While businesses for years have often used Independent Contractors (IC’s) to avoid payroll taxes and other liabilities associated with hiring employees, often times these workers were misclassified, sometimes intentionally, sometimes not. The Obama Administration’s initiative targeting employers that misclassify workers is changing the employment environment. Under the Administration’s and Congress’s direction, The IRS, the Labor Dept and state government agencies are all working together to share information and coordinate enforcement of labor laws in this area. The goal of these efforts is to identify and prosecute employers who misclassify workers. While employers may think they are saving money by classifying workers as independent contractors, if found to be non-compliant, prosecution by these multiple agencies as well as back taxes, wage and hour claims and additional fines can amount to a considerable financial burden. How can an employers protect themselves?
See previous Advi$or article on this subject here
Generally, federal and state courts have relied on the “economic reality test” to establish a workers classification. Factors of that test include how much control the employer has over the worker, who made the investment in the worker’s facilities or equipment, who has the opportunity for profit or loss, how permanent is the work and how vital is it to the operation of the business. While sometimes judging these criteria can be a little “grey”, the government in general is more likely to rule in favor of employee status.
Organizations that wish to use the IC classification but are not comfortable giving up the control factor of that worker that the IC status requires will want to reconsider that worker’s classification right from the start. While it may not seem like the most cost effective option at the time, in the long-term, the financial liabilities will probably be substantially less. For those organizations that wish to use the IC status and are willing to examine the working conditions to ensure compliance, here are some areas to keep an eye on to reduce the risks:
- Use a Independent Contractor agreement that defines the intention to establish an IC relationship and the terms of the relationship.
- Be careful not to issue policies that define work rules, guidelines, performance standards and other policies that may imply control. These types of policies are part of normal employer/employee relationships.
- Be careful not to provide the IC with tools or other equipment that will aid in the performance of the workers job. IC’s should be able to provide their own tools necessary to complete the task the individual was hired to perform.
- Organizations who try to dictate who an individual can work for while they are performing work for the organization will find it difficult to justify IC status. Along those lines, Non-Compete agreements should be avoided to maintain IC status.
- If the IC can demonstrate their establishment of their own business entity, their own insurance, their own EIN, their own licenses, it will go along way in helping the hiring organization prove to the regulators that they are working with an IC.
In this current business environment, organizations that perform these evaluations on a regular basis in their use of IC’s will ultimately save themselves considerable effort, financial resources and simply put, other hassles.
A bill touted as a job-creation bill that would increase the minimum wage and require mandatory paid sick leave, along with other regulations, was introduced in the Senate. The legislation was proposed on March 29, 2012 by Senator Tom Harkin (D-Iowa) who is chairman of the Senate Health, Education, Labor and Pensions Committee.
The wide-ranging bill includes provisions dealing with overtime pay protection, the minimum wage, employment for disabled workers, worker misclassification, paid sick leave, and pension protection. The measure is still awaiting a bill number.
The bill would amend the Fair Labor Standards Act to increase the federal minimum wage to $8.10 an hour in the first year of enactment and to $9.80 in the second year. The wage would be indexed to inflation starting with the third year. The minimum wage rate now is $7.25 an hour and was last increased by Congressional action in 2009.
Restaurant owners should also note that under the bill, the FLSA also would be amended to increase the minimum wage for tipped workers to $3 per hour for the first year of enactment, and an additional 85 cents each year thereafter until the wage equals 70 percent of the federal minimum wage. The current minimum wage for tipped workers is $2.13.
The Advi$or has to admit that it does not quite understand how this kind of legislation, which is going to increase the cost of doing business for many businesses, is going to help create jobs.
Some Tennessee employers have been offered some payroll tax filing relief by the IRS. Specifically, employers in Bradley, Claiborne, DeKalb, Hamilton, Jackson, McMinn, Monroe, Overton and Polk counties which were declared federal disaster areas after severe weather in late February allows the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. Certain IRS deadlines from February 29, 2012 to May 31, 2012 have been postponed to May 31, 2012. Failure to deposit penalties for employment and excise tax deposits due from February 29 to March 15, 2012 were waived as long as the deposits were made by March 15, 2012. (This includes the April 17 deadline for filing 2011 individual income tax returns, making income tax payments and making 2011 contributions to an individual retirement account (IRA).)
If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.
Here’s the latest regarding payroll and payroll taxes in Virginia……
Employees covered by Virginia’s minimum wage law must be paid $7.25 an hour. All employees of employers with at least four workers (including the employer’s spouse, parents or children) are covered except for:
- employees covered by the Fair Labor Standards Act;
- outside salespersons on commission;
- farm laborers or employees;persons whose earning capacity is impaired by physical or mental disability;
- employees working in primarily public-supported charitable institutions;
- cab drivers and operators;
- individuals employed on a piece-rate basis;employees under age 16 or over age 64;
- full-time students under age 18 not employed more than 20 hours a week;
- and students of any age enrolled in a full-time work study program or the equivalent at an educational institution.
Virginia employees are subject to a state income tax. The law requires employers to withhold state income tax from their employees’ wages and remit the amounts withheld to the Department of Taxation. Virginia employers are exempt from withholding requirements for certain nonresident employees who live in the District of Columbia, Kentucky, Maryland, Pennsylvania or West Virginia, and who commute daily to work in Virginia and receive wages for services performed in Virginia for an employer within the geographical limits of Virginia.
State unemployment taxes are less favorable for 2012. Although the Fund Balance Factor remains unchanged at 50%, the Pool Cost Charge has increased from 0.47% to 0.53%. Additionally, the Fund Building Charge of 0.20% remains part of the tax rate calculation thus adding to the cost of the tax over base rates. Tax rates for 2012 range from 0.83% to 6.93%. The Virginia unemployment taxable wage base remains unchanged at $8,000. The new employer unemployment rate is 3.23%
For further assistance with Virginia payroll, contact our offices in Newport News, VA or Johnson City, TN