Contractors vs. Employees

Please review how you classify individuals as either independent contractors or employees. The Internal Revenue Service has developed Form 8919 which individuals may use to report their misclassification as a contractor by their employer. This form allows the individual to exclude the company portion of FICA taxes from their tax return and alerts the IRS to classification issues. This reclassification could cause back payroll taxes and penalties to be due. Also, they have required employers to retroactively include a reclassified individual in retirement plans. There are many factors to consider in determining whether an individual is an independent contractor or employee. At a minimum, you MUST file 1099s and have valid W-9 forms on file as a means of substantiating an assertion that an individual should be treated as an independent contractor.

Having this required documentation on file does not guarantee that under scrutiny, the IRS may not reclassify the compensation as W-2 wages. Regulations require backup withholding of 28% for subcontractors without a valid W-9 on file. Failure to withhold, you could be responsible for the withholding amounts plus interest. For subcontractors you use regularly, consider executing a written agreement with them. Remember that independent contractors should have their own workers compensation insurance. If they don't, you may have Company and personal liability for injuries.

For additional information, see the IRS 20 Factor test on our website.

W-9 Requirements for Contractors

You must have a current W-9 on file for each contractor. The IRS requires a mandatory 28% withholding on compensation paid to contractors that have not completed a form W-9. They will hold you, the employer, responsible for this withholding plus interest and penalties if you are not in compliance with these rules. If you have any questions about this requirement, please contact our office.

Wages Should Include Employee's Personal Use Of Company Auto

Mileage records should be kept when employees (including owners) use a Company-owned or leased vehicle for both business and personal purposes. The value of the personal use of the vehicle should be included in the individual's W-2, based on a formula. Call us to assist you with this calculation. The Company should also have a written policy in place for such use.

Affordable Care Act - Health Insurance Reform

Employers with 50 or more full time equivalent employees are required to provide employer sponsored health insurance to avoid excise tax penalties for non-compliance beginning 2015. Employers below this threshold are exempt from the penalties. Employers below this threshold that are considering establishing an employer sponsored health insurance plan are required to comply with certain benefit requirements. Plans established prior to the effective date are grandfathered in and are not required to comply with benefit requirements. Clarification of the regulations under the Affordable Care Act are being published regularly as updates are available.

Salaried Employees and Overtime Rules

Rules about who can be paid salary and who must get overtime have changed in the past few years. There are requirements and changes from the old rules that you probably need to incorporate into your policy manual.
For a more complete description, go to the US Department of Labor website at or contact your attorney.