Avoid the Crocs! Here Are the New Rules for Reporting Independent Contractor Payments

Not an alligator. Photo by Leigh Bedford. Reptilian factoids by Wikipedia.

It’s important to follow directions. Not convinced? Ask the 52-foot humpback whale that took a wrong turn on its way to Antarctica earlier this month and ended up in Australia’s East Alligator River.

Ironically (and I do not use that term lightly)* the East Alligator River has no alligators in it. It is infested with an estimated 10,000 crocodiles, so that’s still bad for the whale and, from the whale’s perspective, probably just a technicality.

*More on irony below.

As for following directions, that brings us to the IRS. Starting with the 2020 tax year, directions have changed when it comes to reporting payments made to independent contractors. Rather than Form 1099-MISC, payments will now be reported on Form 1099-NEC. That’s an acronym for Non Employee Compensation.

IRS instructions say that payments must be reported on Form 1099-NEC if they meet the following four conditions:

  • You made the payment to someone who is not your employee.
  • You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
  • You made the payment to an individual, partnership, estate, or, in some cases, a corporation (but usually not payments to a corporation).
  • You made payments to the payee of at least $600 during the year.

Payments to corporations generally do not have to be reported on Form 1099-NEC, but payments for attorneys’ fees and a few other odds and ends do.

To determine whether your payments meet the $600 threshold, here’s what the IRS says you should count:

Enter nonemployee compensation (NEC) of $600 or more. Include fees, commissions, prizes and awards for services performed as a nonemployee, other forms of compensation for services performed for your trade or business by an individual who is not your employee, and fish purchases for cash. Include oil and gas payments for a working interest, whether or not services are performed. Also include expenses incurred for the use of an entertainment facility that you treat as compensation to a nonemployee. Federal executive agencies that make payments to vendors for services, including payments to corporations, must report the payments in this box. See Rev. Rul. 2003-66.

You can fund more detailed instructions here. In case you skimmed that too quickly, yes, the IRS instructions really do say “fish purchases for cash.” I didn’t sneak that in there to make sure you were paying attention.

Whales, alligators, and crocodiles are not fish, so you can purchase them freely for cash without reporting the expenditures on a Form 1099-NEC.

I don’t know whether the wayward baleen escaped the river, but I do want to know how that turned out.

*So … back to irony. There’s a term so often misused. It is irony that the East Alligator River has no alligators. It is not irony if there’s rain on your wedding day (sorry, Alanis Morissette, but no doubt you know this by now.) But it is irony that Morissette’s song is called Isn’t It Ironic when all of the supposed examples of irony in the song are examples of bad luck or coincidence, not irony. So yes, it is ironic, but only in that unintended meta kind of way.

On a personal note, I experience personal hygiene irony about once a week when getting ready for bed, when I occasionally get floss stuck in my teeth. And now you know that about me.

© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Here’s a Simple Way to Self-Audit Your Company’s Independent Contractor Misclassification Risk

yawn

The most boring concert I ever went to was Genesis, in the Orange Bowl, Miami, 1987. The sound quality was terrible, and the band just didn’t seem that into it. My dad, who was there with me, was so bored he pulled out a newspaper. (Yes, that means he anticipated being this bored and brought a newspaper, but he was not a Genesis fan. He went for me, which is something a good dad just does.) [Also: Hi, Dad, I know you’re reading!]

Three years earlier, Phil Collins released Against All Odds (Take a Look at Me Now). The song did really well, but he did not play that song or any other solo songs at the 1987 concert. I know this because… wait for it…  the internet! Yes, the set list from that March 1, 1987 show is posted here.

Segue please? Ah yes, take a look at me now.

One of the simplest ways to check your exposure to independent contractor misclassification claims is to perform a self-audit. (Take a look at me now!)

Get a printout of all 1099s your company issued last year. Is the list mostly LLCs? Or individual names? Focus on the individuals’ names, especially the ones who were paid the most. What kind of services did these individuals perform? Did they do something similar to what your W-2 employees do? Did they work side-by-side with your W-2 employees?

