Slide 1

FastFactsFeature Presentation

June 26th, 2008

We are using audio during this session, so please dial in to our conference line…

Phone number: 877-322-9648 Participant code: 182500

Slide 2

Today’s TopicWe’ll be taking a look at…

Independent Contractor or Employee?

Addressing the Employee/Contractor Dilemma

Slide 3

Today’s Presenter

Pamela WeissmanHR Administrator, JHU

Slide 4

Session Segments

PresentationPamela will address the dilemma between distinguishing an Independent Contractor role versus an Employee role.During Pamela’s presentation, your phone will be muted.

Q&AAfter the presentation, we’ll hold a Q&A session. We’ll open up the phone lines, and you’ll be able to ask questions. Pamela will answer as many of your questions as time allows.

Slide 5

Contact Us

If you would like to submit a question during the presentation or if you’re having technical difficulties, you can email us at: fastfacts@jhu.eduYou can also send us an instant message!

GoogleTalk – HopkinsFastFacts@gmail.comAOL Instant Messenger – HopkinsFastFactsMSN – FastFacts@jhu.edu

Slide 6

Survey

SurveyAt the end of this FastFacts session, we’ll ask you to complete a short survey. Your honest comments will help us to enhance and improve future FastFacts sessions.

Slide 7

Independent Contractor or Employee?

Addressing the Employee/Contractor Dilemma

Slide 8

AgendaCurrent IRS Issues in Higher EducationWhy Choosing an Independent Contractor Appears to Make SenseLiabilities of MisclassificationPurpose of DeterminationHow Do We Determine?IRS 20 Factors Maryland Comar CodeTotality of the RelationshipCommon MisconceptionsSponsored ProjectsExamplesFuture TrendsQuestion & Answer

Slide 9

Current IRS Issues in Higher Education

Federal and state governments are currently investigating and scrutinizing payments made to independent contractors working in higher education, due to a significant increase of hiring such individuals by universities in the past several years.

IRS auditors have examined enough abuses of the existing employment tax rules occurring in tax exempt organizations resulting in sensitization to situations that are unique to higher education.

Slide 10

Why Choosing an Independent Contractor Appears to Make Sense

Ease of administrationNo prescribed employment recruitment process

Employment taxes do not have to be paid by the hiring unit

Federal and state withholdingSocial SecurityMedicareUnemployment

Benefits do not have to be paidPerception that liability exposure is reduced

Slide 11

Liabilities of MisclassificationFailure to comply with federal and state criteria may result in penalties regarding:

State Workers’ Compensation lawsFederal laws pertaining to employmentIRS code regarding payroll taxes, SS, Medicare and FICAIRS code regarding qualification of 403 (b) and Pension PlansState unemployment insuranceCriminal penalties and finesUniversity policies associated with hiring employeesLoss of government sponsored projects and grants

Slide 12

Purpose of Determination

Comply with Internal Revenue Service laws and the State of Maryland Comar Code to:

Safeguard the university Safeguard the departmentSafeguard the individual

Slide 13

How Do We Determine?IRS and the state of Maryland presumes all individuals who provide a service are employees.Determined on a case-by-case basisAssessed using Independent Contractor Certification forms Careful analysis is required in applying the twenty factors and the MD Comar Code to assure that formalistic aspects of an arrangement designed to achieve a particular status do not obscure the substance of the arrangement.Rules to classify a worker as an employee or an independent contractor are complex and often difficult to apply.

Slide 14

IRS 20 Factors

1. Instructions or Directions-how much and what kind of control?

Where-due to technology, can be anyplace and is not as relevant as beforeWhen-depending on the occupationHow-protocols, manuals departmental procedures,Methods, meetings, conversations

Slide 15

IRS 20 Factors

2. TrainingMeetingsCorrespondenceOther methods-online training, manuals

3. IntegrationPart of the department’s business or Raison d'être

Slide 16

IRS 20 Factors

4. Services Rendered PersonallyIndication of control Principal is interested in the means by which the work is done

5. Hiring AssistantsShows an independent relationship

Slide 17

IRS 20 Factors

6. Continuing RelationshipSporadic or intermittentRelationship is considered “permanent”Length of time-determines if the performance is an isolated event or continuous in nature

7. Set Hours of Work

Flex schedules today dilute the importance of this variable

Slide 18

IRS 20 Factors

8. Full Time Work Does not necessarily mean an 8-hour day or 5-day work weekMay be required even though not specified orally or in writing

