As our readers know by now, that the IRS is continuing to look at alternative means of revenue generation. Attacking the area of misclassified work
ers was one that we have focused on and now this is possibly the next.
IRS may not only use this to to generate revenue, but find a way to solve for the growing Social Security shortages. Many of us hear varying numbers describing the shortfall in Social Security funds for retiring baby-boomers. Several plans have been submitted to the Obama administration that would put more government control over 401(K) plans as a means to help support those shortfalls.
IRS Employee Plans Compliance Unit has launched its 401(k) Compliance
Check Questionnaire Project. The will be sending instruction letters to 1,200 random sponsors of 401(k) plans that filed an Annual Report for the 2007 plan year.
IRS intends to use the information to identify key compliance issues for future guidance on, and enforcement of, these issues. The questionnaire is not an IRS audit or investigation, however,failure to respond will result in IRS enforcement action, which may include an examination of the 401(k) plan.
The Questionnaire seeks detailed information on a wide range of topics. Topics include: demographics,participation, employer and employee contributions, top-heavy and nondiscrimination testing, distributions (including plan loans), automatic contribution arrangements, designated Roth features, plan operations
and administration, and IRS voluntary compliance programs.
The Questionnaire can be seen on the IRS website at 401(K) Questionnaire (Click on "View/Print the Guide to Completion of the 401(k) Questionnaire").
If you receive the instruction letter, the Questionnaire must be completed and submitted to the IRS within 90 days of the date on the letter. While the Questionnaire is publicly available on the IRS website, plan sponsors completing the Questionnaire must do so through a secure on line system on the IRS website.
by Maria Ricci, GM, PSC The Contractor Engagement Checklist we produced last week prepares the employer of record for the proper on-boarding of a contractor to avoid any 
problems later. The continuity and ease of this administration ultimately gives the client, where the contractor is working, a positive experience.
However, you and your contractor have an important role to play to ensure that the relationship is a successful one. Below you will find some keys to professional conduct that will make the relationship go smoothly and insure a positive outcome for all involved.
CONTRACTOR RESPONSIBILITIES:
by Maria Ricci
There are quite a few steps that should be considered before providing a 
contractor with an engagement contract and sealing the deal. Whether you are hiring for a couple of hours or several months the impact of a poorly executed engagement can result in misfortune later!
Get Ready, Set and Go!:
- A Statement of Work (SOW) is provided to the engagement officer (hiring manager) with the following details: name of the contractor, contact information, rate, start date and end date of the engagement.
- Have both an Independent Contractor Agreement and an Employment Agreement available and insure that both have been carefully established and approved by your legal counsel based on the classification the worker is electing to engage with.
- Communicate with the Contractor. Review the statement of work and establish whether they will be processed as an Independent Contractor or Employee. The on boarding package you will provide to the contractor and the checklist you need to use is different depending on the workers classification status.
Below are examples of items you need to include on a checklist. Items may vary based on federal, state/provincial tax and labor laws.
| EMPLOYEE (T4/W2) CHECKLIST | INDEPENDENT CONTRACTOR CHECKLIST
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- Employment Agreement w/ resume
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- Federal, State/Provincial Tax Forms
| - Articles of Incorporation
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- Corporate Employee Handbook
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- Copy of Policies and Procedures
| - Copy of Policies and Procedures
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- Payroll Forms/Direct Deposit
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- Background Check Authorization
| - Proof of Background Check Completion
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- Expense Reimbursement Forms
| - Expense Reimbursement Forms
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- Time Sheet/Entry Instructions
| |
ETC...
| ETC...
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As you can see there are quite a few things to consider. Building the process, actualizing the agreements, validation, distribution and collection of the forms, ongoing compliance, etc… You also need to factor in the cost and time you will need to invest before you even get to the, "Get Ready, Set and Go stage!"
Once you see what's behind compliance, outsourcing may be a great option. :)
Let PSC know how we can help...
In our series this week about preventative measures organizations can take to mitigate risks and costs associated with the use of Contract Labor, we wanted to address the first line of defense...Be prepared.
Like the Boy Scouts mantra of "Be Prepared", there is no better way of mitigating the risks you might have if your firm were to be pulled into a tax audit for the misclassification of employees. As a basic in Human Resource Management, your firm should work with HR and Legal to craft the company's general position on the usage of independent contractors. That policy should include, but not be limited to:
- How to Engage a Contractor?
- What are the Legal Requirements?
- What is the Tenure Policy?
- What Information do I need to Gather?
- Who do I Need to Contact?
In addition to the policies, create an educational FAQ that can be accompanied to the policies and demonstrate that your organization has take the proper steps to protect, document, and educate its company.
Remember, if you do all these things you won't prevent an tax audit nor will you avoid potential penalties, but having these items in place and documented will demonstrate to the courts and the auditors that you took the right actions to try and "prepare" yourself as best as you could.
If you want help in getting prepared, don't hesitate to take our free Risk/Reward Assessement to determine what exposures your firm might have.
