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.