Archive for November, 2011

What is the “20 Factor Test?”

November 29th, 2011

Many business owners have heard of the IRS’s 20 Factor Test… but what exactly is it, and what is the purpose?  The 20 Factor Test is a list of 20 different factors IRS auditors use to analyze a business before concluding whether a sufficient  level of control is present to create an employer-employee relationship.

As an employer, these 20 questions are useful in determining whether your workers are employees or independent contractors. Employees bring forth payroll tax obligations, and independent contractors do not, and misclassifying a worker as an independent contractor can result in the imposition of fines, penalties, and back-taxes, should you be audited by the IRS.

Try and assess the following 20 factors as honestly as possible and they will be helpful in determining whether or not you are inheriting any risk by treating a worker as an independent contractor. Each factor is designed to evaluate who controls how work is performed. Under IRS rules, independent contractors control the manner and means by which services are achieved. The more control a company has over, when, where, and by whom the work is performed, the more likely the workers are employees.

A worker does not have to meet all 20 criteria to qualify as an employee or independent contractor, and no single factor is decisive in determining a worker’s status–The individual circumstances of each case determine the weight IRS auditors may assign to different factors. It is recommended that you rely on a tax professional to help you, or request an IRS determination by filing Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

  1. Instructions. Workers who are required to comply with others’ instructions about when, where, and how they are to work are ordinarily employees.
  2. Training. Training workers indicates that employers exercise control over the means by which results are accomplished.
  3.  Integration. When the success or continuation of a business depends on the performance of certain services, the workers performing those services are subject to a certain amount of control by the owners of the businesses.
  4. Services rendered personally. If services must be rendered personally, employers control both the means and the results of the work.
  5. Hiring, supervising, and paying assistants. Control is exercised if employers hire, supervise, and pay assistants.
  6. Continuing relationships. Continuing relationships between workers and employers indicate that employer-employee relationships exist.
  7. Set hours of work. The establishment of set hours of work by employers indicates control.
  8. Full-time required. If workers must devote full time to employers’ businesses, employers have control over workers’ time. Independent contractors are free to work when and for whom they choose.
  9. Doing work on employers’ premises. Control is indicated if the work is performed on employers’ premises.
  10. Order or sequences set. Control is indicated if workers are not free to choose their own patterns of work but must perform services in the sequences set by the employers.
  11. Oral or written reports. Control is indicated if workers must submit regular oral or written reports to employers.
  12. Payment by hour, week, or month. This points to employer-employee relationships, provided that this method of payment is not just a convenient way of paying a lump sum agreed on as the cost of a job. Independent contractors are usually paid by the job or on straight commission.
  13. Payment of business and/or traveling expense. Employers paying workers’ expenses of this nature shows that employer-employee relationships usually exist.
  14. Furnishing tools and materials. If employers furnish significant tools, materials, and other equipment, employer-employee relationships usually exist.
  15. Significant investments. Workers are independent contractors if they invest in facilities that are not typically maintained by employees (such as an office rented at fair market value from an unrelated party). Employees depend on employers for such facilities.
  16. Realization of profits or losses. Workers who can realize profits or losses (in addition to profits or losses ordinarily realized by employees) they are independent contractors. Workers who cannot are generally employees.
  17. Working for more than one firm at a time. If workers perform services for a number of unrelated persons at the same time, they are usually independent contractors.
  18. Making services available to the general public. Workers are usually independent contractors if they make their services available to the general public on a regular and consistent basis.
  19. Right to discharge. The right of employers to discharge workers indicates that the workers are employees.
  20. Right to terminate. Workers are employees if they have the right to end their relationships with their principals at any time without incurring liability.

For additional information on the 20 Factor Test, review “Law and Background Relating to Worker Classification for Federal Tax Purposes,” provided by the IRS.

PEO Advantage also provides our customers and Web site visitors with an important white paper for Avoiding the Employee or Contractor Dilemma. Contact our team for more information.

Employee or Independent Contractor? Don’t Misclassify!

November 22nd, 2011

For quite some time, determining whether a worker could be classified as an employee or an independent contractor has been a bit of a gray area. It is estimated that in 2009 misclassification  cost the government 2.7 billion in underpaid federal taxes, workers comp and unemployment insurance and it is estimated that up to 30% of companies may still be incorrectly misclassifying workers as independent contractors rather than employees.