9. Work Done on PremisesWork performed off premises does not necessarily indicate freedom from control

Slide 19

IRS 20 Factors

10. Order or Sequence SetPattern or sequence of workEstablished routineOrder of services

11. ReportsShows accounting of actionsEnd result reports are acceptable

Slide 20

IRS 20 Factors

12. Payments Regular invoicesHourly wages, paid by the piece/unit, salary

13. ReimbursementTravel Materials

14. Tools and Materials-computer, software, accessories

Slide 21

IRS 20 Factors

15. Significant InvestmentAdvertising, insurance (workmen’s comp, indemnities)Word of mouth-not recognized by IRSComputer, software, education

16. Profit or LossPayment method-lump sumBusiness enterprise and judgment

17. Works for More than One Person or FirmEmployee of several firms

Slide 22

IRS 20 Factors

18. Offers Services to the General Public (or industry)

Advertising Does not perform services on a continuing basis

19. Right to Fire and Right to QuitQuestion # 12 on the Independent Contractor Certification form

20. Position in the OrganizationTitle or position description paid through payroll

Slide 23

IRS 20 Factors

IRS Criteria that Carry Less Weight Than in the past Evidenced Through Recent Court Rulings

Performing work on the organization's premisesSetting the hours to be workedTermination of the relationship by the workerDischarging the worker by the client

Slide 24

Maryland Comar CodePresumption of an Employee:

A. The person has been and will continue to be free from the employing unit's control or direction.

B. The service is outside the usual course of business of the employing unit.

Performing duties related to the primary function of the hiring units business

C. The person performing the service is customarily engaged in an independently established business.

Slide 25

Totality of the Relationship

All of the factors are reviewed and the entire relationship between JHU and the individual is weighed.

Although we may in good faith determine that a worker is an independent contractor, an IRS agent many reach a different conclusion by for example, weighing some of the 20 factors differently.

Additionally, the IRS will focus on the intent and the substance of the work arrangement therefore, the criteria should be rigorously applied.

Slide 26

Common Misconceptions

If an (IRS) Form 1099-MISC is issued, the worker is an independent contractor.My worker and I have signed a written agreement that makes the individual an independent contractor.My worker performs similar work for other businesses so the worker is an independent contractor.My worker has a business license, an LLC or a business card, so the worker is an independent contractor.I pay my workers when I need them and by invoices; therefore they are independent contractors.My worker has been an employee of the university and has retired. They now want to work casually and want to return as an independent contractor.

Slide 27

Sponsored Projects

When a sponsored project is to be charged for an independent contractor's fees, the department must be certain that any requirements applicable to the grant or award have been met prior to entering into a contracted services agreement.

When hiring an individual from another university who does not meet the federal and state requirements, it is recommended that the department pay the university who would then pay the individual.

Slide 28

Current Regional Example

April’s CottageWorkers supplied own materials, equipment and suppliesCould accept or reject work; could hire assistantsWorked from home and were autonomousDid not receive training from April’s CottageHad signed contracts Paid by the piece

IRS RejectedLong term relationshipProfit or lossCore competency of the businessRight of business to control designs although they had never exercised that right

Slide 29

Example

Dr. B- Owns and operates Z Medical Center purchases a specialized x-ray machine

Dr. C- A well known, highly skilled and highly trained professional in the field of radiology

Dr. B hires Dr. C to take and read x-rays but does not instruct or tell him how to read them.

Slide 30

Future Trends

Testimony before the committee on ways and means, House of Representatives was presented last May 2007.

A report to the committee on finance, U.S. Senate was made by the US Government Accountability Office, July 2007.

IRS laws pertaining to worker classification are becoming more restrictive and additional funding has been granted.

More cooperation between agencies will make it easier to identify organizations who classify workers inappropriately.

Slide 31

Conclusion

It’s important to remain compliant with both federal and state tax authorities due to risk of fines, fees, back taxes and loss of sponsored programs.Accurate data collection from the department and the individual is vital to appropriately classifying the individual providing services to JHU. Please don’t focus only on the favorable variables. All variables will be considered and the IRS will choose.It will become even more difficult to prove individuals are independent contractors as the U.S. General Accountability office (GAO) moves their tax gap strategy forward.

Slide 32

We’re going to open the phone lines now!

There will be a slight pause, and then a recorded voice will provide instructions on how to ask questions over this conference call line.

We’ll be answering questions in the order that we receive them.

We’ll also be answering the questions that were emailed to us during the presentation.

If there’s a question that we can’t answer, we’ll do some research after this session, and then email the answer to all participants.

Q&A

Slide 33

Thank You!

Thank you for participating!We would love to hear from you.

Are there certain topics that you would like us to cover in future FastFacts sessions?Would you like to be a FastFacts presenter?Please email us at: fastfacts@jhu.edu

Slide 34

Survey

Before we close, please take the time to complete a short survey.Your feedback will help us as we plan future FastFacts sessions.Click this link to access the survey… http://connect.johnshopkins.edu/fastfactssurvey/

Thanks again!