Employees

Did you know that under current law, any family or individual who pays a household employee more than $2,000 (2016) a year must withhold and pay Social Security and Medicare taxes, also known as FICA. The law mandates that all domestic workers, such as cooks, nannies, housekeepers and gardeners, are subject to this combination of tax types known as the “nanny tax.” Federal unemployment insurance taxes must also be paid if the household pays any number of employees a total of $1,000 or more in a calendar quarter.

As this entry in Wikipedia notes, the "nanny tax" is comprised of a combination of taxes you withhold from your employee and the taxes you pay as the employer. Typically, you'll withhold Social Security and Medicare (collectively known as FICA) and federal and state (where applicable) income taxes from your domestic worker/employee each pay period. You'll also pay a matching portion of FICA, as well as federal and state unemployment insurance taxes.

According to Care.com, you, as the employer, in order to properly pay what you owe in nanny taxes and satisfy your obligation, will need to collect the following:

• ID numbers: You need both the federal and state tax identification number in order to report your nanny taxes. You can get your federal employer identification number (FEIN) from the IRS and use this number to obtain your state identification number from the appropriate tax agency in your state.

• Payroll info: You need to accurately calculate your employee's gross pay, calculate the taxes withheld, and track the corresponding employer taxes each pay period.

• Forms:

• You must provide your nanny with a Form W-2 by the end of January each year.

• You need to file any required year-end forms with the state (where applicable), as well as Form W-3 and Form W-2 Copy A with the Social Security Administration.

• You need to prepare a Schedule H and file it with your federal income tax return.

• Quarterly filings:

• You should file state tax returns, typically on a quarterly basis.

• You should send 1040 estimated payments to the IRS four times per year.

The employee, or nanny, should provide the employer with the following:

• A Social Security number or an ITIN;

• A completed Form I-9 with proper identification; and,

• A completed federal W-4 form and corresponding state income tax withholding form (if you live in a state with income taxes).

Are there any exceptions to the general rule of who is an employee?

If the babysitter is the taxpayer's parent, spouse, or if the babysitter is under 18 and is not primarily engaged in the household employment profession, the nanny tax does not apply. Investopedia encourages the use of an agency as another way to avoid the nanny tax pitfall:

Another way for taxpayers to avoid dealing with the nanny tax is by hiring household help through an agency. The agency will then be the employer and be the one who pays the nanny tax. Also, if household helpers are officially self-employed, they will be responsible for paying their own taxes and the taxpayer will not have to worry about the nanny tax.

Who else could qualify as an employee for the purpose of the nanny tax?

It depends on whether what you’ve paid these people exceeds the applicable dollar threshold. That sweet old lady across the street whom you pay to pick up your child from the school bus stop and watch them for an hour until you get home from work? She counts. So does that gardener you pay for three hours of work three times a month to make sure your lawn stays well manicured.

Refer to Topic 756, “Employment Taxes for Household Employees,” for additional information on the topic provided by the Internal Revenue Service.

Many of us will eventually face what it’s like to engage a professional caregiver to help care for the needs of someone we love. It’s not an easy task, and sometimes it can be frightening as we entrust the life of a loved one to someone outside of the family. The process of finding the right person to help our loved one securely stay in their home can seem like a daunting undertaking. Even though the benefits of having help are obvious, the idea of inviting a stranger to live in your home and take care of a loved one makes many people feel uncomfortable. On top of all these considerations, there is also the added stress of understanding the various financial and insurance arrangements of a caregiver scenario. Before you dive into that process, it’s helpful to have a firm grasp of what options are available to you and to know exactly how the system works. (And walking into it armed with knowledge can help reduce the stress of the process.)

The typical caregiver scenario involves either a caregiver “independent contractor” (“independent caregiver”) or a caregiver through an agency. In the independent caregiver scenario the caregiver effectively becomes the employee of the recipient. This relationship requires that a significant degree of liability and responsibility be assumed by the recipient, especially when it comes to risk management (insurance) and managing payroll and tax withholdings. These responsibilities (liabilities) can be a tremendous burden to the care-recipient.

On the other hand, there is the “agency scenario,” which involves a caregiving agency. The agency typically assumes all responsibilities and liability for things like payroll, payroll taxes, and other. In the agency scenario, the caregiver is an employee of the agency.  

