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Independent Contractors Determining Classification: Categories of Evidence


        Employee or Independent Contractor?

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Since common law factors change, the courts and the IRS have grouped the preceding questions into three main categories, known as the “categories of evidence.” These categories are behavioral control, financial control and type of relationship.

Behavioral control Individuals should be classified as employees if the employer assumes control over their instruction and training:

     • Instruction – an employee is generally told:

               o When, where and how to work

               o What tools or equipment to use

               o What workers to hire or to assist with the work

               o Where to purchase supplies and services

               o What work must be performed by each individual

               o What order or sequence to follow

     • Training – an employee may be trained to perform services in a
     particular manner.

Financial control The extent to which the individual carries the following financial burdens or privileges can dictate whether he or she is an employee or an independent contractor:

     • Cost of work expenses and reimbursements

     • Contributions and significant company investments

     • Offering services to the general public

     • Manner of compensation and payment

     • The possibility for making a profit or sustaining a loss after the
     work is complete

Type of relationship The following can also be used to classify an individual:

     • Written contracts describing the intended relationship

     • Whether the worker receives employee benefits

     • The permanency or length of the relationship

     • How integral the services are to the company’s principal activity

Hiring an independent contractor offers employers many advantages. Unlike for traditional employees, employers do not pay taxes on independent contractors’ wages, and are not expected to provide benefits. Employers often save 30 to 40 percent on labor costs by using independent contractors. In addition, as independent contractors are generally hired for a specific period or project, employers have no obligation to rehire them after each contract period or project is complete.

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Independent Contractors Determining Classification: Common Law Control Test


        Employee or Independent Contractor?

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The IRS uses a version of the common law control test to determine whether an individual is an employee or an independent contractor. If the majority of the factors in the control test favor the existence of an employer-employee relationship, then the individual should be classified as an employee (or vice versa).

IRS Factors Used to Determine Control

Answering the following questions in the affirmative suggests that an employer contractor relationship exists:

     • Can the individual earn a profit or suffer a loss from doing the task?

     • Does the individual offer services to the public?

     • Does the individual provide his or her own tools, materials, office space
     or supplies?

     • Is the individual paid when the job is completed?

     • Does the individual provide his or her services for more than one company
     at a time?

     • Does the individual have the authority to hire others, and is he or she
     responsible for their wages?

     • Doe the individual set his or her own working hours?

     • Does the individual cover his or her own travel and business expenses?

Answering the following questions in the affirmative suggests the existence of an employer-employee relationship:

     • Does the individual have a long-term relationship with the company?

     • Does the individual work full time for the company?

     • Does the individual receive instructions on where to work?

     • Can the individual quit without being liable for breaking a contract?

     • Is the individual is paid by the hour?

     • Does the employer instruct the individual on how to perform his or
     her job?

     • Has the individual received training for the job he or she is to perform?

     • Is the individual required to give progress reports on the work completed
     throughout the project?

     • Is the individual’s work considered an important aspect of the company’s
     daily operations?

Other government agencies, including state agencies, have developed their own systems to determine an individual’s status within a company. Employers should contact these agencies directly for specific information.

Hiring an independent contractor offers employers many advantages. Unlike for traditional employees, employers do not pay taxes on independent contractors’ wages, and are not expected to provide benefits. Employers often save 30 to 40 percent on labor costs by using independent contractors. In addition, as independent contractors are generally hired for a specific period or project, employers have no obligation to rehire them after each contract period or project is complete.

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Advantages/ Disadvantages of Hiring Independent Contractors


        Employee or Independent Contractor?

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Advantages

Labor cost reduction – Companies can get the same or better services for less money because there are no employment add-on costs.

Supplies and office space cost reduction – Independent contractors provide their own equipment, materials and office space.

Liability reduction – Employers are not automatically responsible for any injuries independent contractors may sustain while providing their services or for wrongful termination, job discrimination or sexual harassment lawsuits. However, because many of these areas are highly regulated by state and federal law, employers may still be liable under certain circumstances. Contact legal counsel for more information.


Disadvantages

Misclassifying employees as independent contractors is potentially a serious liability for employers. Typically, misclassifying an employee can expose employers to federal sanctions and investigations, state audits and penalties, and unexpected unemployment and workers’ compensation lawsuits.

