Heightened IRS Scrutiny on Worker h d k Misclassification and Tax - PowerPoint PPT Presentation

Presenting a live 110 ‐ minute teleconference with interactive Q&A Heightened IRS Scrutiny on Worker h d k Misclassification and Tax Compliance P Preparing for Federal and State Information Sharing; i f F d l d St t I f ti Sh i Evaluating Risks and Benefits of the New IRS Compliance Program THURS DAY, DECEMBER 1, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Bob Adams Managing Director Tax S Bob Adams, Managing Director, Tax S ervices RSM McGladrey Washington D C ervices, RSM McGladrey , Washington, D.C. S tephen Ashby, Accounting and Auditing Manager, Billups Company CPAs Inc. , Clackamas, Ore. Michael Gall, Baker Hostetler , Cleveland, Ohio Wray Rives, Owner, RivesCPA, PLLC , Coppell, Texas Wray Rives, Owner, RivesCPA, PLLC , Coppell, Texas Tim Ellenwood, Director of Employment Tax, RSM McGladrey , Vienna, Va. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .

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Heightened IRS Scrutiny on Worker Misclassification and Tax Compliance Mi l ifi ti d T C li Seminar Dec. 1, 2011 S S tephen Ashby, Billups Company CP tephen Ashby Billups Company CP As Inc. As Inc Wray Rives RivesCP Wray Rives, RivesCP A, PLLC A PLLC steve@billupscpa.com wray@rivescpa.com Tim Ellenwood, RS M McGladrey Bob Adams, RS M McGladrey tim.ellenwood@mcgladrey.com bob.adams@mcgladrey.com Michael K. Gall, Baker Hostetler mgall@bakerlaw com mgall@bakerlaw.com

Today’s Program Review Of Federal, S tate Worker Classification Tests S lide 7 – S lide 18 [S t ephen Ashby] Ongoing IRS Research Proj ect On Employment Taxes S lide 19 – S lide 22 [Wray Rives] IRS IRS Labor Department Memorandum Of Understanding -Labor Department Memorandum Of Understanding S S lide 23 – S lide 23 S lide 27 lide 27 [Tim Ellenwood] IRS Voluntary Classification S ettlement Program S lide 28 – S lide 47 [Wray Rives and Bob Adams] S lide 48 – S lide 69 Best Practices For Determining Worker S tatus [Michael K. Gall] [ ]

Stephen Ashby, Billups Company CPAs Inc. REVIEW OF FEDERAL STATE REVIEW OF FEDERAL, STATE WORKER CLASSIFICATION TESTS

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: A A Agenda Agenda d d  Introduction I t d ti  Common elements of the tests  Three approaches to independent contractor tests ◦ Economic reality test ◦ Economic reality test ◦ IRS common law test ◦ “ABC” test The Billups Company CPA's Inc. Clackamas, Oregon 8

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: I t Introduction Introduction I t d d ti ti  Milton Friedman and tax withholding  Stakeholders in the issue Stakeholders in the issue ◦ Taxing authorities – federal and state ◦ Department of Labor ◦ Employers The Billups Company CPA's Inc. Clackamas, Oregon 9

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: C Common Elements Of The Tests Common Elements Of The Tests C El El Of Th Of Th T T  Facts and circumstances are key  Operational control Operational control  Financial or business control  Nature of the business relationship The Billups Company CPA's Inc. Clackamas, Oregon 10

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: E Economic Reality Test Economic Reality Test E i i R R lit lit T T t t  U.S. Supreme Court – U.S. v. Silk, 331 U.S. 704 (1947)  Issue – Employer Social Security taxes Issue Employer Social Security taxes  Five-part test The Billups Company CPA's Inc. Clackamas, Oregon 11

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: E Economic Reality Test (Cont.) Economic Reality Test (Cont.) E i i R R lit lit T T t (C t (C t ) t )  Five-part test (Cont.) Fi t t t (C t ) ◦ Degree of control by employer ◦ Extent of the relative investments by the parties. y ◦ Degree to which the employee profit and loss are determined by the employer. ◦ The skill and initiative required for the job The skill and initiative required for the job ◦ The permanency of the relationship The Billups Company CPA's Inc. Clackamas, Oregon 12

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: “ABC” T “ABC” T “ABC” Test “ABC” Test t t  Used by about two-thirds of states in making determinations for state employment tax purposes  The general requirement is that the worker must meet three, (in some states, two) criteria to be considered independent. The Billups Company CPA's Inc. Clackamas, Oregon 13

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: “ABC” T “ABC” T “ABC” Test (Cont.) “ABC” Test (Cont.) t (C t (C t ) t )  Three-part test Th t t t ◦ A= Alone: Does the individual work independently of the employer’s control? ◦ B= Business: Does the individual maintain his own place of business? ◦ C= Control: Does the individual practice or work at an p established trade, and exercise control over his own schedule and method of operation? The Billups Company CPA's Inc. Clackamas, Oregon 14

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: IRS C IRS C IRS Common Law Test IRS Common Law Test L L T T t t  Test is used for determining classification, for purposes of T t i d f d t i i l ifi ti f f federal employment taxes.  Based on common law, the economic reality test, the “ABC” test  IRS expands the list to 11, more detailed tests. The Billups Company CPA's Inc. Clackamas, Oregon 15

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: IRS C IRS C IRS Common Law Test (Cont.) IRS Common Law Test (Cont.) L L T T t (C t (C t ) t )  Eleven-part test El t t t ◦ Behavioral control  Degree of supervision  Training ◦ Financial control  Reimbursed business expenses Reimbursed business expenses  Worker’s investment in his business  Availability to other employers  Method of compensation f  Profit potential for the worker The Billups Company CPA's Inc. Clackamas, Oregon 16

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: IRS C IRS C IRS Common Law Test (Cont.) IRS Common Law Test (Cont.) L L T T t (C t (C t ) t )  Eleven-part test (Cont.) El t t t (C t ) ◦ Business relationship  Written contracts  Provision of benefits  Permanency of the relationship  Importance of the worker’s services to the company Importance of the worker s services to the company The Billups Company CPA's Inc. Clackamas, Oregon 17

Employee Vs. Contractor Classification: Employee Vs. Contractor Classification: Resources With More Information R Resources With More Information R With M With M I f I f ti ti  Department of Labor fact sheet on the Fair Labor Standards p Act and employment relationships: http://www.dol.gov/whd/regs/compliance/whdfs13.htm  Department of Labor Web site: http://www.dol.gov/whd/  Employer’s Supplemental Tax Guide Publication 15-A: http://www.irs.gov/pub/irs-pdf/p15a.pdf  IRS Web site: Independent contractor (self-employed) or employee? l ? http://www.irs.gov/businesses/small/article/0,,id=99921,00.ht ml United States v Silk 331 U S 704 (1947): United States v. Silk , 331 U.S. 704 (1947):   http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=case& court=us&vol=331&page=704  Brock v. Mr. W Fireworks, Inc. , 814 F.2d 1042 (5th Cir. 1987) , ( ) , The Billups Company CPA's Inc. Clackamas, Oregon 18