It would be fair to say that deciding on which of the two relationships to go with would involve a cost/benefit trade-off between going with the independent caregiver scenario or the caregiver agency scenario. Not all of the cost taken into account would necessarily be financial or monetary. Some of the cost would be subjective or intangible in nature. The decision as to which scenario to go with is personal in the sense that it depends on the individual facts and circumstances. What makes sense for one recipient might not make sense for another.  

Frequently, families may utilize a privately hired individual (independent contractor) for these following reasons, as noted in this helpful breakdown from NAHU.org:

• They can hire a person they choose based on their best judgment.

• They have more control and choice in the care plan, which may provide more flexibility for the family.

• The cost is typically lower than that of an agency.

• There may be more flexibility in terms of the caregiving schedule.

If you decide to hire an independent caregiver you should be prepared to:

• Locate potential caregivers

• Screen applications

• Conduct interviews

• Run background checks

• Administer payroll, including social security and other taxes

On the other hand, there are a number of offsetting benefits that come from hiring a caregiver through a caregiver agency instead of hiring an independent contractor. Here are a few of the major benefits of using a home care agency are the following, as quoted from VisitingAngels.com:

• Agencies will screen caregivers and conduct background checks. The ideal agency should allow you to interview several candidates in order to find the best caregiver considering your situation and circumstances.

• Always request professional and personal references for anyone you select.

• Agencies are typically bonded, licensed, and insured. Agencies should assume full liability for all care provided, and should be insured in the event a caregiver is injured in your home.

• Worth emphasizing is the fact that should you choose to hire an independent caregiver, as the employer, you will be responsible for the liability risk of both the caregiver and the care recipient.

• Before considering hiring an independent caregiver, carefully consider all of the liability, responsibility, and attention that will be required of you.

Visiting Angels makes a critical point: before you go down the path of hiring an independent caregiver, make sure you fully understand the “liability, responsibility and attentiveness” that will be required of you.

Likewise, before you hire an agency, make sure you understand how much control you’re relinquishing to the agency and whether or not that will have a negative impact on your loved one. In other words, ask lots of questions so that you know what you’re getting into before you commit to either option. It could make all the difference for both your loved one and you and your family as you work together to find a solution that makes the most sense for your situation.

In a previous article posted in February 2016 we discussed the Family and Medical Leave Act of 1993 (FMLA). In this article, we will discuss what the Paid Family Leave Act (PFL) is and how it works as an adjunct to the FMNA. The FMNA and PFL work together; they do not cancel each other out or replace the other.

As Ehow notes, the FMLA is a federal act that was passed in 1993, and it is applicable to the entire nation. The PFL, however, is a California state law enacted in 2002. The PFL provides for up to six weeks of paid leave in a 12-month period to employees who take time off to attend to family needs.

The Family Medical Leave Act (FMLA) and California's Paid Family Leave (PFL) programs provide certain leave entitlements to employees caring for sick or injured family members or bonding with a new baby. The FMLA is federal legislation available to workers on a national level whereas the PFL is state legislation only available to California workers who contribute to the State Disability Insurance (SDI) program.

In addition, the FMLA does not require any contribution from the eligible employees. The PFL, however, is totally funded by employee contributions and only participating employees are eligible.

The FMLA entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave.

The FMLA also guarantees the employee’s leave to attend to serious medical illness of self, spouse, child, or parent, to care for the newborn, and other family exigencies. The PFL, on the other hand, does not guarantee the leave but only provides for compensation of the employee during the qualifying leave.

Compensation

Generally speaking within the State of California, the amount of compensation that a qualifying employee is entitled to receive under the PFL legislation is not a straight 1:1 ratio. At present in most jurisdictions, the compensation afforded employees is 55 percent of their wages.

Recent Developments

There has been a growing trend within jurisdictions situated both within and without California (in similar family leave programs in other states) to implement a form of the PFL that mandates compensation at the rate of 100 percent of wages.

Recently, the San Francisco Board of Supervisors voted to mandate that employers offer six weeks of paid leave for new parents at 100 percent of an employee’s salary, making the city the first place in the U.S. to enact fully paid family leave.

