What’s the Gig Deal?
What’s the Gig Deal? The number of people working “gig” jobs, such as food delivery and driving for ride-sharing services, certainly seems to have gone up during this time of…
April 6th, 2021
In this second installment looking at the gig economy, Tom dives into worker status. Should they be classified as an employee or as an independent contractor? And what should you, the tax preparer, do if your tax client doesn’t agree with the classification?
by Tom O’Saben, EA
Hello again everybody. Tom O’Saben from the University of Illinois Tax School coming to you with our weekly tax season blog. In fact, we do blogs all year long. But again, I’m trying to make these video blogs a little bit easier for you to listen to while you’re trying to get through tax season. Before we begin today…again, my name is Tom O’Saben. I’m the Assistant Director of Professional Tax Education and Outreach for Tax School. I’m also a Fall Tax School instructor and author and reviewer of the University of Illinois Federal Tax Workbook. I do these weekly blogs. And I’m also quite heavily involved with webinars. In addition to that I’m a tax practitioner with more than 30 years of experience. So let’s get right into this and you can listen to it as you’re getting ready to face another day in tax season. So we’re going to call this installment what’s the gig deal part 2. In a previous installment we had what’s the gig deal. And in that installment, I said at a future date, we would have a discussion about the issue between independent contractor and employee. So that’s why we’re having what’s the gig deal, part two. And in fact, what really made me think about doing this was recent legislation that was proposed in California. I quoted from the New York Post (that’s why I have it in italics) from November 4, that California voters decided Tuesday that Uber and Lyft can deny drivers benefits by classifying them as what? Independent contractors instead of employees according to report. That’s what the state was after… to make these individuals employees rather than independent contractors. The initiative was called Proposition 22. And it overturned a state labor law that made it easier to count drivers as employees rather than independent contractors. And again, I’m quoting from the New York Post. Supporters of the measure, according to the New York Post, included Uber, Doordash, Instacart, Lyft, Postmates, which raised more than $200 million to support the proposition. Opponents were labor unions, top Democrats, and now President Joe Biden. Here was a tweet that was quoted again, by the New York Post… said the gig economy giants are trying to gut the law and exempt their workers. It’s unacceptable. And again, this information is courtesy of the New York Post from November 4 of 2020. Again, the big people out there, Uber, Lyft, Instacart, etc, wanted to continue to have their workers defined as independent contractors, except which, again, now has made it easier for them than California Labor Law, which made it easier to actually treat them as employees. And why would employers want to treat workers as independent contractors? Well, they’re going to save the employment taxes. They’re going to save workers comp. They’re going to save liability. They’re going to put all of that onto the worker. And I’m not saying that one way is better than another. I’m just stating a fact. Why do we have labor unions and Democratic candidates, for example, being against that? For the very reasons that the businesses are for it. Without being employees, they don’t have the ability to have collective bargaining. They don’t have benefits provided by the employers, etc. So it’s a big big time issue. But I found it interesting that the state of California was actually able to get this proposition passed, to make it more difficult for companies to define workers as being employees versus independent contractors. But let’s talk about federal law. But I just wanted to give that California law to give you a feel for some of this direction that’s happening within the gig economy. And for that matter, it’s an age old discussion about whether or not someone is an employee or an independent contractor.So what’s really the gig deal? Well, there are basic rules to understand an employee versus independent contractor. And I will tell you, again, this is not brand new. It’s been around for a long time. So let’s see what the IRS has to say about it. Instead of having many factors we used to have years ago, it really comes down to three basic issues: behavioral control, financial control, and what is the relationship with that employer? And I actually have from the IRS, and we’ll talk about, for example, what constitutes behavioral control. And you could go ahead and go to the IRS website and get this information for yourself. We talk about the types of instruction given, when and where to go to work, what tools to use, where to purchase supplies, and receive instruction, the degree of instruction, how the work is to be done, evaluating, training a worker on how to do the job, all of those things may in fact rise to the level of that worker being considered an employee instead of an independent contractor. How about financial control does the business does have the right to direct or control the financial and business aspects of the worker? How about significant investment in equipment the worker uses in working for someone else? Are they using their own equipment? Unreimbursed expenses, independent contractors are more likely to incur those expenses on their own, versus the employer paying them. The opportunity to have profit or loss. Is there a profit motive, like we talked about in our last installment of the gig deal? The method of payment? Aren’t employees normally guaranteed a wage whereas independent contractors may have a contract, etc. So you want to look at these factors. How about relationship… the type of relationship between the worker. Are