Good day, ladies and gentlemen, and welcome to the IRS webinar, Who is an Employee? At this time,
all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor
over to IRS representative, Casey. Ma'am, the floor is yours. Casey - Internal Revenue Service
Representative Thank you, and welcome to the Internal Revenue Services, Federal, State and Local
Representative And my name is Juli. We are excited to bring you this webinar, which helps you to
presentation on Who is an Employee? My name is Casey. Juli - Internal Revenue Service
understand how to determine whether your workers are employees. Before we begin, it's important
to note that this presentation is general information only and is not official guidance. Casey -
Internal Revenue Service Representative During this presentation, we will address the following
topics. Workers who are not considered employees, such as independent contractors or statutory
non-employees. Workers who are considered employees, or example, statutory employees or
common-law employees. Next, we will address the special circumstances that exist for government
entities, such as Section 218, and how it applies to your determination of whether you have an
employee. We will discuss how you can obtain help in determining whether you have an employee by
filing Form SS-8 with the Internal Revenue Service. And lastly, if you have workers that are
improperly classified as independent contractors, we will discuss the Voluntary Classification
Settlement Program and how it can help you. Before you know how to treat payments you make to
workers for services, you must first know the business relationship that exists between you and
the person performing the services. It is critical for any taxpayer paying compensation to
properly classify workers as employees or independent contractors. In some cases, the workers
may be independent contractors or employees under the common-law rules. In others, workers may be
designated as employees by a Section 218 Agreement, or workers may be defined as statutory
employees or statutory non-employees, because specific laws address the occupation. In general,
the determination of worker status is made by applying an established common-law standard that
addresses the facts and circumstances concerning how the work is performed. Juli, can you begin
our discussion with the definition of an independent contractor? Juli - Internal Revenue Service
Representative Sure, Casey. There's no formal definition of the term independent contractor.
Generally, an independent contractor is a self-employed individual who is contracted to perform
services for a taxpayer. An independent contractor controls the means and methods of how they
accomplish the task or project. People such as doctors, veterinarians, and auctioneers, who work
in an independent trade, business or profession, in which they offer their services to the
public, are generally not employees. However, whether such people are employees or independent
contractors depends on the facts in each case. The general rule is an individual, is an
independent contractor if you the person for whom the services are performed have the right to
direct or control only the result of the work and not the means and methods of accomplishing the
results. Another example of a worker that is not considered an employee is a statutory
non-employee. There are three categories of statutory non-employees: direct sellers, qualified
real estate agents, and certain companion sitters. We'll briefly describe each one of these
categories. Direct sellers include persons engaged in selling consumer products in the home or
place of business other than in a permanent retail establishment or to buyer on a buy/sell basis,
a deposit commission basis, or any other similar basis prescribed by regulations for resale in
the home or at a place of business other than in a permanent retail establishment, or a person
engaged in the trade or business of delivering or distributing newspapers or shopping news.
Qualified real estate agents include individuals engaged in appraisal activities for real estate
sales if substantially all, meaning at least 90%, of their earned income is commissions on sales
or other output as a real estate agent in connection with the sale of real property. Companion
sitters are individuals who furnish personal attendance, companionship, or household care
services to children or to individuals who are elderly or disabled. Companion sitters who are
not employees of a companion sitter placement service are generally treated as self-employed
statutory non-employees. Now that we have discussed, who are not considered employees, let us
talk about what workers would be considered employees and why? Even if workers are independent
contractors under the common-law rules, which we will discuss in a minute, the same workers may
nevertheless be treated as employees by statute, known as statutory employees for certain
employment tax purposes. Internal Revenue Code Section 3121(d)(3) lists individuals in four
occupational groups, who under certain circumstances, are considered employees for Federal
Insurance Contribution Act (FICA), but not for federal income tax. This would happen if they fall
within any one of the following four categories: One, a driver who distributes beverages other
than milk, or meat, vegetables, fruit, or bakery products, or who picks up and delivers laundry
or dry cleaning, if the driver is your agent or is paid on commission; Two, a full time life
insurance sales agent whose principal business activity is selling life insurance or annuity
contracts or both, primarily for one life insurance company; Three, an individual who works at
home on materials or goods that you supply and that must be returned to you or to a person you
name if you also give specifications for the work to be done; Four, a fulltime traveling or city
salesperson who works on your behalf and turns in orders to you from wholesalers, retailers,
contractors, or operators of hotels, restaurants, or other similar establishments. The goods
sold must be merchandise for resale or supplies for use in the buyer's business operation. The
work performed for you must be the salespersons principal business activity. For more
information on these four categories of statutory employees, please refer to Publications 963 and
15-A, and IRS.gov. There are conditions that must be present for these workers to be treated
statutorily as employees for FICA purposes. Additionally, workers in the first and fourth
categories are also employees for Federal Unemployment Tax Act (FUTA) purposes. Another category
of statutory employees are officers of a corporation. Officers are generally employees under IRC
3121(d)(1) unless they meet both of the following requirements. The officer does not perform any
services or performed only minor services, and the officer is not entitled to receive, directly
or indirectly, any remuneration. Things to consider when determining if the services are minor
