Payroll Certification Review - 2025-2026
Course Overview
2025-2026 Payroll Certification Review Course, PAYO Exam Spring 2026
Registration: Nov 10, 2025 - Apr 17, 2026; Exam Dates: Jan 5 - Apr 18, 2026
Focus on federal laws/regulations effective Jan 1, 2025.
Worker Classification
Types of Workers:
Common Law Employees
Independent Contractors
Statutory Employees
Statutory Non-Employees
Temporary Help Agency Referrals
Leased Employees
Employee vs Independent Contractor
Employee Criteria:
Paid through payroll
Works under employer control, exclusively
Subject to dismissal
Receives employee benefits
Tools and training provided
Independent Contractor Criteria:
Paid through Accounts Payable
Works for multiple employers
Sets own schedule and does not follow employer's instructions
Has own tools and can hire assistants
Tax Forms
Form 1099-NEC: Used for reporting payments to non-employees (≥$600).
If TIN is not provided: 24% backup withholding required.
Form 1099-MISC: Prior reporting method for miscellaneous income.
Worker Status Determination
Common Law Test: Assesses control over a worker.
Control parameters include behavioral and financial control.
Reasonable Basis Test: Allows misclassification if certain safe-harbor rules are met.
Form SS-8: To determine worker status according to IRS for federal taxes.
Statutory Employees and Non-Employees
Statutory Employees: Treated as employees for tax purposes despite not meeting common law tests (e.g., insurance agents).
Statutory Non-Employees: Treated as independent contractors for taxes (e.g., real estate agents).
Payroll and Reporting Responsibilities
Temporary Help Agency: Hires workers to serve client companies, payroll handled by agency.
Leased Employees: Workers employed by leasing companies; agency assumes some HR responsibilities.
Legal Considerations
Common Law vs Statutory Classification: Supreme Court’s broader criteria for employee classification.
Adherence to federal and state wage-hour laws; ABC test for determining independent contractors.
Misclassification Penalties
Penalties vary based on intention and type of misclassification:
Not Intentional: Fines on employer's portion of FICA.
Intentional: Full liability for all taxes and additional fines.
Employee Rights and Benefits
Misclassified independent contractors lack protections, including unemployment benefits and lower FICA rates.
Best Practices
Treat ambiguity in worker status as employee until clarified.
Contracts waiving rights are not valid; each classification should be reviewed individually.
Immigration Compliance
IRCA Requirements: Form I-9 for verifying employee eligibility to work in the U.S.
Maintain Form I-9 for the required duration and comply with E-Verify processes.
Course Overview
The 2025-2026 Payroll Certification Review Course prepares individuals for the PAYO Exam in Spring 2026.
Registration Period: November 10, 2025 - April 17, 2026.
Exam Dates: January 5 - April 18, 2026.
Course Focus: Concentrates on federal payroll laws and regulations that became effective as of January 1, 2025, ensuring up-to-date knowledge for the exam.
Worker Classification
Accurately classifying workers is crucial for tax compliance, benefit eligibility, and legal protections. Misclassification can lead to significant penalties.
Types of Workers:
Common Law Employees: Workers whose services are controlled by an employer as to what will be done and how it will be done.
Independent Contractors: Self-employed individuals who control the methods and means of performing tasks.
Statutory Employees: Certain workers who are independent contractors under common law but are treated as employees for specific payroll taxes, such as FICA.
Statutory Non-Employees: Workers specified by statute (e.g., direct sellers, licensed real estate agents) who are treated as independent contractors for federal tax purposes, even if they might otherwise meet common law employee criteria.
Temporary Help Agency Referrals: Individuals placed by a staffing agency; the agency typically handles payroll and HR administrative functions.
Leased Employees: Workers employed by a professional employer organization (PEO) and leased to a client company. The PEO often assumes employer responsibilities for payroll, benefits, and HR compliance.
Employee vs Independent Contractor
Distinguishing between an employee and an independent contractor is fundamental for tax obligations and worker rights.
Employee Criteria:
Payroll and Compensation: Paid a regular wage or salary through the employer's payroll system, with taxes (income, FICA) withheld.
Employer Control: Works under the direct control and instruction of the employer regarding when, where, and how the work is performed, often exclusively for one employer.
Dismissal Rights: Subject to dismissal by the employer, indicating a dependent work relationship.
Benefits Provided: Receives employment benefits such as health insurance, paid time off, retirement plans, and workers' compensation.
Resources and Training: Employer provides necessary tools, equipment, and training for the job.
Independent Contractor Criteria:
Accounts Payable Compensation: Paid for services via Accounts Payable, typically without tax withholdings (unless backup withholding applies).
Autonomy and Multiple Clients: Works for multiple clients or businesses, exercising independence in client selection and work methods.
Self-Directed Schedule: Sets own working hours, deadlines, and methods, operating without direct employer instruction or supervision.
Own Resources: Utilizes own tools, equipment, and business expenses, and may hire their own assistants or subcontractors.
Tax Forms
Form 1099-NEC (Nonemployee Compensation): This form is specifically used for reporting payments of 600 or more to non-employees, such as independent contractors, freelancers, and vendors, for services performed in the course of a trade or business.
