cpp chapter 1 notes (1)

The Employer-Employee Relationship

Importance of Determination

• Employee Responsibilities:

  • Requires withholding and employer contributions (FIT, Social Security, Medicare, FUTA, state/local taxes)

  • Workers’ Compensation

• Independent Contractor:

  • Tax withholding not required with valid TIN

  • Employer must issue 1099-NEC for payments >= $600 annually

  • Misclassification leads to revenue loss for IRS and issues with employee benefits.

Common Law Test

• Purpose: Used by IRS for worker status determination (tax purposes)

• Key Factors:

  • Right to Control:

    • Employee (EE): Determines how work is done

    • Independent Contractor (IC): Control relates mainly to the outcome

  • Control Factors:

    • Behavioral Control: Instructions and training

Financial Control

• Un-reimbursed business expenses

• Workers' investment in work, public service availability

• Payment methods: time-based or job-based, potential for profit or loss

Type of Relationship

• Presence of a written agreement

• Employee benefits provided, term of relationship, importance of services in operations

Reasonable Basis Test

• Overview: Worker can qualify as EE under Common Law but be treated as IC based on reasonable basis

• Factors Considered:

  • Court decisions, IRS rulings, technical advice

  • Previous audits with no penalties

  • Recognized practices in the industry

  • Consistency is crucial for safe harbor

Types of Employees

• Statutory Employee:

  • Not EEs by Common Law but treated as such for certain taxes

  • Categories (HALT):

    • Home workers, agent-drivers, full-time life insurance salespersons, city salespersons

• General Requirements:

  • Workers perform all services, no substantial investment by them, part of ongoing relationship.

Statutory Non-employee

• Definition: May qualify as EE under Common Law, treated as IC for tax withholding

• Criteria (REDS):

  • Qualified real estate agents, direct sellers

• Requirements:

  • Compensation tied to sales/output, written contracts, not treated as EE for tax purposes.

Other Types of Employees

• Temporary Help Agency Employees:

  • Short term, agency-paid, responsible for wages and taxes

• Leased Employees:

  • Hired/trained by leasing company, agency incurs fees

• PEOs (Professional Employer Organizations):

  • Manage HR, payroll, and benefits for clients.

Worker Misclassification – Enforcement and Penalties

• IRS Penalties:

  • Unintentional: 1.5%-3% for not withholding FIT; 20%-40% for SS/Medicare

  • Intentional: Full FIT not withheld, 100% EE/ER SS/Medicare

• Enforcement Elements:

  • Form 1099-MISC for workers receiving both W2 and 1099 from the same ER

  • Sharing complaints between IRS and state agencies, potential for retroactive benefits.

Right to Work in the U.S.

• Legislation:

  • Immigration Reform and Control Act (IRCA) mandates verification of workers’ right to work since November 6, 1986

• Form I-9 Requirements:

  • Completed on the first day of employment, verified within 3 days

  • Proof of identity and work eligibility required.

I-9 Documentation

• Acceptable forms must provide proof of identity and right to work; specific forms cannot be mandated by employers.

Verification Services

• Social Security Administration:

  • Offers free online service to verify name/number matching

• eVerify:

  • Online service to confirm names, numbers, and right to work status.

New Hire Reporting

• Federal Requirement:

  • Requires reporting employee and employer information within 20 days of hire

  • States may impose additional reporting and penalties

  • Conspiracy penalties of $500 for non-compliance.