He's not my employee, he's an independent contractor - or is he?

Employee QuestionsIn representing closely held businesses (those in which the business owners are intimately involved with the day to day operations of the business) one of the biggest issues that we run across is that owners treat employees like independent contractors, instead of as an employee. The owner does not get to decide who is an independent contractor and who is an employee - there are tax and labor laws governing those classifications.  Most importantly - if you have a person who you have been treating as an independent contractor who is actually and employee you have personal, non-dischargeable, liability for all those payroll taxes that you should have been paying but didn't.  Payroll taxes are only the start of the problems - do you owe the person benefits, what if they get sick and had they been an employee they would have had your insurance coverage, what if they get in an accident and you didn't have them listed on your liability policy?

Rich Lipton, CPA, founder of Lipton CPA Associates has put together a great guide on Employee or Independent Contractor - Which Is It? in his most recent newsletter.  Rich has kindly agreed to let me share it with you.  Importantly, Rich offers a great checklist of employee v. independent contractor that all business owners should be looking at.

If you hire someone for a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees.

Why It Matters

The Internal Revenue Service and state regulators scrutinize the distinction between employees and independent contractors because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do this because independent contractors are not covered by unemployment and workers' compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.

Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

The Difference Between Employees and Independent Contractors

Independent Contractors are individuals who contract with a business to perform a specific project or set of projects. You, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

Example: Sam Smith, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. He is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if he works more or less than 400 hours to complete the work, Sam will receive $6,400. He also performs additional electrical installations under contracts with other companies that he obtained through advertisements. Sam Smith is an independent contractor.

Employees provide work in an ongoing, structured basis. In general, anyone who performs services for you is your employee if you can control what will be done and how it will be done. A worker is still considered an employee even when you give them freedom of action. What matters is that you have the right to control the details of how the services are performed.

Example: Sally Jones is a salesperson employed on a full-time basis by Rob Robinson, an auto dealer. She works 6 days a week, and is on duty in Rob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Rob. Rob also pays the cost of health insurance and group term life insurance for Sally. Sally Jones is an employee of Rob Robinson.

Independent Contractor Qualification Checklist

The IRS, workers' compensation boards, unemployment compensation boards, federal agencies, and even courts all have slightly different definitions of what an independent contractor is, though their means of categorizing workers as independent contractors are similar.

One of the most prevalent approaches used to categorize a worker as either an employee or independent contractor is the analysis created by the IRS. The IRS considers the following:

  1. What instructions the employer gives the worker about when, where, and how to work. The more specific the instructions and the more control exercised, the more likely the worker will be considered an employee.

  2. What training the employer gives the worker. Independent contractors generally do not receive training from an employer.

  3. The extent to which the worker has business expenses that are not reimbursed. Independent contractors are more likely to have unreimbursed expenses.

  4. The extent of the worker's investment in the worker's own business. Independent contractors typically invest their own money in equipment or facilities.

  5. The extent to which the worker makes services available to other employers. Independent contractors are more likely to make their services available to other employers.

  6. How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job.

  7. The extent to which the worker can make a profit or incur a loss. An independent contractor can make a profit or loss, but an employee does not.

  8. Whether there are written contracts describing the relationship the parties intended to create. Independent contractors generally sign written contracts stating that they are independent contractors and setting forth the terms of their employment.

  9. Whether the business provides the worker with employee benefits, such as insurance, a pension plan, vacation pay, or sick pay. Independent contractors generally do not get benefits.

  10. The terms of the working relationship. An employee generally is employed at will (meaning the relationship can be terminated by either party at any time). An independent contractor is usually hired for a set period.

  11. Whether the worker's services are a key aspect of the company's regular business. If the services are necessary for regular business activity, it is more likely that the employer has the right to direct and control the worker's activities. The more control an employer exerts over a worker, the more likely it is that the worker will be considered an employee.

Minimize the Risk of Misclassification

If you misclassify an employee as an independent contractor, you may end up before a state taxing authority or the IRS.

Sometimes the issue comes up when a terminated worker files for unemployment benefits and it's unclear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost many thousands of dollars to defend, even if you successfully fight the challenge.

There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:

  • Familiarize yourself with the rules. Ignorance of the rules is not a legitimate defense. Knowledge of the rules will allow you to structure and carefully manage your relationships with your workers to minimize risk.

  • Document relationships with your workers and vendors. Although it won't always save you, it helps to have a written contract stating the terms of employment.

If you have any questions about how to classify your employees, please give us a call. We can help guide you in the right direction in the eyes of the IRS.

Image: Idea go / FreeDigitalPhotos.net 

Are Seniors Going to Lose Long Term Care Coverage - How will they be cared for?

Medicaid CutsElderlawanswers reports this week that congressional proposals to change Medicaid funding target cutting services to seniors.  The report takes the position that block funding of Medicaid will underfund Medicaid to the states.  The states will then have to cut back on services, which is disproportionately effect the elderly as they are the biggest users of Medicaid services.  I note that if Medicaid paid even a portion for home care as it does for nursing home care, it would likely cost less to care for our senior population, and more people could be cared for in their homes, which is where they would like to be in the first place.

The full text of the article with links is below:

After the fierce backlash against their plan to privatize Medicare, Republican strategists are focusing on their proposal to cut $750 billion from Medicaid. Ironically, policy experts say that scheme would have a much greater impact on today's elderly and near-elderly than the Medicare proposal ever would. A flurry of reports released by different groups paint an alarming picture of millions of nursing home residents and those who receive long-term care at home losing Medicaid coverage over the next decade if the Republican plan becomes law.