or nominal, the character of the service, the frequency and duration of performance, and the
actual or potential importance or necessity of the services in relation to the conduct of the
corporation's business. Reminders: an officer must be entitled to receive directly or indirectly
any remuneration. If the officer only performs minor services, but is still compensated, then the
officer is treated as an employee. Remember, both requirements must be met to have the officer
not be treated as an employee. Casey, can you begin our discussion on common-law employees? Casey
- Internal Revenue Service Representative Sure, Juli. For employment tax purposes, an employee is
defined by IRC Section 3121(d)(2), as any individual who under the usual common-law rules
applicable in determining the employer-employee relationship has the status of an employee. To
determine whether an individual is an employee or an independent contractor under the common-law
rules, the relationship of the worker and the business must be examined to determine if the
business has the right to direct and control the worker as to the manner and means of the
workers job performance. In other words, does the entity have the right to tell the worker not
only what will be done, but how it will be done? As an aid to determining whether an individual
is an employee under the common-law rules, IRS Revenue Ruling 87-41 identifies factors, commonly
referred to as the 20 common-law factors, indicating whether the taxpayer has the right to direct
and control the actions of the worker sufficient to establish an employer-employee relationship.
Although, this revenue ruling is still valid, the IRS has grouped the more relevant factors into
three main categories of facts that provide evidence whether a worker is an employee or an
independent contractor. The 3 categories are: behavioral control, financial control, and
relationship of the parties. Let's look at each of these categories in more detail. Factors that
fall under the behavioral control category show whether the taxpayer has a right to direct and
control how the worker performs the specific task for which they are engaged. Many times, when
workers perform their task reasonably, the taxpayer does not appear to exercise much control. The
critical question, however, is whether there is a right to control. If the taxpayer has the
right to do so, it isn't necessary that the taxpayer exercise that right and actually direct and
control the manner in which the services are performed. Facts showing a business retains the
right to direct and control how a worker performs a task include, the type and degree of
instructions and the training provided to the worker. Let's begin our discussion with some
examples of instructions that would indicate an employee relationship: when and where to do the
work, what tools or equipment to use, what workers to hire or to assist with the work, where to
purchase supplies and services, what work must be performed by a specified individual, and what
order or sequence to follow. The key idea here is that an employee is generally subject to the
taxpayer's instruction about when, where and how to work Daily or ongoing instructions about the
expected task are especially indicative of employee status. Training is a classic means of
explaining detailed methods and procedures to be used in performing a task. Periodic or ongoing
training about procedures to be followed and methods to be used indicates the employer wants the
services performed in a particular manner. This type of training is compelling evidence of
employee status. Now, let's discuss some examples of training and what would indicate an employee
relationship. Employees often work subject to regulations and manuals which specify how their
jobs are to be done. For example, teachers must receive periodic training in departmental
policies. They attend meetings, follow an established curriculum, use certain textbooks, submit
lesson plans and abide by departmental policies concerning professional conduct. Police officers
and firefighters must be trained to follow departmental rules and regulations. Election workers
are trained to follow procedures established for the polling place, and they are directed by
supervisor. However, some types of training or minimal instructions may be provided to either an
employee or an independent contractor, including orientation or information sessions about a
taxpayer's policies. In other cases, a business will not need to provide instructions to highly
specialized professionals, the task may require little or no instruction. For example, a physical
therapist hired by a school district requires no training from the school. The worker already
has the education and training prior to being hired. The school probably isn't qualified to train
the worker. In this example, providing instructions and training is not important. Thus, they
are neutral factors in determining whether the worker is an employee or independent contractor,
and therefore all the other facts would make the final determination. Juli, can you discuss the
next category of evidence for us? Juli - Internal Revenue Service Representative Absolutely. The
second category includes evidence of whether the taxpayer controls the business and financial
aspects of the worker's activity. Generally, employees are not at risk of incurring a loss of
income during their work, because they receive a salary for as long as they work. In comparison,
independent contractors have a possibility of profit or loss. Facts showing the possibility of
profit or loss include significant investments in equipment, tools or facilities, having fixed
costs and unreimbursed expenses; working by the day or job rather than on a continuous basis;
having payment based on contract price, regardless of the cost to accomplish the job. Other
factors that show whether the business has a right to control the business aspects of the
worker's job include services available to the public and method of payments. Let's talk briefly
about each one of these aspects. An independent contractor can make a profit or loss. The extent
to which the worker has unreimbursed business expenses, a significant investment and therefore
their overall ability to realize a profit or loss is key in making a determination. Independent
contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs
that are incurred regardless of whether work is currently being performed are especially
important. An independent contractor often has a significant investment in the facilities or
tools they use in performing services. They are generally free to seek out business
opportunities, often advertise, maintain a business location, and are available to work in the
relevant market. How the business pays their workers is also important. An employee is generally
guaranteed a regular wage amount for an hourly, weekly or other period of time. This usually
indicates a worker is an employee, even when the wage or salary is supplemented by a commission.
