A recent article in The Wall Street Journal on March 14, 2013 entitled “Payroll Audits Put Small Employers of Edge” prompted us to remind you that misclassifying employees as independent contractors is risky and can be costly.

Many employers look at using independent contractors as a way to save money.  The employer is not responsible for paying the Social Security, Medicare, unemployment taxes and workers’ compensation insurance on independent contractors.  “Some employers also are turning to contractors to avoid hitting the 50-employee threshold that would require them to pay for employees’ health insurance, starting next year, under the federal health-care law, or pay a penalty.”

In addition, it eliminates paying other benefits such as paid time off and provides the flexibility of utilizing the worker only when there is sufficient work.  It can be seen as a great cost savings measure.  “A Michigan State University study estimates that contractors can save employers as much as 40% on labor costs.”

However, the IRS has cracked down on the misclassification of workers over the past three years.  Audits have increased dramatically because the IRS increased its budget for this purpose.  “Since September 2011, the government has collected $9.5 million in back wages for more than 11,400 workers who were misclassified as independent contractors by their employers, the Labor Department says.”

How do you know if you are correctly classifying a worker?

The classification guidelines are not black and white, which is the source of much confusion.  The determination is based on three Common Law Rules:

1. Behavioral.  Does the company control or have the right to control what the worker does and how the worker does his or her job?
2.  Financial.  Are the business aspects of the worker’s job controlled by the payer?  (This includes things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship.  Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)?  Will the relationship continue and is the work performed a key aspect of the business?

You must weigh all these factors.  Unfortunately, there is no “magic” or set number of factors that “makes” the worker an employee or independent contractor.  Many times employers do not know that they have misclassified workers until they get audited.

Confused?

If you are still unclear as to the classification of a worker after considering the three Common Laws, the IRS has created Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) which can be filed by either the business or worker.  The IRS will review the facts and circumstances and then make an official determination of the worker’s status.

Because this is an area of much confusion, many employers do not want to run the risk of penalties from misclassification and choose to hire employees.  We encourage you to measure the workers you have classified as independent contractors against the guidelines.  If you discover that you have misclassified a worker, there is some good news.  In January, 2013 the IRS extended an amnesty program which waives or reduces some of the penalties of misclassification.

Don’t run the risk of IRS penalties.  Please contact us at 239-433-5554 if you would like additional guidance or have questions about the classification of workers.

Sandie Peterson selected as HR Professional of the Year

HRMA of Southwest Florida, an affiliate of the Society for Human Resource Management, has named Sandie Peterson, SPHR, with Markham Norton Mosteller Wright & Company P.A., Human Resources Professional of the Year.

Peterson, who for more than a decade has served as human resources manager and consultant with MNMW, was recognized for her professionalism, leadership, stewardship and innovation. She has contributed tirelessly to furthering the goals of her firm as well as HRMA. Peterson has held multiple volunteer positions with HRMA including chapter president, and has been instrumental in updating chapter processes and procedures necessary to ensure the organization’s success.

A graduate of the University of Missouri with a Bachelor of Arts degree in psychology, Peterson holds the designation of senior professional in human resources (SPHR). She specializes in assisting client companies with comprehensive human resources requirements with a goal to prevent lawsuits by maintaining employment law compliance and implementing appropriate policies and procedures. Peterson specializes in federal and state employment laws, employment policy and procedures, HR 101, sexual harassment, team building and supervisor training.

Markham Norton Mosteller Wright & Company P.A. is a certified public accounting and consulting firm with offices in Fort Myers, Naples and Fort Lauderdale. They offer a wide range of services including individual and business tax planning and preparation, business consulting, technology management and support, audits and reviews, litigation, mediation, forensic accounting and elder services. For more information, visit www.markham-norton.com.

Employers Hiring Veterans by Year’s End May Get Expanded Tax Credit

Employers planning to claim an expanded tax credit for hiring certain veterans should act soon, according to the IRS. Many businesses may qualify to receive thousands of dollars through the Work Opportunity Tax Credit, but only if the veteran begins work before the new year.

Here are six key facts about the WOTC as expanded by VOW to Hire Heroes Act of 2011.