Hiring an independent contractor offers employers many advantages. Unlike for traditional employees, employers do not pay taxes on independent contractors’ wages, and are not expected to provide benefits. Employers often save 30 to 40 percent on labor costs by using independent contractors. In addition, as independent contractors are generally hired for a specific period or project, employers have no obligation to rehire them after each contract period or project is complete.

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Independent Contractors as Statutory Non-Employees


        Employee or Independent Contractor?

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There are two categories of statutory non employees: direct sellers and licensed real estate agents. These individuals are treated as self-employed for federal tax purposes if:

     1. Nearly all payments for their services as direct sellers
     or real estate agents are directly dependent on their sales
     or other output, rather than the number of hours they work

     2. Their services are performed under a written contract stating
     that they will not be treated as employees for federal
     tax purposes.

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Independent Contractor’s as Statutory Employees


        Employee or Independent Contractor?

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Generally, independent contractors must be classified as employees if they fall within any of the following four categories and they meet the criteria for withholding Social Security and Medicare taxes:

     • Drivers who distribute beverages (other than milk), meat,
     vegetables, fruits or bakery products, or who pick up and deliver
     laundry or dry cleaning, and who are either employer agents or are paid on commission

     • Full-time life insurance sales agents whose principal business activity is selling life insurance, annuity contracts or both, primarily for one life insurance company

     • Individuals who work at home on materials or goods that are supplied and must be returned to an employer (or its designated entity) when the employer also provides the specifications for the work to be done

     • Full-time traveling or city salespersons who work on behalf of an employer and turn in orders to that employer from wholesalers, retailers, contractors or operators of hotels, restaurants and other similar establishments. The goods sold must be merchandise for resale or supplies for use in a buyer’s business operation. The work performed for the employer must be the salesperson’s principal business activity.

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Who is an Independent Contractor?


        Employee or Independent Contractor?

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As a general rule, the more an employer controls the work of an individual, the more likely that individual is the employer’s employee. For this reason, it is generally accepted that employers can control or direct the result of the work done by independent contractors, but not the means and methods by which contractors choose to accomplish each assignment.

In addition, employers do not supervise a contractor’s work as they would monitor an employee’s performance, nor do they usually provide the supplies or tools the contractor needs to complete its tasks.

In contrast, employers can exercise a higher degree of control on their employees. This includes not only the jobs employees perform but also the processes and tools they must use to complete them.

There are also compensation differences between the employer-contractor relationship and the employer-employee relationship. A contractor’s claim for compensation is tied to its ability to meet the expectations of its contract. It is possible for an employer to refuse compensation to a contractor that fails to deliver the services it was hired to provide. On the other hand, an employer’s ability to refuse paying employee wages is limited and often illegal.

Nevertheless, there are some exceptions to the general rule regarding degree of control.

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Employee or Independent Contractor?



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Hiring an independent contractor offers employers many advantages. Unlike for traditional employees, employers do not pay taxes on independent contractors’ wages, and are not expected to provide benefits. Employers often save 30 to 40 percent on labor costs by using independent contractors. In addition, as independent contractors are generally hired for a specific period or project, employers have no obligation to rehire them after each contract period or project is complete.

However, employers should be cautious when classifying individuals as independent contractors. Misclassifying an employee as an independent contractor can have serious financial and legal consequences.

At the end of each year, the Internal Revenue Service (IRS) requires employers to issue Form 1099 to every contractor to whom they paid $600 or more during the tax year and file Form 1096 with the IRS to report payments the employer made to contractors.

The IRS, the U.S. Department of Labor and various state agencies constantly monitor compliance with employee and independent contractor classification using a variety of criteria. Using the Employment Tax Examination Program (ETE), special IRS teams investigate misclassification of workers through audits. Employers that file Form 1099 are subject to audits, as are employers in industries that tend to abuse the privilege of hiring independent contractors.

If a company is found in violation, the IRS will impose the following penalties in addition to attorney and tax advisor’s fees:

     • Retroactive payment of back taxes for the individual

     • Interest calculated from the time when payments were due

     • Penalty fines of up to 100 percent of the amount due

     • Retroactive contributions to the individual’s Medicare and Social Security,
     federal and state unemployment taxes, and workers’ compensation benefits

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IRS Releases Figures for Determining Individual Mandate Penalty Cap in 2015

 

Quick Facts
  • IRS Rev. Proc. 2015-15 provides the 2015 monthly national average bronze plan premium.
  • This amount serves as the cap for any penalty owed under the ACA’s individual mandate.