But California is not the only place where this is happening. As observed by Andrew Flowers for FiveThirtyEight.com: “this is the second big step forward for paid-leave advocates. New York Gov. Andrew Cuomo has also signed into law a bill funding 12 weeks of paid leave for new parents, at 50 percent of a worker’s paycheck, administered by the state and funded through a payroll tax.”

There have been signs elsewhere of a trend toward increasing paid family leave. According to the April 13, 2016 issue of Accounting Today, Ernst & Young has increased its paid parental leave policy for new parents to 16 weeks instead of 12 weeks beginning in July. The new parental leave policy is available to men and women welcoming a child through birth, adoption, surrogacy, foster care, or legal guardianship. EY said it would also provide generous benefits for fertility, surrogacy, and adoption. On average, nearly 1,200 EY employees in the US, half of which are men, take paid parental leave each year.

We suggest to our clients that they consider and even anticipate the possibility that more and more jurisdictions, including their own (California and other), might be eventually subject to legislation requiring them to compensate their employees on leave at the rate of 100 percent of wages--certainly a significant potential cost of doing business that should be taken into account.

Big changes are coming to over-time policy. As noted in Accounting Today, in 2015 the Department of Labor proposed a rule change that will have a monumental impact on the way employers compensate their employees for over-time. The rule change raises the overtime exemption threshold under the Fair Labor Standards Act (FLSA). The final version of this rule change is not expected to be released until late 2016.

The revised regulations, which are estimated to affect more than 5 million American workers, will increase the salary threshold for the overtime exemption from $455 a week ($23,600 annually) to $970 a week ($50,440 annually).

This will eventually increase the number of employees eligible to receive overtime pay. Under the old rule, only employees earning up to $23,500 annually could be entitled to over-time pay. Under the new increased exemption threshold, employees earning less than or equal to $50,440 annually will be entitled to over-time pay.

The rule change will impose financial and non-financial burdens on employers as businesses work to have full compliance with the FLSA and thereby avoid penalties and lawsuits for non-compliance.

Financially, it will add the burden of increased payroll costs. Therefore, more attention should will need to be devoted to managing cash flow requirements.

Attention should also be given to determine which positions will transition to non-exempt status. Employers will need to decide whether to just go with the flow, increase the salary level to maintain exempt status, or transition the position to non-exempt status. In addition, updating recordkeeping requirements and procedures can be critical to ensure full compliance with the Fair Labor Standards Act and applicable state wage and hour laws.

Thanks to the apparent uproar and number of negative comments invited by the DOL over its proposed change in the regulations, there appears to be growing speculation, however, that the terms of the final overtime threshold rule will be significantly different than as originally proposed.

Note the following differences in the initial proposed terms of the regulation change as quoted in HRMorning:

• The minimum salary threshold will rise to at least $40,000, instead of an initial increase to $50,440.

• The threshold will be tied to an automatic index so major legislative changes are not needed every time lawmakers want it to increase.

• The agency is considering changes to the duties tests, though at this point it is only asking for comments. The duties tests would be applicable to the executive, administrative, professional, computer or outside sales categories.

Of course, there is one big caveat to all of this. The new overtime rule will not be issued until late 2016, which means it probably won’t take effect until 2017. The presidential elections could completely change the landscape. The new over-time rule has been crafted and championed by Obama and the Democrat Party. If there is a shift in power in November, everything mentioned above could be in flux.

Pursuant to the terms and requirements of the Affordable Care Act (“ACA”), Forms 1095B and 1095C must be prepared and filed by certain employers and provided to employees by a statute specific time in order to be in full compliance with the ACA. 

Form 1095-B, Health Coverage

Form 1095-B is used to report certain information to the IRS and to taxpayers about individuals who are covered by minimum essential coverage and therefore are not liable for the individual shared responsibility payment.

Every person that provides minimum essential coverage to an individual during a calendar year must file an information return reporting the coverage. Filers will use Form 1094-B (transmittal) to submit Forms 1095-B (returns). However, employers (including government employers) subject to the employer-shared responsibility provisions sponsoring self-insured group health plans generally will report information about the coverage in Part III of Form 1095-C instead of on Form 1095-B.

For 2015 tax returns, everyone employed by a company with 50 or more employees will receive a new Form 1095. This form is in addition to the Form 1095-A received by other taxpayers using the marketplace to purchase their health insurance. You need this form to file your taxes as it provides the necessary proof that you have adequate health insurance for the year. Without this proof you could be subject to the new shared responsibility tax.

