It is crucial farm operators correctly report individuals who provide services to the operation as an employee or independent contractor. Misclass-ifying an employee as a contractor can result in severe penalties being imposed on the employer by the IRS. There are several criteria the IRS uses in determining if an individual is an employee. These criteria are divided in three categories.
• Behavioral Control: Does the employer retain the right to control the details of a worker’s perfomance?
· When and where they work.
· What tools or equipment to use.
· What workers to hire or to assist with the work.
· Where to purchase supplies and services.
· What work must be performed by a specified individual.
· What order or sequence to follow.
· Training given to the worker.
• Financial Control: Does the business have a right to control the business aspects of the worker’s job?
· The extent to which the worker has unreimbursed business expenses.
· The extent of the worker’s investment.
· The extent to which the worker makes his or her services available to the relevant market.
· How the business pays the worker.
· The extent to which the worker can realize a profit or loss.
• Relationship of the Parties: How do the parties view their relationship?
· Written contracts describing the relationship the parties intended to create.
· Whether or not the business provides the worker with employee-type benefits like insurance, a pension plan, vacation pay or sick pay.
· The permanency of the relationship. If you engage a worker with the expectation the
relationship will continue indefinitely rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.
· The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely you will have the right to direct and control his or her activities.
According to Internal Revenue Code section 3509, if the IRS determines the employer has misclassified a worker as an independent contractor, it can assess the following penalties:
• 1.5 percent of each misclassified worker’s wages because income taxes were not withheld;
• 20 percent of each misclassified worker’s FICA taxes that were not withheld;
• The employee’s FICA must be paid and
• Any other applicable penalties and interest.
On September 21, 2011, the IRS announced a new voluntary worker classification settlement program providing employer’s payroll tax relief who voluntarily reclassify their employees. To be eligible for the program, the employer must:
• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099-MISC for the workers for the previous three years,
• Not currently be under audit by the IRS and
• Not currently be under audit by the Department of Labor or a state agency concerning the classifica- tion of these workers. (Employers who have been subject to an IRS, Department of Labor or state agency audit may still qualify for this amnesty program if the employer complied with all
requirements of the audit.)
To apply for the program, an employer files Form 8952, Application for Voluntary Classification Settlement Program (VCSP), at least 60 days before they want to begin treating the workers as employees.
Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers over the past year. No interest or penalties are due and the employer will not be audited for payroll taxes related to these workers for the prior years. Employers under the program are subject to a special six-year statute of limitations, rather than the usual three years generally applying to payroll taxes.
If a worker is correctly classified as an independent contractor, a 1099-MISC may be required. Farm operations should issue a Form 1099-MISC for payments of $600 or more paid to an individual for:
• Rents, royalties and sharecropping payments;
• Nonemployment compensation and commission payments; or
• Fee payments to attorneys, accountants or other professional service providers.
Some payments do not require reporting on a Form 1099-MISC:
• Most payments made to a corporation,
• Payments made to a government agency or tax- exempt organization and
• Payments for merchandise.
Penalties for failure to file a Form 1099
If the 1099 is filed between March 1 and March 31, the penalty is $30 for each failure. Late filing between April 1 and July 31, the penalty is $60 per failure. Filing after August 1 can result in a $100 per failure penalty. There is a maximum $500,000 penalty for a small business.
· Publication 51, Agricultural Employer’s Tax Guide: www.irs.gov/pub/irs-pdf/p51.pdf
· Publication 15-A, Employer’s Supplemental Tax Guide: www.irs.gov/pub/irs-pdf/p15a.pdf
· Publication 225, Farmer’s Tax Guide: www.irs.gov/pub/irs-pdf/p225.pdf
· IR-2011-95, IRS Announces New Voluntary Worker Classification Settlement Program; Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers, www.irs.gov/newsroom/article/0,,id=246203,00.html
The items covered in this article are informational only and are not meant as tax, legal or financial advice; consult with your tax professional, lawyer or financial consultant for guidance on issues specific to your situation. The authors do not endorse any websites, companies or applications, and cannot attest to the accuracy of the information provided by third-party sites or any other linked site.
The authors are Extension Economists with the Alabama Cooperative Extension System. For more information about farm management and financial analysis, please contact your County Extension Coordinator or an Extension Specialist: North Alabama: Holt Hardin, (256) 574-2143 or Robert Page, (256) 528-7133; Central Alabama: Jamie Yeager, (334) 624-4016; Southwest Alabama: Steve Brown, (251) 867-7760; Southeast Alabama: Thomas Hall, (334) 693-2010.