PSC 2010 Contractor Survey ResultsAs other labor laws begin to blur in the dust of the D.O.L. and I.R.S's proposed changes, employers are finding it increasingly difficult to stay compliant. Remaining abreast of what rules and regulations are being impacted by proposed changes is
just half the battle. New areas are being looked at with scrutiny to determine what is "fair".
According to Employment Law specialists, Jackson Lewis, LLP, the time a worker actually works is now being looked at for fairness. "Another compliance challenge involves the changing scope of the workday and workplace. Some employees use cell phones, PDA's and home computers to access company networks, check e-mail, and listen o voice mail during "nonworking" hours. Other spend time in security clearance lines at airports, putting on and taking off protective gear before and after their jobs duties. These increasingly common practices push the boundaries of the workday and workplace and challenge the wage and hour compliance."
How many hours a day do you commute to work? Are you working or commuting. We know we all do it but it certainly will be hard for company's to figure out what's fair and enforcible.
Please let us know how you see this issue...what's fair?
who are facing
President Obama has signed into law the Hiring Incentives to Restore Employment (HIRE) Act, which is focused on accelerating the hiring of unemployed workers.
The HIRE Act has many provisions that impact employers, including a payroll tax exemption, and increased tax credits for employers that meet certain eligibility requirements. The legislation immediately enhances employers’ cash flow by permitting employers to retain the employer portion of the Social Security tax ordinarily remitted.
Social Security Tax Exemption
The 6.2% Employer Social Security Tax exemption applies to previously unemployed individuals hired after February 3, 2010 who have worked less than 40 hours during the 60-day period prior to employment and whose 2010 earned wages after March 18, 2010 and before January 1, 2011 do not exceed $106,800.*
- Employers can save the 6.2% Employer Social Security Tax, whether they hire a $40,000 worker, or a $90,000 worker. Employers, including nonprofit organizations, and colleges and universities, would not have to wait until 2011 to benefit from this tax relief because savings would accrue with each payroll processed.
- The legislation also encourages businesses to hire workers earlier in the year because the tax benefit will be greater. For example, a $60,000 worker hired on April 1 saves an employer about $2,800 in taxes. Delaying the hiring until June 1 would reduce savings to about $2,200.
- This exemption has no cap or limit as to the total amount of tax benefits that can be claimed by an employer. Employers can save up to $6,622 per qualifying worker, whether they hire one worker or hundreds of new workers.
Tax Credit
Employers will receive an income tax credit, which is either $1,000 for each qualifying worker hired after February 3, 2010, and employed for at least 52 consecutive weeks, or 6.2% of wages paid to the qualifying worker over the 52-week period, whichever is less. Wages during the last 26 weeks must be at least 80 percent of wages paid for the first 26 weeks.
- Any new hire must certify "by signed affidavit," under penalties of perjury, that he/she has "not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment."
- Neither the 6.2% Employer Social Security Tax exemption nor the retention tax credit is permitted if a person is hired to replace another employee "unless such other employee is separated from employment voluntarily or for cause."
The information on this site is provided solely as a courtesy and should not be construed as legal advice. Your legal counsel should be consulted for updates on law and guidance that may have an impact on your organization and the specific facts related to your business.
* The 6.2% Employer Social Security Tax exemption applies to previously unemployed individuals hired after February 3, 2010 who have worked less than 40 hours during the 60-day period prior to employment and whose 2010 earned wages after March 18, 2010 and before January 1, 2011 do not exceed $106,800. If an otherwise qualifying individual earns more than $106,800, then the Employer Social Security Tax exemption only applies to the first $106,800 of qualifying wages. Other conditions may apply.
Additional Details: To qualify for the $1000 business tax credit, an employee must be hired after February 3, 2010 and employed for at least 52 consecutive weeks. Other conditions may apply. Wages paid to otherwise-qualifying individuals prior to enactment of the HIRE Act are still subject to the Social Security Tax. As part of this calculation, it is assumed that all February wages and half of March’s wages are subject to the Social Security Tax. Actual results may vary and may depend on when the HIRE is finally passed into law.