Form 1095-C, Employer-Provided Health Insurance Offer and Coverage Insurance

Form 1095-C is filed and furnished to any employee of an ALE member who is a full-time employee for one or more months of the calendar. ALE members must report that information for all 12 months of the calendar year for each employee. ALE is the abbreviation for Applicable Large Employer.

Applicable Large Employers, generally employers with 50 or more full-time employees (including full-time equivalent employees) in the previous year, must file one or more Forms 1094-C (including a Form 1094-C designated as the Authoritative Transmittal, whether or not filing multiple Forms 1094-C), and must file a Form 1095-C for each employee who was a full-time employee of the employer for any month of the calendar year. Generally, the employer is required to furnish a copy of the Form 1095-C (or a substitute form) to the employee.

Form 1094-C must be used to report to the IRS summary information for each employer and to transmit Forms 1095-C to the IRS. Form 1095-C is used to report information about each employee. The information reported on Form 1094-C and Form 1095-C is used in determining whether an employer owes a payment under the employer shared responsibility provisions under section 4980H. Form 1095-C is also used to determine the eligibility of the employee for the premium tax credit.

Extended Reporting Time Frame To Employees

As noted by this tax professional, a crucial driver to being in full compliance with the ACA is timely reporting of requisite 1095B and 1095C information to affected employees. Special note should be made to the fact that the IRS has granted an extension for Form 1095 B and 1095 C being sent to employees. The following table summarizes the impact of the statutory extension of time to report to employees.

Note: This delay does not impact the timing of Form 1095 A, Health Insurance Marketplace Statement. 1095 A is the form you receive if you purchase your health insurance through the Marketplace and not through your employer. http://news.resourcesforclients.com/index.php?u=NGdrUR4YvtBw&issue=78

The following discussion is an excerpt taken from a press release made available by the White House Office of the Press Secretary addressing “New Steps to Advance Equal Pay on the Seventh Anniversary of the Lilly Ledbetter Fair Pay Act”:

Approximately seven years ago, President Obama signed into law his first piece of legislation as President, the Lilly Ledbetter Fair Pay Act. Policies that ensure fair pay for all Americans and that help businesses to attract the strongest talent not only narrow the pay gap, but also boost productivity and benefit our economy. Yet today, the median wage of a woman working full-time year-round in the United States is about $39,600--only 79 percent of a man’s median earnings of $50,400. While the gap has narrowed slightly over the past two years, there is much more work to be done to ensure fair pay for all.

The President has identified several additional actions (see following) that his Administration is taking to further advance equal pay for all workers and to further empower working families:

• EEOC Action on Pay Data Collection: The Equal Employment Opportunity Commission (EEOC), in partnership with the Department of Labor, is publishing a proposal to annually collect summary pay data by gender, race, and ethnicity from businesses with 100 or more employees. The proposal would cover over 63 million employees. This step--stemming from a recommendation of the President’s Equal Pay Task Force and a Presidential Memorandum issued in April 2014--will help focus public enforcement of our equal pay laws and provide better insight into discriminatory pay practices across industries and occupations. It expands on and replaces an earlier plan by the Department of Labor to collect similar information from federal contractors.

• Call to action: The President is renewing his call to Congress to take up and pass the Paycheck Fairness Act, commonsense legislation that would give women additional tools to fight pay discrimination. States are increasingly taking action to fight pay discrimination, such as California and New York which passed equal pay laws last year and a number of States that will see legislation introduced this year. The President urges States--and employers--to take action to advance pay equality.

• White House Report: The Council of Economic Advisers is releasing an issue brief, “The Gender Pay Gap on the Anniversary of the Lilly Ledbetter Fair Pay Act,” that explores the state of the gender wage gap, the factors that influence it, and policies put forward by this Administration that can help address it. The brief highlights that the U.S. gender wage gap is now 2.5 percentage points larger than the average for industrialized countries. It also points to significant progress made since 2000 by the United Kingdom to reduce their pay gap by almost 9 percentage points and by Japan, Belgium, Ireland, and Denmark to reduce each of theirs by around 7 percentage points.