Intentionally misclassifying employees as independent contractors will result in serious penalties issued by the IRS or Department of Labor. Just recently, in the largest such enforcement action in California history, the state labor commissioner filed suit seeking $17 million in back wages, overtime pay and penalties from ZipRealty due to alleged misclassification of workers as exempt from overtime. Even unintentionally misclassifying an employee could result in the imposition of fines, penalties, back-taxes for which the employer is generally liable and even criminal prosecution. 

The 20 factor test has long been a guideline for small employers to use when assessing how to pay their workers, but some companies choose to ignore the 20 factor test and treat their workers as 1099 independent contractors. These companies do so at their own risk of running into trouble with the IRS and/or the Department of Labor. 

As of September, the IRS has announced a new program designed to reduce penalties for companies who have historically and unintentionally misclassified workers as independent contractors rather than employees. The new Voluntary Classification Settlement Program offers companies relief from penalties and some back payroll taxes if the company was audited by the Department of Labor and found to be incorrectly classifying workers.  Under the new provisions, companies who enter the program will not be subject to employee classification employment audit for previous years. 

There are many advantages for classifying a worker as an independent contractor if the type of arrangement allows it. Classifying workers as independent contractors relieves the employer of collecting and remitting employment related taxes. Even workers compensation insurance costs are the responsibility of the independent contractor. Additionally, employment related risks are reduced or eliminated.

Alternately, classifying workers as employees requires that the company withholds local, state and federal income taxes, and also pay half of the tax required under the Federal Insurance Contributions Act for Medicare and Social Security. Employees may also have rights to participate in any employee benefits, such as vacations, holidays and retirement plans, which may create additional expenses for the employer.

For companies who cannot treat workers as independent contactors or who have decided not to, outsourcing their employment to a PEO offers the best of both worlds. Partnering with a PEO offloads the responsibilities of full IRS compliance. PEOs deliver the advantages of having employees, but without the risks associated with treating workers as independent contractors. 

Does your company need help finding a PEO in your area, or have questions about correctly classifying your workers? Contact us  today for ways to ensure compliance and operate more efficiently by offloading your administrative responsibilities.

Help! The Holidays are an HR Nightmare!

November 14th, 2011

Despite the high costs of paid time off (PTO), companies offer this benefit to be competitive in attracting and retaining the best employees. Even the best employees need a break every now and then! Employees enjoy the benefits of PTO, whether that is in the form of vacation days, holidays, or personal leave because PTO allows them to relax and focus on non-work related activities, yet still receive a regular, fixed or a prorated amount of pay.

The holidays bring forth the most commonly used period of utilizing PTO, with employees extending their holiday trips or taking vacation time surrounding the holidays to extend their time away from the office.  For a business owner, this can be a very stressful time of the year. In addition to concentrating on your company’s operations, growth, and the year ahead, you now have to focus on HR administration and employee management. Is everyone eligible for vacation time? How long have they been working, do they get a full two weeks this year? How many days have they taken off already this year? With numerous employees requesting PTO this time of the year, keeping up with administration can quickly become a full time job for management.

HR administration and employee management come with a laundry list of policies, liabilities and costs—things that are likely outside your core expertise. Professional Employment Organizations (PEOs) work with companies of all sizes, and can HELP manage vacation and PTO accrual. Specialized technology streamlines everything from payroll to benefits to managing an employee’s personal data.

Thousands of business owners have given themselves the gift of a PEO, to save themselves time and money. With a PEO, you may even have time to focus on your own holiday plans and take some time for yourself this holiday season! To save additional time and money, call up industry experts who know which PEO will be the best fit for your company based on your unique needs, goals, and budget. With PEO Advantage you can count on performance-driven, affordable employee leasing solutions that save you time and headaches. We do all the work to provide you with the facts you need to feel confident you’re making the best possible choice – which means that selecting a PEO requires no extra work from you, at this already busy-time of the year!

Audits Performed by ICE: Is Your Company Compliant?

November 7th, 2011

In February, 2011, the U.S. Immigration and Customs Enforcement (ICE) announced it was going to audit 1,000 businesses in an intensifying effort to battle illegal immigration. To date, ICE has actually issued audit notices to more than 1,000 companies per quarter this year, and has advised that audits will continue to increase as more resources become available.

The number of I-9 audits per year has been increasing for several years now. In 2010, audits resulted in the criminal arrest of 196 employers, and 119 convictions. The audits by ICE do not target any specific industry, and audits are performed on businesses of all sizes, from small start-up companies to large nationwide enterprises. Auditors examine all hiring records to uncover illegal or undocumented workers.