In 2015, the individual mandate penalty is capped at:

  • $2,484 per year for each individual; and
  • $12,420 per year for a family with five or more members.

 

The Affordable Care Act (ACA) requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty. This rule, which took effect in 2014, is often referred to as the individual mandate. The penalty amount that an individual must pay is capped at the annual national average bronze plan premium.

On Jan. 16, 2015, the Internal Revenue Service (IRS) released Revenue Procedure 2015-15 (Rev. Proc. 2015-15), which provides the 2015 monthly national average premium for bronze-level plans. For 2015, the monthly national average premium for bronze-level qualified health plans (QHPs) is:

  • $207 per individual ($2,484 annually); and
  • $1,035 for a family with five or more members ($12,420 annually).

Rev. Proc. 2015-15 is effective for taxable years ending after Dec. 31, 2014.

Background

Beginning in 2014, individuals who do not obtain minimum essential coverage for one or more months will be liable for a penalty under the individual mandate (unless an exception applies). The penalty amount is calculated and paid when the individual files his or her federal income tax return for the year.

The penalty amount is the greater of two amounts: a flat dollar amount or a percentage of the individual’s income. However, the penalty amount that an individual must pay is capped at the national average bronze plan premium for the individual’s family size. Thus, for each taxable year, the penalty amount is the lesser of:

  • The sum of the monthly penalty amounts; or
  • The sum of the monthly national average bronze plan premiums for the shared responsibility family.

This cap is based on the annual national average premium for QHPs that:

  • Have a bronze level of coverage;
  • Would provide coverage for the individual’s family members who are liable for a penalty under the individual mandate; and
  • Are offered through the Exchange for that plan year.

Individual Mandate Cap in 2014

For 2014, the monthly national average premium for bronze-level QHPs was:

  • $204 per individual ($2,448 annually); and
  • $1,020 for a family with five or more members ($12,240 annually).

Methodology Used to Determine the National Average Premium Amount

Under the ACA, non-grandfathered health insurance coverage, including QHPs offered through Exchanges, can only consider the following four factors when setting individual premium rates:

  1. The rating area;
  2. Age;
  3. Tobacco use; and
  4. Family size.

Revenue Procedure 2014-46 describes the methodology used to determine the monthly national average bronze premium plan. Based on the ACA’s rating factors, the monthly national average bronze plan premium for an individual who does not obtain minimum essential coverage is determined by using a population-weighted average of the premium in each county (or county equivalent) that would be charged to a 21-year-old individual who does not use tobacco.

In determining a taxpayer’s monthly national average bronze plan premium for a family, the age-21, non-tobacco user premium described above is multiplied by the number of family members who are liable for a penalty, up to a maximum of five.

Based on these factors, the 2015 monthly national average premium for bronze-level QHPs is $207 per individual and $1,035 for a family with five or more members. This means that, annually, the individual mandate penalty amount is capped at $2,484 per year for each individual, and $12,420 per year for a family with five or more members.

Hiring Independent IT Contractors



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Consider using an IT staffing agency. Using an IT staffing agency eliminates the potential headache of hiring a contractor yourself, as the agency will do all the legwork for you.

Do your homework. You usually get what you pay for when hiring an independent contractor. Good contractors may come with a hefty price tag, but when the reputation of your business is on the line, only the best contractors should do. Screen all potential contractors and perform a thorough interview to narrow down the best candidate for the task you need performed. Make sure to request references. There are several websites on the Internet where companies can hire IT contractors.

Avoid misclassification. Misclassification of an independent contractor can occur when a contractor receives many of the benefits of an actual employee, such as paid time off or health insurance, or is hired for an indefinite period of time. While the cost savings as a result of not having to pay contractor benefits or payroll taxes sounds enticing, the government enforces tough penalties for misclassification.

Retain knowledge. If you hire an independent contractor to perform tasks around the office, it is important to pay attention to what he or she is doing so that you won’t have to pay for the same services in the future. By learning the processes the contractor used to complete the job, you can use that knowledge in the future to keep costs down and increase security.