Have they been providing services for years? Did they used to be W-2 employees of your company?

Do they have contracts with your company? Are those contracts any good? Are they specific enough, and do they memorialize the good facts (those that support independent contractor status)?

It’s labor-intensive to do a comprehensive self-evaluation of your risk of independent contractor misclassification claims, but for rough back-of-the-envelope estimating, this can be a pretty useful exercise.

I hope it helps.

That’s All.

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© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Need training on avoiding independent contractor misclassification claims? Hey, I do that!  

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Lost Chicken, Very Friendly: 2020 IRS Tips on Independent Contractor Status Are Now Available

Years ago, I signed up for the Next Door app, thinking it might be helpful to hear about things going on in my neighborhood. Most of the posts I see are useless — Can anyone recommend a good restaurant? Is it gonna snow tonight? Does Solon have any good proctologists?

I was ready to unsubscribe but just hadn’t gotten around to it. But then, last week, I got the post that made it all worthwhile:

36204067-6829-41E5-8647-D9C3FF88FABC

I should have clicked “Thank,” because I really do want to thank D. from South Central Solon for that post. The best part, of course, is the armchair psychoanalysis of Lost Chicken’s personality: “Very friendly.” (Lost Chicken also scores high for empathy and teamwork.)

Also known for being “Very friendly” is the IRS. New for 2020 is the Employer’s Supplemental Tax Guide, also known by its catchier, more taxlike moniker, Publication 15-A. Please don’t take my copy. You can get your own here.

Publication 15-A includes a section on independent contractor misclassification. It reminds employers that the IRS uses a Right to Control Test, which evaluates factors related to behavioral control, financial control, and the type of relationship of the parties. The specific factors are listed.

To improve readership, the IRS offers several helpful hypotheticals to illustrate the Independent Contractor vs. Employee conundrum, using memorable characters such as Vera Elm, an electrician; and Helen Bach, an auto mechanic. (But I see Helen Bach as more of a resurrected doomsday cult leader. I’m going to assume that the person who wrote this hypothetical pulled one over on the supervisor who approved it. Well played, IRS writer. Well played.)

Publication 15-A provides other helpful tips for employers at tax time. Get yours now, while supplies last. I’m going to offer a few extra copies on the Next Door app.

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© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Need training on avoiding independent contractor misclassification claims? Hey, I do that!  

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Sperm Oil Legal Alert: Can You Sue under the Tax Code for Independent Contractor Misclassification?

Sue tax code independent contractor misclassification

When laws are well-written, they’re really specific so everybody knows what you can and cannot do. For example, Title 21, Section 173.275(c) makes it a federal crime to use more hydrogenated sperm oil in food than necessary to accomplish the intended lubricating effect of the sperm oil. (Thanks @CrimeADay!)

Some laws, on the other hand, leave room for interpretation. That’s when lawyers can get creative.

A drapery hanger in Maryland filed a lawsuit alleging that he was misclassified as an independent contractor and should have been paid overtime like an employee. He sued under the usual federal and state laws, but he added a bit of creativity.

The Internal Revenue Code includes a section allowing someone to sue if an evildoer “files a fraudulent information return with respect to payments purported to be made to any other person.” That’s 26 USC 7434, for those keeping score at home. And USC refers to the United States Code, not OJ Simpson’s alma mater.

The drapery hanger included this claim in his lawsuit, alleging that the sole proprietorship that allegedly owed him overtime pay also violated this law by filing 1099s instead of W-2s.

Points will be awarded here for creativity, but those points cannot be used in court. Federal courts don’t take points. (This was not addressed in law school.) All points awarded may be applied to future discounts at your local gas station. No purchase necessary. Void where prohibited.

The court said, nice try but no. This section of the Code refers to the filing of fraudulent amounts of pay, not filing the wrong form.