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:
Everybody is buzzing about the historic passing of the Obama Healthca
re reform in the United States. Whether a Republican or a Democrat, you will agree that this legislation will go down as a historic event for many reasons.
Many individuals, companies and industries will be impacted by this new legislation. One that we would like to look at are the possible implications to the Professional Employment Organization (PEO) Industry. The PEO companies provide services used by small and medium sized businesses (SMB) to outsource their payroll and human resources administrative departments. PEO's are also used by large corporations to provide an outsourced form of management for independent contractor and other various recruitment activities.
The Negative
One of the biggest markets that the PEOs provide services to is the SMB Market. Many companies have utilized the PEO industry to gain greater buying power for various employee benefits and outsource the various HR "Administrivia" that SMB's don't have the time or resources to focus on. However, now that the SMB market may have access to a healthcare alternative for their employees, or now even get a tax benefit for offering there own benefits, the PEO industry may find itself losing a large part of their market share to the National Healthcare Option. One need only to look at the PEO market in our Northern neighbor, Canada. The demographics on the PEO industry are a fraction, on a prorated basis, of the industry here in the US. Canadian Small and Mid Size businesses do not have to rely on PEO's due to the National Healthcare system currently in place. There has been growth in the larger client size deals for the Canadian PEO Industry but, like in the US, this has primarily been to mitigate risk and improve the management of large independent contractor populations.
The Positive
With the National Healthcare option, there have been studies alleging that many full time workers will leave their corporate jobs to pursue more independent type of positions now that an alternative option is available. This may cause a larger growth in the ranks of independent contractors working in the market driving organizations to pursue the use of PEO organizations, as in Canada, to mitigate tax and co-employment risks by the centralization of these resources managed by a third party.
While definitely still to soon to tell and with many more aspects of the legislation and the PEO industry to consider, we will continue to welcome your insights and options and continue to report on this industry changing movement.
Please share your views with us. Also, take a moment to complete our Risk/Reward assessment and let us help you determine what opportunities for savings and/or potential risks you might have.
In our series on how to be prepared in the various aspects of Independent Contractor risks, we came accross this article from a the CPA firm of
Habif, Arogeti & Wynne, LLP in Atlanta.
We trust you'll find these Audit proceedures helpful.
IRS Employment Tax Audit InitiativeBy Frank Ciaburri
Last fall, the IRS announced a major audit program targeting underpayment of employment taxes by companies. Over the next three years, they expect to conduct approximately 6,000 audits of randomly selected employers for employment tax compliance. A broad cross-section of businesses are targeted, including tax exempt employers. To ramp up for this initiative, the IRS has trained 200 to 300 experienced agents to handle the workload. Starting this month, the IRS will be sending letters to employers selected for audit. Once selected, a company should expect the audits to be very detailed and time consuming. In addition, the audit may expand into other aspects of company operations.
The audits are part of the National Research Program, which is structured to gather statistical information about compliant and noncompliant employers. This information will be used to help determine whether enforcement or legislative changes will be necessary to address evasion of employment tax schemes. The goal is to test how much of an estimated $15 billion gap in employment taxes actually exists and how to close it. Of course, collecting revenue from non-compliant employers is an important aspect.
Audit Focus
The expectation is that the audits will be thorough and will address areas perceived to be issue prone:
- Worker Classification
- Fringe Benefits
- Owner/Officer/Executive compensation
- Reimbursed Expenses
- Non-Filers
The audits will begin with the examination of federal employment tax returns and in larger companies will typically impact functions other than payroll, including benefits, legal and tax.