• 2016 White House Summit: The White House will host a Summit on “The United State of Women” on May 23rd together with the Department of State, the Department of Labor, the Aspen Institute, and Civic Nation. The summit, which comes nearly two years after the first-ever White House Summit on Working Families, will create an opportunity to mark the progress made on behalf of women and girls domestically and internationally over the course of this Administration and to discuss solutions to the challenges they still face. The Summit is being held with additional cooperation from Goldman Sachs 10,000 Women, the Tory Burch Foundation and the Ford Foundation.

The President’s Council of Economic Advisers has continued to spotlight the pay gap and other challenges women face in the workforce as well as policy solutions proposed by the Administration to address these persistent challenges.

Within the last few days the Obama administration announced executive action that would require companies with 100 employees or more to report to the federal government how much they pay their employees broken down by race, gender, and ethnicity. The proposed regulation is being jointly published by the U.S. Equal Employment Opportunity Commission and the Department of Labor. It is hoped that this transparency will help to root out discrimination and reduce the gender pay gap.

The Family and Medical Leave Act of 1993 (FMLA) entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave. Employees are also entitled to return to their same or an equivalent job at the end of their FMLA leave.

This article intends to shed some light about the following:

• Which employers are covered by the FMLA

• When employees are eligible and entitled to take FMLA leave

• What rules apply when employees take FMLA leave

Eligible employees under FMLA are entitled to:

• 12 workweeks of leave in a 12-month period for:

• the birth of a child and to care for the newborn child within one year of birth

• the placement with the employee of a child for adoption or foster care and to care for the newly placed child within one year of placement

• to care for the employee’s spouse, child, or parent who has a serious health condition

• a serious health condition that makes the employee unable to perform the essential functions of his or her job

• any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on “covered active duty”

• 26 workweeks of leave during a single 12-month period to care for a covered service member with a serious injury or illness if the eligible employee is the service member’s spouse, son, daughter, parent, or next of kin (military caregiver leave).

The FMLA applies to all:

• public agencies, including local, State, and Federal employers, and local education agencies (schools)

• private sector employers who employ 50 or more employees for at least 20 workweeks in the current or preceding calendar year – including joint employers and successors of covered employers.

The foregoing information is courtesy of the United States Department of Labor and their FAQ page:

The FMLA has served as the cornerstone of the Department of Labor’s efforts to promote work-life balance since President Clinton signed the legislation in 1993. For those who would argue that compliance with the FMLA is burdensome, at best, the best available evidence suggests that adopting flexible practices in the workplace potentially boosts productivity, improves morale, and benefits the economy.

The Family and Medical Leave Act codified a simple and fundamental principle: Workers should not have to choose between the job they need and the family members they love and who need their care. The significance of the FMLA is in its recognition that workers aren't just contributing to the success of a business, but away from their jobs they are contributing to the health and well-being of their families. The intent of the FMLA is to promote economic security of families and serve the national interest in preserving family integrity.

There will be those employers who view the impact of the FMLA requirements as economically burdensome and counter-productive to their business. In order to dissuade the naysayers from non-compliance and uncooperative conduct Section 105 of the FMLA and section 825.220 of the FMLA regulations prohibit the following actions:

• An employer is prohibited from interfering with, restraining, or denying the exercise of, or the attempt to exercise, any FMLA right.

• An employer is prohibited from discriminating or retaliating against an employee or prospective employee for having exercised or attempted to exercise any FMLA right.

• An employer is prohibited from discharging or in any other way discriminating against any person, whether or not an employee, for opposing or complaining about any unlawful practice under the FMLA.

• All persons, whether or not employers, are prohibited from discharging or in any other way discriminating against any person, whether or not an employee, because that person has —

• Filed any charge, has instituted, or caused to be instituted, any proceeding under or related to the FMLA;

• Given, or is about to give, any information in connection with an inquiry or proceeding relating to any right under the FMLA; or

• Testified, or is about to testify, in any inquiry or proceeding relating to a right under the FMLA.

Examples of prohibited conduct include:

• Refusing to authorize FMLA leave for an eligible employee,

• Discouraging an employee from using FMLA leave,

• Manipulating an employee’s work hours to avoid responsibilities under the FMLA,

• Using an employee’s request for or use of FMLA leave as a negative factor in employment actions, such as hiring, promotions, or disciplinary actions, or,

• Counting FMLA leave under “no fault” attendance policies.

