Tax Exempt Government Entities Federal State & Local Government

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1 Internal Revenue Service Tax Exempt Government Entities Federal State & Local Government Lori Stieber, Internal Revenue Agent Government Entity Specialist, Midwest 1

2 Web Search Reveals Popular Topic 2

3 Employee or Contractor Who are employees? 3

4 Types of Employees Common law defined Specific tax statute Section 218 defined State or local law Statutory employee 4

5 Employment Under the Internal Revenue Code IRC Sec. 3121(d)(2) Common law test IRC Section 3121(d)(3) Other employees by statute IRC 3401(c) Officer, employee, or elected official of government Reg (c)-2(b) Holder of public office is not self-employed 5

6 Public Officials Mayor Legislator or elected representative County commissioner Judge/justice of the peace County or city attorney, marshal, sheriff, constable Registrar of deeds Tax collector or assessor Road commissioner Board members 6

7 Fee-Based Public Officials Receive income directly from the public Fees received by government and paid over to the official are considered wages paid to an employee 7

8 Other Workers Paid volunteers are employees Volunteer firefighters are employees Election Workers and Officials Exempt from income tax withholding May be subject to social security and Medicare based on an annual threshold Refer to Section 218 Agreement & state statute 8

9 Other Workers Road Commissioners Usually elected or appointed official Animal Control Officer Elected or appointed position is generally an indication of employee status. 9

10 Common-Law Employee Reg. Sec (d)-1(c) Generally the employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to result, but also as to details and means. 10

11 Control Test Worker subject to control as to: What is to be done How it is to be done Employer may allow broad freedom, but retains right to control 11

12 Tests Under Common Law The IRS recognizes three categories of control to consider when making a determination of employee status: Behavioral control Financial control Relationship of the parties 12

13 Behavioral Control Facts that indicate a right to direct and control work: Instructions Training Government identification (i.e. badge or clothing) Nature of occupation Evaluation 13

14 Financial Control Facts that indicate control over business and financial activities: Significant investment in equipment, tools, or facilities Unreimbursed expenses Offers service to general public Method of payment (by job vs. by hour, etc.) Opportunity for profit or loss Part-time vs. full-time status Worker has corporate status 14

15 Relationship of the Parties Facts determining how the parties view the relationship: Can refuse payment for nonperformance Provide fringe benefits Discharge/termination rights Permanency Regular business activity Work is integral to business 15

16 Employees An Employee might Wear I.D./Uniform Work hours/days determined by payor Trained by the payor Use supplies & equipment & staff provided by payor Inclined to quit without obligation Follow internal policy/procedures 16

17 Independent Contractors An Independent Contractor might Make own schedule Provide staff Buy own products Have business telephone Furnishes supplies & equipment Have business liability insurance Seeks a profit and risks loss 17

18 Payments To An Employee Forms and Filing Requirements: Secure W-4 before paying employees File Form W-2 and W-3 Form 941 for Employment Tax Withholding 18

19 Independent Contractor Forms and Filing Requirements: Secure W-9 before payments to any Vendor File Form 1099-MISC and 1096 Form 945 for Backup Withholding of Tax 19

20 Recap 1. Define an employee 1. the right to control and direct the individual 2. Determine whether a worker is an employee or independent contractor 1. 3 broad categories of evidence 3. Report payments to workers 1. W2 Wages Compensation for services 20

21 Section 530 Refers to Section 530 of the Revenue Act of 1978 (not an IRC provision) Originally one-year provision, extended indefinitely May terminate taxpayer s employment tax liability with respect to an individual not treated as an employee 21

22 Section 530 Requirements Reporting consistency Substantive consistency Reasonable basis 22

23 Reporting Consistency Filing all 1099 s Employers that do not timely file Forms 1099-MISC cannot receive section 530 relief for those workers for that year 23

24 Substantive Consistency Employer treated all workers in similar positions the same Similar duties are consistently performed 24

25 Reasonable Basis Business must have reasonably relied on one of the following: Prior audit Judicial precedent Industry practice researched Other reasonable basis like advice from professional advisors 25

26 Form SS-8 Not sure whether a worker is an employee or independent contractor? Complete Form SS-8 for IRS determination Information requested from worker and payer Not an audit 26

27 Voluntary Classification Settlement Program Partial relief from federal employment taxes with reclassification: Certain eligibility requirements apply Form 8952, Closing Agreement See Announcement Self-Employed/Voluntary-Classification-Settlement- Program 27

28 VCSP Eligibility Announcement ( IRB) Voluntary prospective classification Consistent prior treatment Filed all required Forms 1099 three years prior Audit status change 28

29 Resources Search VCSP VCSP Frequently Asked Questions Form 8952, Application for Voluntary Classification Settlement Program and instructions Announcement Regulation (c)-2(b) 29

30 Thank You! 30