Of the issues being examined, employer misclassification of workers as independent contractors has the greatest collection potential for the IRS, as the employer could be liable for employment taxes even if the misclassified workers have paid their employment taxes. For fringe benefits, the audit focus will be on the proper treatment of fringe benefits and per diems as tax free rather than as compensation. For compensation of owners and other highly paid employees such as officers and executives, the IR will consider whether compensation is reasonable in amount and will include deferred compensation, stock options, and other perks. Expense reimbursements will be reviewed for compliance with the accountable plan rules to exclude them from compensation.
How to Prepare for a Potential Audit
To make sure your company is ready for an audit, consider taking the following actions:
- Ensure that past employment tax returns and supporting records are available and have been reviewed for compliance with applicable rules. This includes reviewing past employment tax notices and ensuring that they have been resolved.
- Perform a self-audit of your company's employment tax practices and procedures, focusing on the areas the IRS would audit if your company were selected. If issues are discovered in this process, consult with tax counsel to determine the appropriate corrective action.
If Your Company is Selected for Audit
If your company is selected for audit, designate the person that will manage the audit. This may be an internal resource and/or outside tax counsel. In larger companies, an audit may be handled by the payroll and/or tax departments, as they have experience in dealing with IRS audits.
Smaller enterprises, whether they prepare their own payroll or use a payroll services provider, generally should consider having their tax counsel manage the audit, as tax counsel regularly handles IRS audits.
In the PSC Train Blog this week we have been discussing "prevention" steps for Independent Contractor risks. Today we are going to address a seemingly innocent operational convenience that can have deep legal and cost consequences.
We encounter many times when organizations find out, after the fact, that a independent contractor is working on premise without the proper corporate documentation. When this occurs the company works to get the proper paperwork in place after the assignment has begun. Sometimes due to the urgency of the work, the contractor is engaged immediately with the promise of paperwork to follow. So, what's the big deal?
Well it turns out that when a contractor is asked to complete and execute paperwork outlining terms and conditions of their assignment after they have been engaged, that documentation can be deemed null and void by the courts because it was completed after the engagement took place. The contractor could contend that it was signed under duress. Meaning that if they didn't sign it they might have lost that the assignment and the revenue. They could contend that some of the terms and conditions, like non-compete, non-disclosure, were unknown to them and therefore unenforcible by law. There are a slew of exposures that can be caused by operationally putting the "kart before the horse". So, what's the solution?
First, don't let this happen. Create a policy whereby a contractor cannot be engaged or arrive to perform any work until all paperwork is completed and verfied. This isn't always optimal but it might be better than the legal and cost alternative. Educate offenders of this policy.
Secondly, you can provide the contractor "consideration" for signing the document. While the laws vary by state, provice and federal jurisdictions. Most legal advice will direct that by paying the contractor a nominal sum of money in consideration for signing the contract post assignment, the effect is that the contractor was compensated for the contractual considerations and therefore, the contract is valid and thus the terms enforcible.
As with many things in life, something so simple or small can be very dangerous.
Check in with us next week while we explore more news and prevention strategies in the world of employer of record services.
NOTE: We strongly recommend that you consult your legal counsel on the proper activities before your institute any of the recommendations in this post. These are merely operational guidance.
We have a guest writer jumping on the PSC Blog Train today. Maria Ricci is the General Manager for PSC in Canada and has many years of industry experience. Recently she has come upon a reoccuring risk to companies who use contract labor and wanted to share her experiences with us. I'm sure you will find it insightful.
PROTECTING YOUR INTELLECTUAL PROPERTY
by Maria Ricci, GM, PSC
Many corporations today find themselves associated with staffing firms whose multifaceted service offerings include Traditional Staffing, Specialty Staffing, Outsourcing Services, MSP Services, VMS Technology, RPO services, PEO services and what not. A one stop shop philosophy remains the most commonly used value proposition and marketing tool for the majority. Very interesting at the outset and may, at times, seem beneficial. Upon further inspection, risks may present themselves for the corporation regarding the protection of their intellectual property.