• Hiring Deadline: Employers may be able to claim the expanded WOTC for qualified veterans who begin work on or after Nov. 22, 2011 but before Jan. 1, 2013.
• Maximum Credit: The maximum tax credit is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.
• Credit Factors: The amount of credit will depend on a number of factors. Such factors include the length of the veteran’s unemployment before being hired, the number of hours the veteran works and the amount of the wages the veteran receives during the first-year of employment.
• Disabled Veterans: Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit.
• State Certification: Employers must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency. The form must be filed within 28 days after the qualified veteran starts work. For additional information about your SWA visit the U.S. Department of Labor’s WOTC website.
• E-file: Some states accept Form 8850 electronically.

Visit the IRS.gov website and enter ‘WOTC’ in the search field for forms and more details about the expanded tax credit for hiring veterans.

Links:

• Expanded Work Opportunity Tax Credit Available for Hiring Qualified Veterans
• VOW to Hire Heroes Act – Frequently Asked Questions and Answers

This information has been provided by the Internal Revenue Service. For more information about hiring veterans,  please contact our office at (239) 433-5554. 

Please join us for an IMPORTANT educational session on how to better manage your Human Resource processes. You can expect to learn even more about the areas of HR management you are already doing well, but more importantly, you may discover unseen risks in what you are not doing for your employees.

If you plan to add employees, there are tax credits available if you hire qualified veterans.  Employers who follow the guidelines listed below are eligible for a credit of up to $9,600 for each qualified veteran that they hire after the law’s enactment (November 21, 2011) and before January 1, 2013.

Guidelines:

• You must establish that the veteran is a member of a targeted group that qualifies for the credit, by obtaining a Form 8850.  www.irs.gov/pub/irs-pdf/f8850.pdf
• You can submit the form before the veteran starts work or no later than 28 days after they begin.
• The form must be submitted with a perjury statement.
• It can be submitted electronically or to a local agency

Extended Certification Period

The IRS has extended the original 28-day period to obtain certification.  If you hired qualified veterans between November 22, 2011 and May 22, 2012, you will be considered to have satisfied the certification requirement if you submit a pre-screening notice by June 19, 2012.

Tax-exempt organizations can qualify for a credit against their share of the Federal Insurance Contributions Act (FICA) tax they pay on wages to qualified veterans, provided the veterans are performing services related to the organizations’ tax-exempt function.

Guidelines:

• You must file Form 5884-C   www.irs.gov/pub/irs-pdf/f5884c.pdf
• Because filing Form 5884-C is not coordinated with liability on Form 941 for FICA tax, the organization should not reduce its required employment tax deposit in anticipation of the credit.

If you have questions, please call Sandie Peterson, SPHR at 239-433-5554.

Sandie Peterson, SPHR of Markham Norton Mosteller Wright & Company, P.A. has been appointed to the HR Florida State Council position of Historian for 2012.  This newly created position has responsibilities of maintaining a record of Council activities and accomplishments for the year, designing, developing and updating the HR Florida web page “scrapbook,” recording the total volunteer hours for Council core positions to raise awareness of volunteer value and working with the Immediate Past President in developing and submitting the annual Society for Human Resource Management Affiliate Program for Excellence (SHAPE) report.

Markham Norton Mosteller Wright & Company P.A. is a certified public accounting and consulting firm with offices in Fort Myers and Naples. They offer a wide range of services including business consulting, technology consulting, technology management and support, tax preparation and planning, litigation, mediation, forensic accounting and elder services. For more information, call 239-433-5554 or visit www.markham-norton.com.

Sandie Peterson, SPHR and HR Consultant with Markham Norton Mosteller Wright & Company will present on November 17th in conjunction with SCORE and the SBDC at FGCU at the Liles Hotel in Bonita Springs. For more information and to register, please visit www.sbdcseminars.org

New IRS Program Will Reduce Misclassification Paperwork

Until a new Internal Revenue Service (IRS) voluntary worker classification settlement program went into effect many employers have avoided reclassification because of the impact.  The new program will greatly reduce the amount of red tape employers must cut through when reclassifying workers.

