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New Jersey Working Together

New Jersey Working Together. Exam Panel Worker Classification. New Jersey Working Together. Relationship Types Employer-Employee Independent Contractor Statutory Employee Non-statutory Employee. New Jersey Working Together. Employer-Employee

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New Jersey Working Together

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  1. New Jersey Working Together Exam Panel Worker Classification

  2. New Jersey Working Together • Relationship Types • Employer-Employee • Independent Contractor • Statutory Employee • Non-statutory Employee

  3. New Jersey Working Together • Employer-Employee • An employer-employee relationship generally exists when the persons (or businesses) for whom the services are being performed: • have a right to control and direct the individual who performs the services, • 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 • Rev. Rul. 87-41

  4. New Jersey Working Together • Independent Contractor • An independent contractor relationship may exist where a worker follows an “independent trade, business or profession in which they offer their services to the public.” • 20 Factors Test • Rev. Ruling 87-41

  5. New Jersey Working Together • Independent contractors cannot receive employee benefits or protections including: • – workers’ compensation • – unemployment insurance (Form 940) • – minimum wage and overtime pay • – workplace discrimination law protections (Age Discrimination in Employment Act, Civil Rights Act, etc.) • – collective bargaining rights • – temporary disability/Americans with Disabilities Act • – Occupational Safety and Health Act • – Fringe benefits such as health insurance and family and medical leave

  6. New Jersey Working Together • Statutory Employee • Officers of corporations, as well as superintendents, managers, and other supervisory personnel are generally considered employees unless the officer performs few to no services for the corporation and is not paid (or entitled) to be paid.

  7. New Jersey Working Together • Statutory Employee • Drivers engaged in distributing meat, vegetable, fruit, or bakery products; beverages (other than milk); or laundry or dry-cleaning services • Fulltime life insurance salesmen • People who perform work from home according to the service consumer’s specifications, using materials or goods furnished by the service consumer that are required to be returned

  8. New Jersey Working Together • Statutory Employee • Fulltime traveling or city salespersons engaged in solicitation and transmission to the service consumer of orders of wholesalers, retailers, contractors, or operators of hotels, restaurants, or other establishments for merchandise for resale or supplies for use in their business operations

  9. New Jersey Working Together Non-Statutory Employee • Licensed real estate agents for whom a substantial part of their income is paid on commission under a contract specifying that they are not an employee for tax purposes • “Direct sellers” (i.e., those who sell consumer products in a place other than a permanent retail establishment, are engaged in selling consumer products to any buyer on a buy-sell basis, deposit-commission basis, or any similar basis for resale, or are engaged in newspaper or shopping news delivery)

  10. New Jersey Working Together Non-Statutory Employee • Companion sitters (i.e., babysitters or careworkers for the elderly or disabled) who are not employees of a companion-sitting placement service.

  11. New Jersey Working Together Audit Red Flags • IRS likely to discover misclassification through audit. Misclassification suspicions are raised if: • Businesses employing large numbers of independent contractors • Businesses issuing Forms 1099-MISC with large sums reported in Box 7 (“Nonemployee compensation”) • Workers have only one IRS Form 1099-MISC • Forms 1099 with a missing or wrong TIN (highest audit potential)

  12. New Jersey Working Together • IRS Form SS-8 divides the “control test” into three categories: • Behavioral Control • Financial Control • Relationship of Worker and Firm

  13. New Jersey Working Together • Misclassified workers who have already filed returns for the year should file amended returns under IRS Form 1040X with the recomputed tax. • – Calculate FICA tax with IRS Form 8919. • – Request a refund on the SECA tax so much as the amount remaining following the FICA tax offset. See IRC § 6521(a). • No longer entitled to claim self-employment deductions.

  14. New Jersey Working Together • If the misclassified worker has a deficiency (occasionally, from too many disallowed Schedule A self-employment deductions), he is not relieved of any further taxes or penalties due to misclassification. – Include IRS Form 4852, unless and until employer provides a corrected Form W-2.

  15. New Jersey Working Together • During an audit, the IRS will – Compare W-2 and 1099 lists to identify workers whose status changed during the year; – Identify workers who received continuing payments during the year; – Question the status of all individuals who were compensated via 1099. • IRS employment tax agents generally base their findings on written Form SS-8 responses or oral interviews of workers. (Disgruntled workers are often willing to talk.)