Develop a contractor-specific security policy. Intellectual property stored on your computer network is probably worth a lot of money. If you hire a contractor, make sure there is a policy in place to let him or her know your expectations for keeping your assets safe. The contractor should know that protecting sensitive information, such as lead lists, email addresses, medical records, credit card numbers and Social Security numbers should be the top priority while performing the task. Make sure your employees are aware of any security policies, as well.

Ultimately, it is in most companies’ best interest to employ a full-time IT staff, if possible. Full-time IT employees have the time to intimately learn your business’ network and are the best defense against cyber attacks, whereas relying on independent contractors can be expensive in the long run. If your firm does not have the size or scope to require full-time IT personnel, it’s important to set expectations with your IT contractor to ensure your data and systems remain safe and your security expectations are upheld. Whichever option your business chooses, cyber security should be taken very seriously.

When it comes to IT work, many small and mid-size companies just don’t have the budget to employ a full-time IT staff. Often, these tasks are performed by the owner or current employees with limited knowledge of how the company’s computer system or related tasks work. This creates potential cyber security problems that can lead to a data breach, theft or destruction of intellectual property and identity theft.

Luckily, businesses can hire independent contractors to assist them with all IT-related tasks. Businesses can reach out to contractors for short-term help, such as setting up a network or firewall or designing a company website, or opt for long-term contracts, such as providing 24/7 network troubleshooting support or developing cyber security policies.


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Recommendations for Improving Female Safety Workplace Culture


          Providing Safety for Women in Construction

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Include sexual harassment prevention training in safety and health programs.

Ensure all communication materials are gender-neutral and include women. Visual materials should include examples of female construction workers to promote an integrated construction workplace.

To address the problem of workplace isolation, employers, apprenticeship programs and unions (where responsible) should assign female workers to work in groups of two or more when possible, especially those who are relatively new to the construction trade.

Make sure supervisors are trained in ensuring the safety of female workers and can answer any questions workers may have.


Sanitary facilities

Gender-separate sanitary facilities should be provided on worksites.

Where changing rooms are provided on construction sites, they should also be gender-separated and provided with inside and outside locking mechanisms.

Employees should be allowed to use sanitary or hand-washing facilities as needed.

Toilet facilities should be kept clean and in good repair with clean toilet paper within reach.

Hand-washing facilities should exist within close proximity to toilet facilities.


Health and safety training

Employers and unions should make skills training courses available and encourage all workers to take advantage of them.

Journeymen should establish mentoring relationships with new workers to provide informal skills and safety training.

Supervisors need to emphasize safety as well as productivity on the job site.

Employers should emphasize that safety training is as important as skills training.


PPE and PPC

The design of PPE and PPC for women should be based on female measurements.

Union apprenticeship programs should provide female construction workers with resources on where to find equipment and clothing that fits.

Employers should make sure that all workers of all sizes have well-fitting PPE and PPC for safe and efficient performance.

PPE intended for use by women workers should be based upon female anthropometric (body measurement) data.


Ergonomics

It should be accepted that some workers need to use different lifting and material handling techniques.

Employers, unions, apprenticeship programs and other training entities should review skills training programs to see whether alternative methods are included for getting work accomplished by workers of different sizes or strengths. All programs should emphasize the importance of safe lifting.

Workers need to hear from employers and unions that it’s acceptable to ask for help and to explore alternative ways to lift and carry.

All workers should be trained in the proper ways to lift and bend.


Reproductive hazards

Employers should post Safety Data Sheets (SDS) for each chemical present on the worksite.

Workers should read all SDSs and share the information with their physicians if they are pregnant or planning to start a family.

All workers should educate themselves about the potential reproductive risks from exposure to certain chemicals.

Employers should make reasonable accommodations for workers in later stages of pregnancy, rather than forcing them out of the workplace.

During the later stages of pregnancy, women should consult with their physicians about strenuous physical activities on the job.

The National Institute for Occupational Safety and Health (NIOSH) found that, in a one-year period, 41 percent of female construction workers suffered from gender harassment.As increasing numbers of women enter the construction trades, concerns about their health and safety are growing. In addition to the primary safety and health hazards faced by all construction workers, there are safety and health issues specific to female construction workers. The small percentage of females within the construction trades and the serious health and safety problems unique to female construction workers have a circular effect. Safety and health problems in construction create barriers to women entering and remaining in this field. In turn, the small numbers of women workers on construction worksites foster an environment in which these safety and health problems arise or continue. Source: OSHA


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