An independent contractor is often paid either a flat fee, on a time and materials basis, or a
contract price, regardless of what it actually costs to accomplish the job, and therefore has a
genuine possibility of profit or loss. The third category used to determine worker status is
evidence of the relationship between the parties, including how they view their relationship.
The relationship of the parties is generally evidenced by examining the parties' agreements and
actions with respect to each other, paying attention to those facts that show not only how they
perceive their relationship, but also how they represent their relationship to others. Facts that
show the parties' type of relationship includes written contracts describing the relationships
the parties intended to create. However, a written contract doesn't in and of itself determine
the worker is an independent contractor. The entire picture must be viewed, and all factors
weighed. The facts and circumstances under which a worker performed services are determinative.
The substance of the relationship, not the label, governs the worker's status. Whether or not the
business provides the worker with the employee type benefits like insurance, a pension plan,
vacation pay, or sick pay. The permanency of the relationship. Engaging the worker with the
expectation the relationship will continue indefinitely rather than for a specific project or
period, would generally be considered evidence your intent was to create an employer-employee
relationship. The extent to which services performed by the worker are a key aspect of the
regular business of the company. If the worker provides services that are a key aspect of your
regular business activity, it is more likely you have the right to direct and control their
activities. For example, if a law firm hires an attorney, it is likely it will present the
attorney as its own and would have the right to direct or control or to direct the work. Now,
let's talk about Section 218 Agreements, which may govern the treatment of workers for state and
local governments. For Social Security and Medicare purposes, workers for state and local
governments and interstate instrumentalities may be covered by a Section 218 Agreement. A Section
218 Agreement is a written voluntary agreement between the state and the Social Security
Administration. All 50 states, Puerto Rico, the Virgin Islands, and approximately 60 interstate
instrumentalities have Section 218 Agreements extending Social Security and Medicare coverage to
specified employees. Section 218 coverage guides how workers covered by an agreement are taxed
for Social Security and Medicare, otherwise known as FICA taxes. Therefore, the first question
for a government to ask about a worker's status is whether the worker is in a position covered
under the Section 218 Agreement. If you aren't sure whether the Section 218 Agreement covers a
specific position, contact your state Social Security Administrator, or the SSA regional office
for assistance. If Social Security and Medicare coverage per a Section 218 Agreement apply, this
takes priority over other considerations for purposes of FICA withholding including the
common-law tests and the mandatory coverage rules. If a group of workers is covered under Section
218 Agreement, the agreement cannot be terminated or modified to exclude that coverage group.
State and local government employees who are not covered under a Section 218 Agreement are
generally subject to mandatory Social Security unless they participate in a public retirement
system that serves as a qualified FICA replacement plan. Mandatory Medicare taxes generally
apply to wages of all state and local government employees hired after March 31, 1986. Refer to
Publication 963 for additional details. Casey, can you discuss some additional special
considerations for government entities? Casey - Internal Revenue Service Representative Sure,
Juli. Under IRC Section 3401(c), an officer, employee or elected official of a state or local
government is an employee for income tax withholding purposes. Thus, by federal statute, public
officers are specifically included within the term "employee" for income tax withholding
purposes, and conversely are not "independent contractors". Treasury Regulations 31.3401(c)
clarifies that the officers, employees and elected officials can either be elected or appointed.