2011 has brought forth several million dollars in fines issued to employers by ICE. Many fines issued to non-complying companies included companies that were not guilty of employing undocumented workers, but companies that simply failed to document their workforce properly.

As an employer, there is nothing you can do to prevent an audit, but there are several steps you can take to make sure your company is compliant and prepared in the event of an I-9 audit. If your company works with a professional employer organization (PEO), you are still responsible for compliance with Form I-9 requirements, but your administration is probably a bit more streamlined and less stressful, especially if employee records are managed by your employee leasing partner.

Co-employment arrangements can take on many forms and can sometimes be confusing. If the arrangement into which you have entered is one where an employer-employee relationship also exists between the PEO and the employee, the PEO would be considered an employer for Form I-9 purposes. The PEO may rely upon your previously completed Form I-9 at the time of initial hire for each employee continuing employment as a co-employee of you and the PEO. The PEO may also choose to complete new Forms I-9 at the time of co-employment.

If more co-employees are hired, only one Form I-9 must be completed by either the PEO or your company. However, as mentioned before, both you and your PEO are responsible for complying with Form I-9 requirements.

Here are 7 steps any employer or human resources professional in charge of immigration compliance should consider:

  1. Develop an immigration compliance policy
  2. Establish a written policy for employment verification
  3. Provide a training procedure for employment verification
  4. Ensure that new hires are who they say they are – run background checks
  5. Consider using E-Verify
  6. If you are a government contractor, ensure that any contractors, subcontractors and vendors are in compliance
  7. Conduct your own additional audits of I-9 documents

 

Many Professional Employer Organizations can help your company with all of the above items. PEOs can also assist by recruiting and interviewing potential candidates for your company. They can assist with the employment verification and I-9 forms for new hires in addition to other human resources administration activities. If your PEO is not currently assisting your company with this, or you do not currently work with a PEO and have questions about your company’s immigration compliance, contact us today.

Why Workers’ Comp May Be Costing You a Bundle…

November 1st, 2011

With insurer results weakening due to rising injury expenses and the unstable condition of the economy, insurers are passing costs on to employers of all sizes, with smaller employers feeling the greatest impact.  If you run a construction, HVAC, plumbing, painting, roofing, trucking, manufacturing, staffing, landscaping or maintenance or cleaning business, you are probably well aware of the rising costs of workers’ comp.

Owning a business that is considered high risk can severely stifle your cash flow.  High costs result from high state-regulated rates, and requirements for large down payments and audits.  Traditional workers’ comp policies require up to 50% down payment which adversely impacts cash flow, and polices are audited annually to make sure that actual wages paid to employees per code were estimated accurately at the policy’s inception.  A company whose policy was rated for less than actual wages will be forced to come out of pocket for the difference in a lump sum.

Given your line of work, accidents unfortunately may be unavoidable, regardless of how much you protect your employees. But you do have options for more affordable workers’ comp coverage.  Although rate increases are occurring, insurer competition remains a factor in pricing. Partnering with a company that has access to hundreds of PEOs, additional workers’ comp carriers and all major medical and supplemental insurance carriers, means you don’t have to go to market alone.

PEO Advantage in Tampa is uniquely positioned to serve high risk accounts.  We’re helping high risk companies across the country reduce workers’ compensations costs and improve their cash flow. We even guarantee clients a minimum of 25% cost reduction.

Solutions delivered by PEO Advantage:

  • Pay as you go workers’ comp policies (no deposit, no audit, improved cash flow)
  • Up to 35% discounted rates with PEO Advantage
  • On time and on demand workers’ comp certification access
    • Since PEOs are already licensed and have established work comp policies in many states, a client can add employees and provide proof of insurance immediately
  • Claims review and administration
  • Workers’ comp billing reconciliation
  • Safety plan creation, administration and training
  • Safety audits and reviews
  • Report and document accidents
  • OSHA compliance

Don’t waste any more valuable time or money — more states are approving workers’ compensation rate increases this year, and with PEO Advantage there are no deposits or audits with convenient Pay-as-you-Go policies.  You’ll also see an immediate surge in your cash flow since your premium is based on actual wages during that pay period. Lower costs translate to more competitive bids and, ultimately, more sales and profit to infuse your bottom line!