Backup Withholding: If a Taxpayer Identification Number (TIN) is not provided by the payee, or if the IRS notifies the payer of an incorrect TIN, a 24% backup withholding is required on payments.
Form 1099-MISC (Miscellaneous Information): While previously used for nonemployee compensation, it is now primarily used for reporting other types of miscellaneous income, such as rents, royalties, prizes, awards, and other income payments of 10 or more, or certain medical and health care payments of 600 or more.
Worker Status Determination
Common Law Test: The IRS's primary method for determining a worker's status, assessing the degree of control and independence. It focuses on three main categories:
Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does their job (e.g., instructions, training)?
Financial Control: Does the company control the business aspects of the worker's job (e.g., how the worker is paid, expense reimbursement, investment in tools)?
Type of Relationship: Are there written contracts, employee benefits, or a permanent relationship implying an employer-employee dynamic?
Reasonable Basis Test (Section 530 of the Revenue Act of 1978): Provides a
Course Overview
The 2025-2026 Payroll Certification Review Course prepares individuals for the PAYO Exam in Spring 2026.
Registration Period: November 10, 2025 - April 17, 2026.
Exam Dates: January 5 - April 18, 2026.
Course Focus: Concentrates on federal payroll laws and regulations that became effective as of January 1, 2025, ensuring up-to-date knowledge for the exam.
Worker Classification
Accurately classifying workers is crucial for tax compliance, benefit eligibility, and legal protections. Misclassification can lead to significant penalties.
Types of Workers:
Common Law Employees: Workers whose services are controlled by an employer as to what will be done and how it will be done.
Independent Contractors: Self-employed individuals who control the methods and means of performing tasks.
Statutory Employees: Certain workers who are independent contractors under common law but are treated as employees for specific payroll taxes, such as FICA.
Statutory Non-Employees: Workers specified by statute (e.g., direct sellers, licensed real estate agents) who are treated as independent contractors for federal tax purposes, even if they might otherwise meet common law employee criteria.
Temporary Help Agency Referrals: Individuals placed by a staffing agency; the agency typically handles payroll and HR administrative functions.
Leased Employees: Workers employed by a professional employer organization (PEO) and leased to a client company. The PEO often assumes employer responsibilities for payroll, benefits, and HR compliance.
Employee vs Independent Contractor
Distinguishing between an employee and an independent contractor is fundamental for tax obligations and worker rights.
Employee Criteria:
Payroll and Compensation: Paid a regular wage or salary through the employer's payroll system, with taxes (income, FICA) withheld.
Employer Control: Works under the direct control and instruction of the employer regarding when, where, and how the work is performed, often exclusively for one employer.
Dismissal Rights: Subject to dismissal by the employer, indicating a dependent work relationship.
Benefits Provided: Receives employment benefits such as health insurance, paid time off, retirement plans, and workers' compensation.
Resources and Training: Employer provides necessary tools, equipment, and training for the job.
Independent Contractor Criteria:
Accounts Payable Compensation: Paid for services via Accounts Payable, typically without tax withholdings (unless backup withholding applies).
Autonomy and Multiple Clients: Works for multiple clients or businesses, exercising independence in client selection and work methods.
Self-Directed Schedule: Sets own working hours, deadlines, and methods, operating without direct employer instruction or supervision.
Own Resources: Utilizes own tools, equipment, and business expenses, and may hire their own assistants or subcontractors.
Tax Forms
Form 1099-NEC (Nonemployee Compensation): This form is specifically used for reporting payments of 600 or more to non-employees, such as independent contractors, freelancers, and vendors, for services performed in the course of a trade or business.
Backup Withholding: If a Taxpayer Identification Number (TIN) is not provided by the payee, or if the IRS notifies the payer of an incorrect TIN, a 24% backup withholding is required on payments.
Form 1099-MISC (Miscellaneous Information): While previously used for nonemployee compensation, it is now primarily used for reporting other types of miscellaneous income, such as rents, royalties, prizes, awards, and other income payments of 10 or more, or certain medical and health care payments of 600 or more.
Worker Status Determination
Common Law Test: The IRS's primary method for determining a worker's status, assessing the degree of control and independence. It focuses on three main categories:
Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does their job (e.g., instructions, training)?
Financial Control: Does the company control the business aspects of the worker's job (e.g., how the worker is paid, expense reimbursement, investment in tools)?
Type of Relationship: Are there written contracts, employee benefits, or a permanent relationship implying an employer-employee dynamic?
Reasonable Basis Test (Section 530 of the Revenue Act of 1978): Provides a safe harbor for employers who have historically misclassified workers if they meet certain criteria. These criteria generally involve:
Judicial Precedent: Reliance on published rulings or judicial precedent.
Prior Audit: The worker was treated as an independent contractor in a prior IRS audit.
Industry Practice: Reliance on a long-standing recognized practice of a significant segment of the industry.
No Tax Treatment Inconsistencies: Consistent treatment of workers in substantially similar positions as independent contractors.