For Social Security and Medicare purposes, elected officials also referred to as individuals in
elective positions are subject to a degree of control that typically makes them employees under
the common-law, and therefore subject to these taxes. Elected officials are responsible to the
public which has the power to vote them out of office. They may also be subject to the recall by
the public or a superior official. Very few elected officials have sufficient independence to be
considered independent contractors. The term public officer refers to someone who has the
authority to exercise the power of the government and does so as an agent and employee of the
government. The Internal Revenue Code does not define the term public officer, but Treasury
Regulations 1402(c) addressing self-employment tax, provides holders of public office are not in
a trade or business, and therefore aren't subject to self-employment tax. Rather, an individual
recognized as a public officer is an employee. An exception to this rule applies for certain
public officials paid solely on a fee basis. The treasury regulation gives the following examples
of positions that constitute public office. They include governor, mayor, member of a
legislature or elected representative; county commissioner; state or local judge or justice of
the peace; county or city attorney, Marshall, Sheriff or Constable; registrar of deeds; tax
collector or tax assessor; road commissioners. If there is some question as to whether a worker
is a public officer and employee a critical factor to consider is whether there is a provision
of the state constitution or a statute establishing the position. State statutes should be
reviewed to determine whether they establish enough control for the individual to be classified
as an employee under the common-law test. A statute may state a specific position is that of a
public official, in which case there is likely to be a right to control sufficient to make the
individual an employee. Statutes may also specify the duties of the public office. They generally
establish the officer's superiors and subordinates, if any, as well as an official's term of
office and sometimes the compensation. They may require a public official take an oath of
office, and often establish general and specific penalties for dereliction of duty. For instance,
members of board who are paid for each meeting they attend may face termination if they fail to
attend a certain number of meetings. Juli, can you continue our discussion on special
considerations for government entities? Juli - Internal Revenue Service Representative Yes.
Compensation paid in an employer-employee relationship is taxable wages unless an exclusion
applies, regardless of whether the workers are termed volunteers. For example, in some cases
rather than receive salaries, firefighters may receive amounts intended to reimburse them for
expenses. They may also receive other cash or in-kind benefits that may be wages. Unless these
reimbursements are paid under an accountable plan, these reimbursements are taxable as wages.
You can review Publication 15 and Publication 5137 for more information on accountable plans but
just generally, there are three requirements for a reimbursement to be treated as being paid under
an accountable plan. The expenses must qualify as deductible business expenses incurred while
performing services for the employer. The employee must adequately account for the expenses to
the employer and the employee must return any amounts received that exceed expenses. To put that
another way, amounts that are termed reimbursements, but are not paid under an accountable plan
are treated as wages and subject to income, Social Security and Medicare taxes. Therefore, a per
diem or fixed amount paid to a firefighter or other worker that does not reimburse actual
documented expenses is includable in income and subject to income tax withholding, Social
Security and Medicare tax. The services of volunteers are generally not eligible for the
exclusion from FICA for emergency workers. IRC Section 3121(b) provides services performed by
employees on a temporary basis in the case of fire, storm, snow, earthquake, flood or other
similar emergency are exempt from employment. Firefighters who are on call and work part-time or
intermittently do not qualify for the emergency worker exclusion. This exception only applies for
temporary workers who are hired because of an unforeseen emergency. Medical residents are
generally common-law employees of the hospitals for which they work and therefore are subject to
Social Security and Medicare taxes unless they are accepted by a Section 218 Agreement. IRC
Section 3121(b)(10) provides an exception for students employed by a school, college or
university who are enrolled and regularly attending classes at the school. However, this
exception is not available to full-time employees. Under Treasury Regulations, an employee whose
normal work schedule is 40 hours or more per week is always considered a full-time employee.