A contractor’s professional experience is gained by delivering their services to various and continuous mandates that allow them to put their specialty to work. Contractors will look to staffing companies for assistance in the quest to find these opportunities. Staffing companies make this their priority. A contractor is most valuable to them for placement when they have developed this professional experience particularly within the same industry. This is where the risk presents itself. The Staffing Company will continue to place the contractor where they will continue to deliver the utmost professional and beneficial services which will most often be within a competitive environment to the Corporation. Often then, the contractor finds himself being able to put his experience to practice and sharing his knowledge within this new opportunity and environment. The Corporation’s request for these experienced contractors is high and industry specialized contractors are few. This will prompt the corporation to bring back those same contractors through the years. A corporation’s Protected Intellectual Property has transformed to Shared Intellectual Property.
PSC’s service offering is singularly that of a Professional Employer Organization. This is our key differentiator in comparison to a staffing company. We do not participate in any recruiting activities. We provide 3rd party independent contractor engagement and billing services to those corporations who are manning their Independent Contractor population on their own, bringing known independent contractors back from previous projects or pay rolling independent contractors through staffing companies for long periods of time. PSC’s agreements, contrary to those of staffing companies, allow for and provide all the needed protection for the corporation through our Non- Solicit and Non-Competition, Confidentiality and Non-Disclosure, Intellectual Property clauses which or only amongst some of the clauses within our agreement.
Our value proposition goes beyond the one stop shop.
Please share your thoughts…….
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.
Over the past month we have been instilling a lot of F.U.D. into our readership. F.U.D. stands for Fear, Uncertainty and Doubt. Now, what good service provider would do such a thing without coming back with some solid solutions?
Therefore, over the next few weeks we want to focus our attention on solutions to the problems that are mounting in the general area of Misclassified Contract Workers. If you are new to the PSC Blog Train, read some of our past posts on the market forces that are bringing these risks to light.
How can I protect my organization against Tax Audits and misclassification risks?
First off, let us say that nothing can make your organization "bullet-proof". We live in a litigious society that allows for both individuals and governments to pursue action freely. However, it is how your organization puts processes and procedures into place that will determine the level exposure you have. NOTE: We strongly recommend that you consult your legal counsel on the proper activities before your institute any of the recommendations in this post. These are merely operational guidance.
1) Be Prepared Like with most legal actions, the court will look more favorably on an organization that has taken prudent actions to demonstrate the diligence to comply with the laws. Ignorance is never an accepted excuse by the court. Make sure your organization has taken documented action to be compliant about the engagement of contractors.
2) Have Documented PoliciesDemonstrating to the authorities that your firm was diligent in attempting to follow the rules and comply will often minimize the exposure in terms of penalties. The organization that get hit the hardest are those where the intent is pecieved as maliciously trying to avoid the tax or claiming ignorance. As a bona fide employer you are obligated to know the laws and comply.
Document policy that is periodically distributed to your organization that stipulates the company's position on the use of contractors and the steps that should be followed to engage such resources.
3) Outsource/Centralize ManagementMany organizations have begun to outsource the management of independent contractors to 3rd parties. This is a great way to demonstrate an effort to provide compliance and organization to the process. It also defers the risk to the outsourcer to manage and shield yourself from the risk. One of our clients once described outsourcing independent contractors "as a cheap form of insurance". Any associated processing fees that an outsourcer would charge, are cheaper than your corporate insurance, headcount to manage and the potential risks of penalties. We'll expand on this point more in next week's post.Another alternative is to centralize the management of this within Human Resources or Procurement. Much like the outsourcer, the centralized organization is responsible for compliance and consistency in the processing of contractors, however, it does not provide that layer of 3rd party protection.
4) Inspect
Insure that you periodically inspect the processes and procedures with internal or external counsel. Case, Federal, State/Provincial laws change often and can effect what and how your policies and procedures need to change. Rigor of the program processes must be checked from time to time to insure there has been no degradation in the exception processing.There is a lot more to cover and we will continue to bring you more enlightenment over the next few weeks. In the interim, if you want to take our Free Risk Assessement, please click and answer the 5 easy to answer questions and we'll be back to you with an overview report.