Form SS-8, Determination of Worker Status for Federal Employment Taxes and Income Tax Withholding: Used by either a worker or a business to ask the IRS to determine the status of a worker for federal tax purposes. The IRS will review the facts and circumstances using the common law test.
Statutory Employees and Non-Employees
Statutory Employees: Certain occupations are defined by law to be treated as employees for specific tax purposes (FICA, FUTA), even if they might otherwise be considered independent contractors under common law. Examples include:
A driver who distributes beverages (other than milk), meat, vegetables, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is an agent or is paid on commission.
A full-time life insurance salesperson whose entire business activity consists of selling life insurance or annuity contracts, primarily for one life insurance company.
A home worker performing work according to specifications furnished by the person for whom the services are performed, who supplies the materials.
A traveling or city salesperson working full-time on behalf of a principal and soliciting orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments.
Statutory Non-Employees: Certain types of workers are specifically treated as independent contractors by statute for federal tax purposes, regardless of whether they might meet the common law employee criteria. These include:
Direct Sellers: Individuals involved in selling consumer products in the home or in non-permanent establishments.
Licensed Real Estate Agents: Professionals whose remuneration is directly related to sales or other output, rather than the number of hours worked.
Payroll and Reporting Responsibilities
Temporary Help Agency: When a temporary staffing agency refers workers to client companies, the agency is generally responsible for all employment-related taxes, wages, and benefits. The client company supervises the workers but does not directly employ them for payroll purposes.
Leased Employees: In a co-employment arrangement with a Professional Employer Organization (PEO), the PEO typically assumes employer responsibilities for payroll, benefits administration, tax filings, and HR compliance, while the client company directs the day-to-day work tasks of the leased employees.
Legal Considerations
Common Law vs. Statutory Classification: While common law provides a fundamental framework, specific statutes can override or modify these classifications for certain tax purposes. The Supreme Court has also provided broader criteria, emphasizing the economic realities of the relationship and whether the worker is in business for themselves.
Adherence to Federal and State Wage-Hour Laws: Employers must comply with the Fair Labor Standards Act (FLSA) and state-specific wage and hour laws, which vary widely. Independent contractors are not covered by these laws.
ABC Test for Determining Independent Contractors: Many states (e.g., California, Massachusetts, New Jersey) use a stricter “ABC test” to determine independent contractor status, especially for unemployment insurance and workers’ compensation. To be classified as an independent contractor under the ABC test, all three conditions must be met:
A: The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
B: The worker performs work that is outside the usual course of the hiring entity’s business.
C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Misclassification Penalties
The penalties for misclassifying workers can be severe and vary depending on the intent behind the misclassification:
Not Intentional (Unintentional/Negligent Misclassification): If misclassification is found to be unintentional, penalties typically include fines on the employer's portion of FICA taxes, underpaid income tax withholding, and potential interest on these amounts.
Intentional (Willful Misclassification): If the misclassification is determined to be intentional or fraudulent, the employer can face full liability for all employee and employer taxes (FICA, FUTA, income tax withholding), significant additional fines, penalties for failure to file information returns, and even criminal charges.
Employee Rights and Benefits
Misclassified independent contractors are deprived of critical employee protections and benefits, including:
Minimum Wage and Overtime Pay: Not covered by FLSA.
Unemployment Insurance: Ineligible for unemployment benefits upon termination.
Workers' Compensation: Not covered by workers' compensation laws for job-related injuries.
Employee Benefits: Do not receive health insurance, paid time off, retirement plans, or other benefits typically offered to employees.
FICA Rates: Independent contractors pay both the employer and employee portions of FICA (Self-Employment Tax), which is 15.3\% on net earnings, compared to employees who only pay 7.65\% directly (with the employer paying the other 7.65\%).
Protection against Discrimination: May lack certain protections under anti-discrimination laws enjoyed by employees.
Best Practices
Treat Ambiguity as Employee Status: When there is doubt regarding worker classification, it is often best to treat the worker as an employee until a clear determination (e.g., through an IRS Form SS-8) indicates otherwise. This reduces the risk of significant penalties.
Contracts Waiving Rights are Not Valid: Employers cannot avoid employee classification by having workers sign contracts that waive their rights to be treated as employees or stipulate that they are independent contractors. The IRS and courts look at the actual relationship, not just the contract.
Individual Review: Each worker's classification should be reviewed individually based on the specific facts and circumstances of the work relationship, using IRS guidelines and applicable state laws.
Immigration Compliance
IRCA Requirements (Immigration Reform and Control Act of 1986): Mandates that all U.S. employers verify the identity and employment eligibility of all new hires, regardless of citizenship status.
Form I-9, Employment Eligibility Verification: Employers must complete and retain Form I-9 for every new employee. The form requires employees to attest to their employment authorization and present acceptable identity and employment eligibility documents.
Maintain Form I-9 for Required Duration: Employers must retain Form I-9 for three years after the date of hire or one year after the date employment ends, whichever is later.
Comply with E-Verify Processes: E-Verify is an internet-based system that compares information from an employee's Form I-9 to data from U.S. Department of Homeland Security and Social Security Administration records to confirm employment eligibility. While generally voluntary, some states or federal contracts require its use.