there written contracts? Is the business trying to provide any kind of benefits? Is there permanency of the relationship? In other words, is it going to go on beyond this contract. Services provided – The IRS says and I’ll read this line to you “the extent to which services performed by the worker are seen as a key aspect of the regular business of the company.” All of these types of circumstances would indicate that an individual more than likely is an employee as opposed to an independent contractor. These are the questions that you should talk with both your clients who are the employers, and also the employees/worker to determine these types of conclusions. So what recourse do we have if we have workers that are misclassified? Well, you can talk with the employer. And there’s actually a form for that (you know I like forms) called an SSA. Most of the time, what happens is, you have someone who comes in, and they are a worker. And they have worked for a company, and they have a 1099 for you. And you say, Oh, boy, we got a 1099 NEC. Did you set any money aside? And they say, No, I only worked for this one place last year. I thought they were taking taxes out. I’m sure you’ve heard this before. And so we start asking those behavioral, the relationship, the financial control questions to try to determine whether or not this individual really should have been treated as an employee versus an independent contractor. So let’s take a look at the Form SSA. And I circled some items on here. First of all I mentioned and I circled, who’s filling this out? Is it being filed for the business, which says the firm here? Or is it the employee that in fact is filling it out? Interesting as to what questions the IRS will ask. Well, I circled right here: behavioral control. It’s going to ask those questions about behavioral control. Again, this could be filed by the worker or the business if the business is just unsure. Look at the next page that I circled for you out of the SSA: the financial control that the firm might have over that worker. And finally, the relationship of that worker and the firm. I find it very interesting, in seeing the items we’re talking about. And there’s actually a form for it. Again, can be completed by the firm, or by the worker. If the worker is going to contest how they’ve been treated by the way, this form needs to be filed. This is the last page of the form and then it is signed by the person who’s submitting it; could be the firm, could in fact be that worker. So what’s really the gig deal again. So if this individual who’s coming to see you in the scenario I’m outlining says, “I only worked for this one guy. I use their tools. They told me where to go to work. I’ve been working for them for a couple of years. I can’t believe you know, now that I’m coming in and see you that they’re they’re treating me as an independent contractor and they haven’t taken any taxes out. I really believe I was an employee.” Well you could go ahead and file that SSA. So what then do we do? We can file a Form 8919. And I put a note on here, hope that you have other employment prospects ahead, because I tell you what, the IRS is going to go to that employer and say, here’s the deal. We think you have an employee, and you’ve treated them as an independent contractor. So we’ve got an issue we want to deal with. That’s going to make for a very, very unhappy type of worker. Well, more importantly, an unhappy employer. So what’s in the Form 8919. You can see the instructions at the top when they talk about you believe that you were treated as an independent contractor, but you should have been treated as an employee. And then look at the second section that I’ve highlighted there. And we talk about: Have you filed the Form SSA and it’s been determined that you are an employee. You received notice from the IRS that one has been completed, or I like (g), which says, I filed the SSA and haven’t heard anything yet. So what do you do then, if you, the tax preparer in concert with your client, who apparently in this case is the employee, is sitting across from you, and you believe you’re documenting, they meet all the circumstances to be an employee. The Form 8919 is going to be used to collect the employee share of Social Security & Medicare. We’re going to actually treat this compensation as wages. And you know what else you’re going to do? You’re going to identify the firm and their federal ID number on this form. That’s why I’m saying I hope they enjoyed working for that firm. I’ll tell you, in my experience in 30 plus years of doing taxes, I have probably only completed one of these one time. And the circumstances to me were so clearly in support of this individual being treated as an employee. And I’ll tell you, and I’ll say it also again, at the end, what happened was, the individual had been treated as a W-2 employee for quite a while. Then out of the blue, the company says we’re changing, and we’re going to treat you as an independent contractor; same job, same services, no real history of change. I think the firm was trying to get out of matching the payroll taxes and providing workers comp, liability insurance, etc. But anyway, we filed the form and my client never heard another word. But the key is, they also were not providing services for this firm either. So they never heard any blowback from that former employee. So what are alternatives for employers? If they want to argue that the people that they are contracting to come into work are in fact, independent contractors, then they ought to document the factors that they believe support independent contractor status. I had a situation also some years back where I had an employer that had employees. He’s a builder. And on the weekends, the employees would go ahead and use their own tools, but they might go out to actually a client of the employer and build a deck, or remodel a basement or something like that, or finish out a basement, remodel a bathroom.