For quite some time, jurisdictions have had laws on the books requiring that employers grant employees sick leave without pay. Mandatory compensation while away for sick leave had never really been an issue. Over the past few years, however, momentum has been increasing to make it the law that workers be compensated while away from work for time taken off for sick leave.

One of the most prevalent arguments in favor of mandatory paid sick leave is that the employee can’t afford financially to take time away from the workplace while ill. In this scenario, the sick employee chooses to return to the workplace, thus exposing co-workers to the very germs that made them sick in the first place. So, instead of staying home recuperating from their illness, a contagious returning employee increases the chance that co-workers will get sick and further damage the productivity of the company.

On the other hand, opponents (employers) argue that the mandatory paid sick leave measures make it that much harder to remain competitive and hire new employees. Furthermore, business groups contend that requiring firms to provide paid sick leave benefits will force them to raise prices and consider reducing employees’ hours or other benefits.

According to NationalPartnership.org, mandatory sick leave supposedly affords the following benefits:

• Access to paid sick days reduces the spread of the flu in the workplace by nearly six percent.

• Paid sick days save employers money by reducing turnover.

• If workers were offered seven paid sick days a year, our national economy would experience a net savings of $160 billion a year due to increased productivity and reduced turnover.

• Paid sick days help family caregivers manage both their caregiving responsibilities and the jobs they need to support their families. Sixty-six million American adults are unpaid caregivers for family members or friends — and the number is growing.

This following graphic at USA Today shows the states and cities where paid sick leave is required or being considered, as well as which states have prohibited local governments from enacting their own paid sick leave requirements.

From the governmental perspective, at present, many government employees have access to paid sick days. All states provide paid sick days to at least some state employees, and the federal government provides thirteen paid sick days a year to its nearly 2.5 million full-time employees that can be used for self or family care. A chart summarizing the key points in existing paid sick days statutes (updated as of December 2015), and a brief overview of the policies (as of August 1, 2015), is viewable at NationalPartnership.org.

The idea behind “Ban The Box” is simple: it is a campaign seeking to introduce legislation prohibiting potential employers from asking about an applicant’s criminal background until “later” in the hiring process after consideration of an applicant’s qualifications.

The name “Ban The Box” refers to the check box on typical job applications that asks if the applicant has ever been convicted of a crime. The campaign seeks to remove the criminal history question from preliminary job application forms.

Currently, or without this legislation, employers are entitled to inquire about the applicant’s criminal history as early in the hiring process as when the job application is submitted.

The mantra of the movement is that without the sought after legislation, the job applicant is being treated unfairly. According to Nelp.org, employers should make individualized assessments instead of blanket exclusions and consider the age of the offense and its relevance to the job.

Opponents could argue that the legislation would impose a significant inefficiency on the organization by forcing prospective employers to wade through applications, conduct preliminary interviews, and then eventually get to the point in the process where criminal background is investigated and reasonably serves as a basis for terminating the application. Depending on the nature of the position, as well as the underlying nature of the criminal offense, it may never make sense to hire someone with a criminal background.

So why put the conviction history question off to later?

Advocates of the legislation are not seeking complete disregard of criminal history as one of the elements to the hiring process, but rather seeking to put off consideration of the history until later in the process after the applicant’s qualifications have been taken into consideration. Nelp.org notes that advocates can argue successfully with this point: “Nationwide, over 100 cities and counties have adopted ‘ban the box’ legislation so that employers consider the job candidate’s qualifications first, without the stigma of a conviction record. These initiatives provide applicants a fair chance by removing the conviction history question on the job application and delaying the background check inquiry until later in the hiring.”

An informative guide with additional information is available courtesy of the National Employment Law Project at the Ban the Box Fair Chance State and Local Guide.

The distinction between treating someone as an employee instead of an independent contractor is significant.

For an independent contractor, for example, nothing is withheld from the payments made to the independent contractor for a number of payroll related taxes that would otherwise have been withheld if the payee had been treated as an employee. Within the employer/employee relationship, the employer is liable and responsible for paying for a variety of payroll related taxes such as Social Security and unemployment tax that are avoided by treating the payee as an independent contractor.