Therefore, medical residents generally do not qualify to exclude payments for their services from
Social Security and Medicare taxes. Casey, let's explain Form SS-8 and how it can help? Casey -
Internal Revenue Service Representative Okay. So, after reviewing the 3 categories of evidence, if
you are still unsure whether a worker is an employee or an independent contractor under the
common-law rules, a Form SS-8, Determination of Worker Status for Federal Employment Taxes and
Income Tax Withholding, can be filed with the IRS. Filing a Form SS-8 requesting a worker status
determination means the worker or firm is asking the IRS to establish if the services provided to
the taxpayer are those of an employee or an independent contractor. The Form SS-8 can be
requested by either the worker or the firm, meaning the individual, business enterprise,
organization, state or other entity for which the worker has performed services to make a
determination of the status of the worker under the common-law rules. There is no fee for
requesting SS-8 determination letter. Once the form has been submitted, the IRS will acknowledge
receipt and the case will be assigned to a technician who will review the facts, apply the law
and render a decision. The technician may ask for additional information from the requestor, or
from other involved parties, or from third parties that could help clarify the work relationship
before rendering a decision. The IRS will generally issue a formal determination to the firm and
send a copy to the worker. A determination letter applies only to a worker or a class of workers
requesting it, and the decision is binding as long as there is no change in the facts or law
that form the basis for the ruling. Neither the Form SS-8 determination process nor the review of
any records in connection with the determination constitutes an examination of any federal tax
return. If the periods under consideration have previously been examined, the Form SS-8
determination process will not constitute a reexamination under IRS reopening procedures. Because
this is not an examination of any federal tax return, the appeal rights available in connection
with an examination do not apply to a Form SS-8 determination. If you disagree with a
determination, you can identify facts that were part of the original submission that you think
were not fully considered. Or, if you have additional information concerning the relationship
that was not part of the original submission, you can submit the additional information and
request the office reconsider the determination. Let's talk about the Voluntary Classification
Settlement Program otherwise known as VCSP. This voluntary program provides an opportunity for a
taxpayer treating its workers as independent contractors, or other non-employees to reclassify
its workers as employees for employment tax purposes for future taxpayers with partial relief
from federal employment taxes. The VCSP allows eligible taxpayers to obtain relief similar to
that currently available through the classification settlement program for taxpayers under
examination. To participate in this voluntary program, the taxpayer must meet certain eligibility
requirements, apply by filing Form 8952 application for Voluntary Classification Settlement
Program, and enter into a closing agreement with the IRS. The VCSP is available for taxpayers who
want to voluntarily change the prospective classification of their workers. The program applies
to taxpayers who are currently treating their workers or a group of workers as independent
contractors or other non-employees and want to prospectively treat the workers as employees. To
be eligible for this program a taxpayer must have consistently treated the workers to be
reclassified as independent contractors or other non-employees for the previous three years and
filed all required Forms 1099. Additionally, the taxpayer cannot currently be under employment
tax audit by the IRS or under audit concerning the classification of the workers by the
Department of Labor or a state government agency. If the IRS or the Department of Labor has
previously audited a taxpayer concerning the classification of the workers, the taxpayer will be
eligible only if the taxpayer has complied with the results of that audit and is not currently
contesting the classification in court. A taxpayer participating in the VCSP will agree to
prospectively treat the class or classes of workers as employees for future tax periods. In
exchange, the taxpayer will pay 10% of the employment tax liability that would have been due on
compensation paid to the workers for the most recent tax year, determined under the reduced
rates of Section 3509(a) of the Internal Revenue Code. The taxpayer will not be liable for any
interest and penalties on the amount and the taxpayer will not be subject to an employment tax
audit with respect to the workers being reclassified under VCSP for prior years. For more
information on how the payment is calculated under VCSP, see VCSP FAQ 15 on IRS.gov, and the
Instructions to Form 8952. Juli, can you take us through the VCSP process? Juli - Internal Revenue
Service Representative: I'd be glad to. To participate in the VCSP, a taxpayer must apply using
Form 8952, Application for Voluntary Classification Settlement Program. The application should
be filed at least 60 days prior to the date the taxpayer wants to begin treating its workers as
employees. The IRS will make every effort to process Form 8952 with sufficient time to allow for
the voluntary reclassification on the requested date. Along with the application, the taxpayer
may provide the name of a contact or an authorized representative with a valid Power of Attorney
using Form 2848. However, the taxpayer, and not the taxpayer's representative, is required to
sign Form 8952. The IRS will contact the taxpayer or authorized representative to complete the
process after reviewing the application and verifying the taxpayer's eligibility. Eligible
taxpayers accepted into the VCSP will enter into a closing agreement with the IRS to finalize
the terms of the VCSP and will simultaneously make full and complete payment of any amount due
under the closing agreement. This session was intended to raise your awareness regarding workers
that should be considered employees. There are many resources available on worker classification
and we would like to take a moment to mention a few of those before we close our session today.
First, on IRS.gov, you can find publications that discuss key considerations of who are employees
and include: Publication 15-A, Employer's Supplemental Tax Guide; Publication 963, Federal State
Reference Guide; Publication 1779, Independent Contractor or Employee. In addition to formal
publications, the search function on IRS.gov will provide you with a wealth of information.
Searching any of the topics we discussed today such as Section 218, worker classification, Form
SS-8 or VCSP within the search bar will bring up many relevant results to help you. We also have
webinars on IRSvideos.gov to help you as well. Several that relate most closely to our discussion
today include unique employment tax classification issues in government entities; understanding
the new Form W-4; and worker classification. This webinar will be available for viewing on the
IRS Video portal soon. Thank you for attending.