10.14.11

Federal Incentives to Reclassify “Independent Contractors” as “Employees”

The Internal Revenue Service (“IRS”) has announced a new program that will allow employers to voluntary reclassify employees that have been erroneously classified as independent contractors in return for generous settlement terms. An employer is required to withhold an employee’s federal income and payroll tax, and must pay the employer’s part of FICA taxes and may also have to provide certain benefits it provides to other employees.  The same obligation does not exist for independent contractors. 

The IRS generally weighs three factors to determine if a worker is an “employee” or an “independent contractor”. The three factors are:

• behavioral control
• financial control
• type of relationship

Behavioral control covers facts that show whether the employer has a right to direct and control how the work is done through instruction, training, or other means. Financial control covers facts that show whether the employer has a right to control the financial and business aspects of the worker’s job. This includes the extent to which the worker makes his services available to the relevant market, how he is paid, and the extent to which he can realize a profit or incur a loss. Finally, type of relationship covers written contracts describing the relationship the parties intended to create and whether the employer provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay.

In order to be eligible for the voluntary reclassification program, an employer:

• must have consistently treated its employees as non-employees
• must have filed all required 1099 forms for the workers for the previous three years
• and cannot currently be under audit by the IRS,  the US Department of Labor, or any state government. A taxpayer that was previously audited by the IRS or the US Department of Labor about the classification of its workers will only be eligible if the taxpayer has complied with the results of that audit.

After the eligible employer comes forward, the employer must agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the employer:

• will only need to pay 10% of the employment tax liability that may have been due on compensation paid to workers for the most recent year
• will not be liable for any interest and penalties on the liability
• will not be subject to an employer tax audit for the chosen classification for prior years
• must agree to extend the period of limitations on assessment of employment taxes for an additional three years, to begin after entering into the agreement.

Florida – Tax Credits against Corporate Income Tax or Sales and Use Tax

The following credits are allowed against corporate income tax or sales and use tax. A taxpayer who claims the tax credit against corporate income tax cannot claim the same tax credit for sales and use tax.

Enterprise Zone Jobs Credit
A tax credit against corporate income tax or sales and use tax liability is allowed for businesses located in an enterprise zone. A business located in an enterprise zone needs to demonstrate to the Department that on the date of application, the total number of full-time jobs is greater than the total was 12 months before that date.  Generally, the credit shall be computed as 20 percent of the actual monthly wages paid in Florida to each new employee hired when a new job has been created, unless the business is located in a rural enterprise zone, in which case the credit shall be 30 percent of the actual monthly wages paid. Other restrictions apply, which impact the value of this credit. A taxpayer who claims the enterprise zone jobs credit against corporate income tax cannot claim the sales tax credit for a new employee starting employment after July 1, 1995.

Jobs for Unemployed Tax Credit
A tax credit against corporate income tax liability is allowed for each qualified employee who has been hired by an eligible business on or after July 1, 2010. A qualifying business will receive a $1,000 tax credit against corporate income tax for each qualified employee.

An eligible business is any target industry business that is subject to Florida corporate income tax. A qualified employee means a person:

• Who was unemployed at least 30 days immediately before being hired by an eligible business
• Who was hired by an eligible business on or after July 1, 2010, and had not previously been employed by the eligible business or its parent or an affiliated corporation
• Who performed duties connected to the operations of the eligible business on a regular, full-time basis for an average of at least 36 hours per week and for at least 12 months before an eligible business is awarded a tax credit
• Whose employment by the eligible business has not formed the basis for any other claim to a credit pursuant to this provision.

Should you have any questions about how this development might affect you, please contact Mike Fletcher at mfletcher@argy.com or 703-770-0533.

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