Up until last month, if an employer wanted to voluntarily change the classification of its workers from independent contractors to employees, the employer would have to amend tax forms for each quarter for the three previous years, meaning it would have to file up to 12 941-X forms to obtain Section 530 relief. It was quite an involved process.

Under the new voluntary classification settlement program, businesses could be reclassified for federal employment tax purposes without any sunset of the program announced.  To be eligible for the program, a business must:

• Have consistently treated the workers as nonemployees.
• Have filed all required Forms 1099 for the workers for the previous three years.
• Not be under an IRS, Department of Labor (DOL) or state government agency audit concerning the classification of the workers.
• Be in compliance with the results of any previous IRS or DOL classification audit.

The impact on the business is that:

• The taxpayer agrees to prospectively treat the class of workers as employees for future tax periods.
• The taxpayer will pay 10 percent of the liability amount based on the compensation paid to the workers for the most recent tax year.
• No Federal Unemployment Tax Act tax will be due.
• No penalties and no interest will be imposed.
• The IRS cannot audit the classification of the workers for prior years.
• The taxpayer agrees to extend the statute of limitations on the assessment of employment taxes for three years for the first, second and third calendar years beginning after the date the taxpayer agrees to treat workers as employees.

There will be likely be an impact on benefit plans.  If a qualified retirement plan says it benefits all employees and workers have been excluded as nonemployees, the reclassification to employees will make them benefit eligible automatically unless the plan is amended.

It is important to consider the impact on insured health plans because the company must provide similar coverage to 70 percent of all employees or a reasonable classification of employees that does not discriminate in favor of highly compensated employees.  The failure to provide nondiscriminatory coverage is subject to a $100 per day penalty per employee. The IRS is not enforcing the penalty, which was newly added by the Patient Protection and Affordable Care Act, until guidance is issued.

For self-insured health plans, the failure to provide nondiscriminatory health plan coverage makes the medical benefits provided to highly compensated employees taxable unless the entire premium is included in highly compensated individuals’ taxable income.

Are you confident that your Independent Contractors are classified correctly? If you have questions, please contact Sandie Peterson, SPHR at (239) 433-5554.

Based on article by Allen Smith, J.D., SHRM’s Manager of Workplace Law Content, October 20, 2011.

Finally . . .  Courts rule in favor of Employers

As you are no doubt aware, many employees do not hesitate to sue their employers for Fair Labor Standards Act (FLSA) violations.  There are a number of law firms that thrive on these lawsuits, and advertise relentlessly for the business.  Florida actually has 70% of all the FLSA lawsuits in the United States!

However, there has been a recent victory for employers in the U.S. Court of Appeals for the 11^th Circuit.  They found that an employer who “tenders the entire amount of alleged overtime damages bars a claim for FLSA attorneys’ fees.”  (Dionne v. Floormasters Enterprises, Inc., F.3d.—,2011 WL 318977 (July 28, 2011) (11^th Circ. 2011). 

What does this mean?  If you have had an FLSA violation where you failed to pay appropriate overtime to an employee and you deny liability and make the corrected payment for the entire amount of the FLSA wages claimed by a plaintiff, the lawsuit may be dismissed and you could avoid liability for payment of the plaintiff’s attorneys’ fees.  The hope is that this may deter attorneys from actively seeking out these cases.  At the least, this will reduce the cost if you are sued.

Listed below are some steps you should take to protect your business from FLSA lawsuits:

1. Make certain that you have correctly classified your employees (Exempt and Non-Exempt).
2. Keep accurate records of everyone’s time.
3. Pay non-exempt workers overtime (1 ½ times their regular rate of pay) for hours worked in excess of 40 hours in any work week (a fixed, recurring period of 168 consecutive hours – 7 days x 24 hours).
4. Monitor working time carefully.  (i.e., arriving early, staying late, meal breaks, taking work home, checking e-mails during non-working hours, etc.

The FLSA impacts every business.  If you have questions about classifying employees, timekeeping or defining “work” please contact Sandie Peterson, SPHR at (239) 433-5554.