"This is a huge deal for the nation's seniors, and it's been largely unrecognized," Jocelyn Guyer, the co-executive director of the Center for Children and Families at the Georgetown University Health Policy Institute, told the New York Times.

The plans for Medicaid, part of the budget bill recently passed by the Republican-led House, would turn Medicaid funding to states into a "block grant," something proposed by George W. Bush in 2003 and by Newt Gingrich in 1995.

Under the current system, the federal government matches every dollar that states spend on Medicaid, no matter how high the total goes. Under the House Republican plan, starting in 2013 states would receive a fixed amount every year, which would only increase with population growth and the overall cost of living, not health care costs. If a state's Medicaid costs are higher than its block grant will cover, the state would have to make up the difference, either by spending more of its own money or by restricting eligibility for Medicaid (including nursing home coverage), reducing covered services, or cutting payment rates to health care providers. The Republican plan would make it easier for states to cut benefits and limit eligibility by giving them more flexibility in designing their Medicaid programs than it now permits.

According to the non-partisan Congressional Budget Office (CBO), the federal block grants would not come close to meeting states' needs. The Office predicts that by 2022 federal funding for Medicaid would fall 35 percent below what the federal government now is projected to provide states, and the shortfall would be 49 percent by 2030. Eight states -- including Florida, Colorado and Georgia -- would lose more than 40 percent of their federal funding for Medicaid over the next decade, according to a separate analysis by the Urban Institute released by the Kaiser Family Foundation.

Relaxing or eliminating federal requirements would mean more uninsured or underinsured citizens. The Urban Institute predicts that between 31 million and 44 million fewer people would be enrolled in Medicaid in the next decade, and most would be left without insurance coverage.

States desperate to cut Medicaid costs would likely turn first to services for the elderly and disabled because that's where the money is. Although only 23 percent of people enrolled in Medicaid in 2010 were elderly or disabled, they accounted for 64 percent of Medicaid spending, according to the CBO, and seven of 10 nursing home residents are on Medicaid.

In its own report, titled "The High Cost of Capping Federal Medicaid Funding," the AARP says that the cumulative effect of giving states the option to change their Medicaid rules "could cause millions of poor -- as well as formerly middle-class people who have exhausted their life savings and rely on the Medicaid program -- to lose access to the long-term care services that Medicare does not provide."

Based on of its long experience ensuring that states do not limit eligibility and benefits, the National Senior Citizens Law Center says that the result of block granting Medicaid would mean taking health care coverage away from millions of low-income older adults and people with disabilities.

"In the name of 'flexibility' and state's rights, America's safety net could be ripped to shreds," the group warns in a new Policy Issue Brief, "Medicaid Block Grants: Attacking the Safety Net for Low-Income Older Adults." The Brief outlines eight ways that Medicaid block grants could hurt elderly Medicaid recipients or their families:

  1. It could be harder to qualify for benefits
  2. Coverage for long-term care services and supports could be threatened
  3. Access to nursing home care could be lost
  4. Availability of essential services could be eliminated
  5. Those with both Medicare and Medicaid could be at risk
  6. Spouses of Medicaid nursing home residents could be impoverished
  7. Nursing home consumers would lose protection
  8. Getting medical equipment and supplies could become difficult

 

Image: Ambro / FreeDigitalPhotos.net

 

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College Bound Checklist should include a Power of Attorney and Living Will...

GraduationThe Wall Street Journal recently reported five pieces of advice from financial advisors for families of college-bound children to consider. #5 on the list: Help children protect their health and finances from uncertainty and risk.

Veronica Dagher reports:

Once a child turns 18, parents no longer have the legal authority to access the child's medical records or make health or financial decisions for the child, says Laura Mattia, a Fair Lawn, N.J., certified financial planner. 

That loss of control over a child's care "is a hard thing for a parent to hear," she says, but families need to create a "game plan" to address the unexpected.

It should include three documents—a health-care directive, a HIPAA release and power of attorney—which together allow parents to access a child's medical records and make decisions on the child's health care and finances if necessary.

Ms. Mattia gave this advice to a client whose child was going to study in London for a semester. The client initially was shaken by the realization that she could no longer make crucial decisions on her daughter's behalf without taking legal action, Ms. Mattia says.

This is really good and practical advise.  Those who are long-time readers might recall that I have said from time to time there are situations where I refer people to legalzoom.com.  This is one of them because I tend to get a call the day before the child is leaving that these documents are needed right away.  While I suggest that it would be valuable for an attorney to help the family understand the importance and significance of these documents, something is better than nothing.

On a practical note, if you have a joint account with your child, you will be able to continue to access the account once the child turns 18.

Image: Ian Kahn / FreeDigitalPhotos.net

What's In an Estate Plan - The Wealthy and Wise Episode 2

Check out the second episode of The Wealthy and Wise

In this episode we acknowledge that that estate plans can seem remote, mysterious, complicated and expensive when you don’t know “What makes up an estate plan” and don’t have an overview the information necessary to make informed decisions about your estate.We clear the air on the episode of The Wealthy and Wise as we talk to you about:

What makes up an estate plan?
What happens to your assets if you die without an estate plan?
Determining your net worth from an estate perspective
Sorting out powers of attorney, living wills, health care proxy and advanced directives
Your beneficiaries – who gets your assets, how and when?
Is the government your beneficiary?
How are trusts tools to protect money?
Probate v. Non-Probate assets
And much, much more

The goal of The Wealthy and Wise, as always, is to educate you about how you can take steps in your own life to protect and build your wealth. How’d we do? We’d love your questions and comments, either below or to questions@thewealthyandwise.com. You may find yourself featured in an upcoming episode or podcast!