractors. Experience has proven that when the Internal Revenue Service offers a “voluntary” disclosure program of any type, that this is a warning sign regarding that particular issue. Given that history it is important for businesses to know the rules around independent contractors. [/font]
[font=Calibri]There are three primary standards that the IRS uses todetermine if someone is an employee or an independent contractor. [/font]
[font=Calibri]1.[/font][font=Times New Roman]      
[/font][font=Calibri]Behavioral
Control – I call this the “where, when, how” rule. [/font]
[font=Calibri]a.[/font][font=Times New Roman]      
[/font][font=Calibri]If we tell our contractors where, when and howto do the work they are probably not contractors. [/font]
[font=Calibri]b.[/font][font=Times New Roman]     
[/font][font=Calibri]Do we provide training to our contractors? If sothis is an indication of employee status.[/font]
[font=Calibri]c.[/font][font=Times New Roman]      
[/font][font=Calibri]Do we control the details of how the work isdone? Contractors are self-directed determining the methods and means to reach a determined result.[/font]

[font=Calibri]2.[/font][font=Times New Roman]      
[/font][font=Calibri]Financial
Control – I refer to this standard as “do they work for anyone else?” rule.[/font]
[font=Calibri]a.[/font][font=Times New Roman]      
[/font][font=Calibri]Do our contractors provide services for morethan one unrelated company at the same time? Contractors have multiple clients.[/font]
[font=Calibri]b.[/font][font=Times New Roman]     
[/font][font=Calibri]Do our contractors hold themselves out as abusiness? Are our contractors incorporated, do they have an office, do they carry their own business insurances?[/font]
[font=Calibri]c.[/font][font=Times New Roman]      
[/font][font=Calibri]Do our contractors have a financial investmentin their business? Do our contractors have their own equipment and tools?[/font]

[font=Calibri]3.[/font][font=Times New Roman]      
[/font][font=Calibri]Type ofRelationship – This is the “contract” rule.[/font]
[font=Calibri]a.[/font][font=Times New Roman]      
[/font][font=Calibri]Is there a written contract? This is usually thefirst thing the IRS will ask to see.[/font]
[font=Calibri]b.[/font][font=Times New Roman]     
[/font][font=Calibri]Does the company provide any type of employeebenefits provided? If we provide any type of access to employee benefits this will disqualify the contractor status.[/font]
[font=Calibri]c.[/font][font=Times New Roman]      
[/font][font=Calibri]Are the services of the contractor services thatare part of the regular business of the employer? If we have employees doing the same type work our contractors do this indicates an employee status. [/font]
[font=Calibri]One other key factor that the IRS looks at is “can thecontractor lose money?” If the contractor cannot lose money it is an indication there is an employee – employer relationship.[/font]
[font=Calibri]The penalties for misclassifying a contractor can be significant.In Publication 15 the penalties are listed as: [/font]
[font=Arial]If the employer issued required information returns (1099’s), thesection 3509 rates are:[/font]
[font=Arial]1.[/font][font=Times New Roman]    
[/font][font=Arial]For social security taxes; employer rate of 6.2% plus20% of the employee rate (see the Instructions for Form 941-X).[/font]
[font=Arial]2.[/font][font=Times New Roman]    
[/font][font=Arial]For Medicare taxes; employer rate of 1.45% plus 20% ofthe employee rate of 1.45%, for a total rate of 1.74% of wages.[/font]
[font=Arial]3.[/font][font=Times New Roman]    
[/font][font=Arial]For Additional Medicare Tax; 20% of the employee rateof 0.9%.[/font]
[font=Arial]4.[/font][font=Times New Roman]    
[/font][font=Arial]For income tax withholding, the rate is 1.5% of wages.[/font]

[font=Arial]If the employer did not issue required information returns (1099’s),the section 3509 rates are:[/font]
[font=Arial]1.[/font][font=Times New Roman]    
[/font][font=Arial]For social security taxes; employer rate of 6.2% plus40% of the employee rate (see the Instructions for Form 941-X).[/font]
[font=Arial]2.[/font][font=Times New Roman]    
[/font][font=Arial]For Medicare taxes; employer rate of 1.45% plus 40% ofthe employee rate of 1.45%, for a total rate of 2.03% of wages. [/font]
[font=Arial]3.[/font][font=Times New Roman]    
[/font][font=Arial]For Additional Medicare Tax; 40% of the employee rateof 0.9%.[/font]
[font=Arial]4.[/font][font=Times New Roman]    
[/font][font=Arial]For income tax withholding, the rate is 3.0% of wages.[/font]

[font=Calibri]For employers it is important to review each relationshipand verify they conform to the standards set by the IRS. These are some of the steps companies can take to protect themselves from contractor reclassification.[/font]
[font=Calibri]1.[/font][font=Times New Roman]      
[/font][font=Calibri]Have a written contract with each contractor[/font]
[font=Calibri]2.[/font][font=Times New Roman]      
[/font][font=Calibri]Obtain a completed W-9 from each contractor[/font]
[font=Calibri]3.[/font][font=Times New Roman]      
[/font][font=Calibri]File all required 1099 forms[/font]
[font=Calibri]4.[/font][font=Times New Roman]      
[/font][font=Calibri]Have the contractor issue invoices for payment[/font]
[font=Calibri]While these steps will protect a company; that protection isonly available if there are no obvious violations of the standards of behavioral control, financial control, and type of relationship. [/font]
[font=Calibri]If you have questions regarding contractors please contact [/font][font=Calibri]gary@illuminaregroupinc.com[/font][font=Calibri].[/font]