The employer said, I don’t care what they do on their own time, it’s fine. They bill themselves, they use their own tools, they decide when they go to work. I could see that you have a dual status employee there. If in fact, they (the homeowner) is going to pay the money to the employer, then I think an argument can be made that they could be an independent contractor. There’s also certain businesses that it is the accepted practice in the type of business. Think about stockbrokers or financial advisors. You work with a lot of them, I’m sure, and it has been a standard… There was an attempt some years back, especially given the level of compliance that stockbrokers, for example, or financial advisors have to do, how can they not be classified as employees? Well, it has been an accepted standard that they are in fact, independent contractors, yet they have significant layers of compliance, because it has been an accepted standard. But what if you run into an employer who said, “you know, I really didn’t know how to get this thing going. So I’ve treated my workers as independent contractors, and it’s making me really, really nervous. I really don’t want an audit by the Department of Labor. I have a number of workers who are squawking about the fact that I don’t withhold taxes. Is there any remedy for me?” Ladies and gentlemen, there is. Again, it is not new, but I think sometimes bringing it back to light is important. It is the voluntary classification settlement program, the VCSP. Again, it’s been around for a while, here’s a link at irs.gov, for you to see where to go, what your employer can do. And let’s talk about it more in depth.
Now we’re on the employer side, okay. Here’s the form. I love that there’s a form for that: 8952. So be aware of that form. The employer is going to have to sign and they’re going have to pay some money, which I’ll describe here in just a little bit. So what is it? It’s available for taxpayers who want to voluntarily change the prospective- and I think that’s an important word here, prospective – classification or prospective…not going backwards. I think it’s really really dangerous for an employer to say, I’m no longer going to treat my workers as employees, I’m going to treat them as independent contractors. This is going the other way: independent contractor to employee. The program applies to taxpayers who are currently treating their workers or a class of workers as what? Independent contractors or other non employees, and now going forward want to treat those workers as employees. T hey really feel like that’s going to be the safer bet. What are some of the requirements? The taxpayer – this is the employer now – must have consistently treated those workers as independent contractors, including issuing 1099s to them. Okay. That’s going to be one of the requirements to be reclassified under the VCSP program. And they needed to be issuing those 1099s for at least the last three years. So it’s not just a one and done type of a thing. Furthermore, they can’t currently be under an employment audit. It’s too late if the Department of Labor walks in and says, “okay, I want to treat everybody as employees, I want to do the VCSP.” No, that might be too late. And I say might be, because believe it or not, I’ve actually seen court cases out there, where we have circumstances where let’s say 2017 and 2018 are under audit. For employment taxes, the employer decides to participate in the VCSP program for 2019 and 2020. Those years aren’t under audit, and actually saw cases where it was accepted. But normally, you want to act rather than react. So there can be a VCSP settlement. The taxpayer (the employer) participating in the program is going to agree to treat this class of workers for future periods as employees. And what happens? They only have to pay 10% of the employment tax liability that would have been due for just the most recent year. Isn’t that a pretty good deal? It’s a heck of a lot better than an audit isn’t it? And there’s reduced rates under Section 3509 of the Internal Revenue Code. They won’t be liable for any interest or penalties on that amount. And they won’t be subject for another employment tax audit with respect to that worker that’s being reclassified. What a pretty good deal, isn’t it? So better to act or react and I would share this information with those employers who are really, really nervous about independent contractors being reclassified as employees. Again, look what Prop 22 did in California. Yes, it was acted on in the favor of the businesses that want to continue treating their workers as independent contractors. But I think that’s going to change going forward. It is going to be much easier to get those employment taxes out of companies than it is to get them out of workers. I’ve got a couple of good resources for you to have to reference for your employers. Publication 15 A is a really good one, the employer supplemental tax guide. And I also gave you the web address. So big time issue in dealing with the notion of is someone an independent contractor, or are they an employee? It implies that we are going to need to have conversation with both employers and employees. So have that discussion. Normally, again, it’s going to start with that individual coming to see you, that worker that has that 1099 NEC. They made $20,000 last year, and you tell them that they’re going to owe between $5,000 to $8,000 in tax. And they start telling you about the issues of how they provided the services to this entity. And think in mind… behavioral, financial control, and the relationship. Did it seem to walk and quack like a duck? Then it might just be a duck. We’re gonna cut it off now. We’re running almost 20 minutes on this. I promised I would keep these blogs short. But for all of us here at the Tax School, we wish you good luck the rest of the way. Stay tuned. We’ll have more timely topics as we help you get through the second half of the filing season. Hang in there, my folks. We’ll say goodbye for just a while.
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