Employers' use of independent contractors instead of traditional employees has been on a steady incline over the past 20 years. Some employers feel that they can save money by using independent contractors instead of full-time employees. The contractors themselves may value the autonomy and economic perks that the status provides. Also, the specific skills and knowledge that independent contractors can bring to a short-term project can be critical and, therefore, worth a premium but not sustainable in the long term. But the use of independent contractors is not as perfect as these mutually beneficial points may seem.
A report prepared by the U.S. Government Accountability Office (GAO) in the Fall of 2009 concluded that employee misclassification is a “significant problem” with “adverse consequences” because it reduces tax revenues flowing to the government. In fact, the misclassification of employees as contractors is estimated to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years.
So the theory goes, since independent contractors are, by definition, self-employed, they are not considered “employees” and thus not covered by various tax withholding laws. Independent contractors also are not subject to most employment laws, so in addition to avoiding taxes, some employers may reclassify employees as independent contractors in order to avoid payment of overtime and benefits, and workers’ compensation liability.
And, thus, the crackdown on the misclassification of employees as independent contractors began. he U.S. Department of Labor (DOL) has made the proper classification of employees and independent contractors one of its "top priorities." The agency’s 2011 budget includes an additional $25 million for what it calls the “Misclassification Initiative” designed to target misclassification of independent contractors. Approximately 100 additional DOL enforcement personnel will be added to investigate employers.
The Internal Revenue Service (IRS) is in the middle of a similar misclassification crackdown. Beginning in February 2010, the IRS will commence intensive audits of randomly selected employers. One of the focal points of the audits is whether the employers are improperly misclassifying workers as independent contractors to save on taxes and employee benefits.
There’s also new federal legislation on the horizon. Congress is expected to take up legislation that will penalize employers for employee misclassification. One proposed piece of legislation, known as the Independent Contractor Proper Classification Act, was sponsored by President Obama when he was a member of the U.S. Senate.
States are getting into the enforcement act as well. New York and Massachusetts have created task forces to locate employees who are misclassified. Other states such as Maryland and Colorado have enacted new laws that impose harsh penalties on employers who misclassify employees as independent contractors.
Here in Delaware, the General Assembly passed its own law last year imposing stiff penalties on construction industry employers who improperly classify employees as independent contractors to save on business costs and avoid paying appropriate taxes. In addition to penalties of $1,000-$5,000 per misclassified employee, employers who fail to produce requested records can be issued a stop-work order by the Delaware Department of Labor and fined up to $500 per day for each day during which the requested records are not produced.
Compliance, though, presents its own difficulties. The tests used to determine whether someone is an independent contractor or an employee are fact intensive and differ among government agencies. In addition, each state may have its own unique test to determine a worker’s proper status.
Still, the penalties for non-compliance make this a treacherous area for the unwary employer. In addition to federal and state governments seeking unpaid payroll taxes and associated penalties, employment lawsuits in this area are becoming increasingly common. Claims from misclassified workers range from those seeking unpaid wages and overtime, to multi-million dollar class actions lawsuits. Misclassified employees have also successfully recovered retirement benefits, medical coverage for injuries they sustained on the company’s property, and rights to employee stock options and bonuses.
Given the increased attention to this area, the time to act is now. An internal review and audit of worker classifications should be a crucial component for any company that currently employs independent contractors
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We trust you will weigh in on this important piece. Also, come and take our Risk/Reward Assessement.
Does your company require background checks on employees prior to being allowed to begin employment?
Background checks such as criminal (CPIC), drug, credit and others are typical employment practices for full time employment in both the US and Canada. However, when your company brings in an Independent Contractor are the same checks being conducted?
Now, we are not referring to contractors brought into the organization via staffing agencies. Those staffing agencies should be conducting the necessary background checks that are consistent with your firms hiring practices and consistent with your contractual stipulations with the agency. However, we see many firms that employ Independent Contractors and allow them to arrive on their work premises with no background validation. At Risk?
Real Case Story
This is a real story. Now, after reading this you may say, "No Way!" But after over 20 years in the industry, there is not much I haven't seen or heard.
Pre-9/11, at a large financial services firm in New York City, two gentlemen arrived at Human Resources. When the Human Resources Manager was called the gentlemen identified themselves as FBI agents and inquired if a certain individual who's name they provided was working on-site? Upon checking the full time database and not finding the name, they checked the contractor database and the name showed up. Declining to provide reason, the two agent asked to be taken to the individuals works station where, upon arrival and opening the individuals briefcase, the agents discovered a loaded semi-automatic machine gun. The briefcase was closed and the agents with their suspect in cuffs, left the premises.
The end to this story was that Human Resources never heard another word on the individual nor from the FBI. The individual was working on the company's client database and was brought in by a hiring manager on a referral from a friend outside the company. Needless to say, policy change regarding Independent Contractors was changed that day.
While this case story may seem extreme and probably won't happen to you, be smart and insure you know who you are bringing into your organization and make sure the meet they meet the standards and requirements that you, your employee and company would expect.