  16. New Jersey Working Together • Tax Court has used a seven-factor test to determine classification criteria: – the degree of control exercised by the principal over the details of the work; – which party invests in the facilities used by the worker; – the opportunity of the worker for profit or loss; – whether the principal can discharge the worker; – whether the work is part of the principal's regular business; – the permanency of the relationship; – the relationship the parties believed they were creating.

  17. New Jersey Working Together • Employers whose misclassification was done in good faith can potentially receive protection under Section 530 of the Revenue Act of 1978. • Section 530 is a safe harbor from retroactive taxes and penalties due upon reclassification. • Burden on employer to establish prima facie case. • Three requirements: – Reasonable Basis – Substantive Consistency – Reporting Consistency • Reaso

  18. New Jersey Working Together • Reasonable Basis for treating workers as independent contractors: – Employer reasonably relied on a relevant court case about federal taxes, or an IRS ruling; • Other federal and state decisions may constitute reasonable basis if they use the same common law rules. • Note: Private Letter Ruling or Technical Advice Memorandum issued to an entity’s predecessor does not qualify. – Employer was audited for employment misclassification issues and the IRS did not reclassify its employees;

  19. New Jersey Working Together • Employer treated the workers as independent contractors based on knowledge that was how a significant segment of the industry treated similar workers; or • – Employer relied on some other reasonable basis, such as the advice of a business lawyer or accountant familiar with the facts of the employer’s business. • Employer must have reasonably believed in the professional’s qualifications, and the advice must have been rendered when employment classification decision was made. • Reasonable basis is construed liberally in favor of the taxpayer.

  20. New Jersey Working Together • Substantive consistency: Employer must have treated all workers holding substantially similar positions as independent contractors. – Note that for testing, “substantive consistency” does not apply with respect to services performed after December 31, 2006, unless the individual (1) is performing services for a tax-exempt organization, and (2) is not otherwise treated as an employee of such organization for purposes of employment taxes.

  21. New Jersey Working Together • “Substantially similar positions” – Degree of supervision and control – Managerial responsibilities – Reporting requirements – Job duties – Contractual relationship – Employee benefits

  22. New Jersey Working Together Reporting consistency: Employer must have filed all required federal tax returns (including IRS Form 1099-MISC for workers treated as independent contractors and paid at least $600), consistent with treating workers as nonemployees. • Note that if Form 1099-MISC was filed for some periods and not others, employer may pursue Section 530 relief for periods where it was filed.

  23. New Jersey Working Together • Burden on employer to prove that Forms 1099 were filed and received by IRS. – Best practices: Request confirmation from IRS at time of filing • “Required returns” might include IRS Form 1096, • Annual Summary and Transmittal of U.S. Information • Returns, but not certain. • Possible that if Forms 1099 were filed late, but before initiation of audit, employer might still qualify for Section 530 relief.

  24. New Jersey Working Together • Employers qualifying under Section 530 relief can continue to avoid paying employment taxes, but such workers are notconsidered “independent contractors” for income tax purposes, merely “nonemployees,” for employment tax purposes. • – Note that Obamacare could upset such protections under Section 530

  25. New Jersey Working Together • Section 530 does not apply to the hiring of certain technical workers, such as engineers, designers, drafters, computer programmers, systems analysts, or other similar workers. • The common-law employee/independent contractor tests are determinative here. • Section 530 claims can be filed with IRS Appeals or in U.S. Tax Court, or via the IRS Classification Settlement Program (CSP).

  26. New Jersey Working Together • Incentive for individuals or businesses who voluntarily come forward and reclassify their workers before the IRS or DoL initiates an audit or discovers misclassified workers. • Tax liabilities are reduced to 10% of the amount due (i.e., just over 1% of all wages paid to reclassified workers) over the most recent tax year. Penalties and interest are abated. • Taxpayers accepted into VCSP will not be audited for potentially unpaid employment taxes from prior years.

  27. New Jersey Working Together • Businesses must have consistently treated workers as independent contractors (or nonemployees) for the three years prior. • All IRS Forms 1099 must have been filed for those years. • Businesses cannot currently be under audit by the IRS, DoL, or any state agency.

  28. New Jersey Working Together • To enter VCSP, file IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before plans to reclassify workers as employees.

  29. New Jersey Working Together • VCSP focuses on employer’s tax liability; no similar provision for employees, who might be responsible for the remaining FICA tax that the employer did not pay. • State tax ramifications are not addressed through VCSP; employer may be liable for additional state and local taxes and penalties despite coming forward under VCSP, because few states have corresponding programs Note that several states do have memoranda of understanding with the DoL

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