Have a safe weekend.
As we have been discussing over the past several weeks has been the US and Canadian Governments beginning to look at new revenue opportunities by pursuing
companies who mis-classify workers thus "avoiding" payroll taxes. Malicious intent or not will not deter the authorities from pursing these opportunities at the business level.
Now if that wasn't enough to make you cringe, the individual states are jumping into the fray. Canadian Provincial pursuits cannot be far behind.
The excerpt below is from a release from the state of Indiana:
INDIANAPOLIS — A bill that Republicans hope will roll back business tax increases and Democrats want to encourage job creation has become the Indiana General Assembly's stingy first domino that refuses to fall.
If an agreement is reached soon, another handful of bills is ready to sail through the Democratic-controlled House and Republican-led Senate in its wake. Then, state lawmakers can adjourn for the year and head home.
The House will meet today for the first time since Speaker Patrick Bauer, D-South Bend, surprised members last week by adjourning for six days. The GOP-led Senate, which took only the weekend off, also will meet.
Meanwhile, the important action is happening behind closed doors, where Bauer, his close deputies and Senate leaders are attempting to broker compromises on several issues before Sunday's constitutionally mandated date for adjournment.
Republicans want to delay by one or two years the onset of higher premiums that businesses must pay into the state's unemployment insurance fund. To get that delay, they have offered Democrats 13 separate items the party has sought, such as business tax credits.
But Democrats are holding out for one more item. They want to sharply stiffen the penalties on businesses that mis-classify workers as independent contractors to dodge payroll taxes.
Republicans on Tuesday were resisting. Sen. Brandt Hershman, a Lafayette Republican who is one of the four joint House-Senate conference committee members involved in negotiations, who said the added regulation would have a "chilling effect" on businesses.
Hershman pitched a compromise that would have a state agency study the issue, draft guidelines for enforcement and deliver its results to lawmakers by November.
"I think it's a very reasonable procedure and very common to try and deal with a complex issue," he said.
But that didn't satisfy House Democrats.
"As legislators, that's our role. We are the ones that should define what's to take place," said House Labor and Unemployment Chairman David Niezgodski, a South Bend Democrat who is one of the conferees on Senate Bill 23.
His party wants to enhance enforcement and levy greater penalties against employers found to be inappropriately classifying workers. Doing that, he said, would "throw dollars into the unemployment insurance fund."
Most employee misclassification takes place in the construction industry, said Marc Lotter, a spokesman for the Indiana Department of Workforce Development.
He noted that Indiana has ranked consistently among the nation's leaders in identifying misclassified workers. The state pinpointed 71,000 such workers in a five-year period from 2004 to 2008.
In that time period, the state has taken in $5.1 million in taxes from businesses that were classifying workers wrongly, but paid out $28 million in jobless benefits to workers who were misclassified, Lotter said.
Indiana's unemployment fund is bankrupt and has borrowed $1.7 billion from the federal government to stay afloat.
With jobless rates hovering around 10 percent, it’s not an unusual predicament, and Indiana’s neighbors are borrowing, as well. So far, the federal government has loaned Kentucky $714 million, Illinois $1.8 billion, Ohio $2 billion, and Michigan $3.6 billion.
Unless legislation Indiana lawmakers passed last year is delayed, businesses will begin making payments under the increased tax rates at the end of this month.
The Indiana Department of Workforce Development estimates an extra $350 million would be collected this year under the higher rates.
Businesses face an unemployment benefits-related tax increase of about $50 million statewide next year, regardless of what the General Assembly decides.
The annual federal fees employers pay now – $56 per worker, per year – will increase by $21, to $77 per worker, per year, starting with the payments due in January 2011. The tax hike is the federal government’s mechanism to prod states into paying down their debts.
When states borrowed from the federal government during the recession of the early 1980s, Congress waived that federal increase for states that were making progress toward paying down their debts.