The bottom-line is that if a payee is treated as an independent contractor instead of as an employee, the payer avoids having to pay as much in taxes.

To assist in the determination of whether a payee is an employee or independent contractor, the IRS developed what is referred to as the “20 Factor Test.” The test lists 20 different factors or questions under the common law that, depending on the circumstances at hand, provides some indication of whether the payee is an employee or independent contractor. The thrust of the test attempts to determine and evaluate the degree of control and degree of independence that the payer has over the payee. If the degree of control and independence that the payer has over the payee is significant enough, then the payee is more likely to be determined to be an employee.

The following “20 Factor Test” comes from IRS 87-41.

1. Instructions. An employee must comply with instructions about when, where and how to work. The control factor is present if the employer has the right to require compliance with the instructions.

2. Training. An employee receives on-going training from, or at the direction of, the employer.

   Independent contractors use their own methods and receive no training from the purchasers of their services.

3. Integration. An employee’s services are integrated into the business operations because the services are important to the business. This shows that the worker is subject to direction and control of the employer.

4. Services rendered personally. If the services must be rendered personally, then presumably the employer is interested in the methods used to accomplish the work as well as the end results. An employee often does not have the ability to assign their work to other employees; an independent contractor may assign the work to others.  

5. Hiring, supervising and paying assistants. If an employer hires, supervises and pays assistants, the worker is generally categorized as an employee. An independent contractor hires, supervises and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.

6. Continuing relationship. A continuing relationship between the worker and the employer indicates that an employer-employee relationship exists. The IRS has found that a continuing relationship may exist where work is performed at frequently recurring intervals, even if the intervals are irregular.

7. Set hours of work. A worker who has set hours of work established by an employer is generally an employee. An independent contractor sets his/her own schedule.

8. Full-time required. An employee normally works full-time for an employer. An independent contractor is free to work when and for whom he or she chooses.

9. Work done on premises. Work performed on the premises of the employer for whom the services are performed suggests employer control, and therefore, the worker may be an employee. An independent contractor may perform the work wherever they desire as long as the contract requirements are performed.  

10. Order or sequence set. A worker who must perform services in the order or sequence set by an employer is generally an employee.  Independent contractor performs the work in whatever order or sequence they may desire.

11. Oral or written reports. A requirement that the worker submit regular or written reports to the employer indicates a degree of control by the employer.

12. Payments by hour, week or month. Payments by the hour, week or month generally point to an employer-employee relationship.

13. Payment of expenses. If the employer ordinarily pays the worker’s business and/or travel expenses, the worker is ordinarily an employee.

14. Furnishing of tools and materials. If the employer furnishes significant tools, materials and other equipment by an employer, the worker is generally an employee.

15. Significant investment. If a worker has a significant investment in the facilities where the worker performs services, the worker may be an independent contractor.

16. Profit or loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor.  Employees are typically paid for their time and labor and have no liability for business expenses.

17. Working for more than one firm at a time. If a worker performs services for a multiple of unrelated firms at the same time, the worker may be an independent contractor.

18. Making services available to the general public. If a worker makes his or her services available to the general public on a regular and consistent basis, the worker may be an independent contractor.

19. Right to discharge. The employer’s right to discharge a worker is a factor indicating that the worker is an employee.

20. Right to terminate. If the worker can quit work at any time without incurring liability, the worker is generally an employee.

Furthermore, facts falling within the following three categories are to be evaluated in conjunction with the “20 Factor Test.” These facts will provide evidence of the extent or degree of control and independence that exists between the payer and payee.

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue, and is the work performed a key aspect of the business?

The IRS states the following:

• Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.

• There is no “magic” or set number of factors that define the worker to be an employee or an independent contractor, and no one factor can make this determination.

• Also, factors that are relevant in one situation may not be relevant in another.

Statutory Employees or Independent Contractors

The Internal Revenue Code contains various provisions that prescribe treatment of a specific category or type of worker as an employee or an independent contractor. These provisions override whatever other determinations are made under the common law.

For example, for federal tax purposes certain real estate agents and direct sellers are treated for all tax purposes as not being employees. Others apply only for specific purposes; for example, full-time life insurance salespersons are treated as employees for social security tax and employee benefit purposes while certain salespeople are treated as employees for social security tax purposes, as the IRS notes.