Had the decision gone the other way, a claim under this section of the Code could be tacked onto just about every independent contractor misclassification lawsuit. And we don’t need that hassle. There are already enough laws that cover misclassification. And sperm oil.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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When Sharks Talk to Bears: Beware of Cross-Agency Communications When Defending Independent Contractor Misclassification Claims

Shark independent contractor misclassification information sharing agreements

According to National Geographic, A 20-year old Colorado man has been bitten by a shark, a bear, and a snake.

Either the animal kingdom hates this guy, or he simply tastes delicious.

Formal information sharing across species is probably unusual, but within government agencies, it’s a thing. Businesses need to be aware of cross-agency information sharing when defending audits and defending agency enforcement actions related to independent contractor misclassification.

Federal and state agencies are particularly focused on sharing information about independent contractor misclassification. The Wage and Hour Division of the DOL has signed information sharing agreements with 27 states. The IRS and the DOL have a Memorandum of Understanding. Tax agencies share information too.

This network of cooperation can spell trouble for businesses undergoing 1099 audits or other agency investigations related to potential independent contractor misclassification.

A small assessment by a state agency may not seem like it’s worth fighting, but beware. Information sharing agreements may cause the assessment to multiply. Adverse findings might also be discoverable in litigation if there’s a civil lawsuit.

In other words, you could be viewed as an easy target, having been found already to be in violation.

A finding of independent contractor misclassification by one state agency may feel like a minor snake bite (I don’t know if there is such a thing as a minor snake bite, but stay with me here).  The snake, however, may share information with the shark, who will tell the bear, and before you know it, you’re that guy in Colorado who’s been bitten by all three.

Ouch!

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Like a Drunken Possum, NEW GIG Act Fails Again.

NEW GIG act possum

Screenshot from DailyDot.com, 12/3/2017

I feel bad for this little guy. This possum apparently broke into a Florida liquor store, knocked over a bottle of bourbon, and got sauced. Wildlife rescue picked him up and checked him into rehab (no, not that kind). Full coverage here at DailyDot.com.

I applaud the critter’s effort, though.

He probably feels a little like Senator John Thune (R-SD), who has repeatedly introduced a bill called the NEW GIG Act — designed to simplify tax law for independent contractor misclassification scufflaws. Every time he gets close, though, someone knocks him over the head with a bottle. Or something like that.

The NEW GIG Act has been introduced in Congress several times. If passed, it would Continue reading

Should Businesses Reclassify Workers as Contractors for 2018? (Or, Why You Shouldn’t Paint Your Dog)

Independent contractortax plan - don’t paint your dog

The Republicans just threw a bone to independent contractors with their new tax law. What does that mean for businesses? Let’s examine.

Strategy question for businesses: Now that tax law provides more favorable tax treatment to independent contractors (see more here), should business reclassify workers as contractors for 2018?

If that’s your reason, then no.

Suppose a new law required ice cream shops to give free cones to dalmation owners. This would be a stupid law, but stay with me.

If I paint dots on a yellow lab, do I get free ice cream?

No, of course not. Even I call my yellow lab a dalmation, it’s still a lab.

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How Does the New Tax Plan Affect Independent Contractors?

In 1985, Simple Minds released the song, Dont You (Forget About Me). Despite the most ridiculous looking dancing you can imagine (under a chandelier, in front of TV screens, adding to the mood ???), the video was nominated for two MTV Video Music Awards.

The preposterous dance moves are pretty simple, though, which seems fitting for a band named Simple Minds.

Simplicity is the overriding theme here. Despite the overall complexity of the newly enacted tax plan, one thing is simple: The tax plan is good news for independent contractors.

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Reminder: Jan. 31 Deadline for Filing Independent Contractor Forms

new year 2018Businesses that retain independent contractors need to remember to file their tax forms. The 1099-MISC forms used for reporting payments made to independent contractors are due to the IRS on January 31st. The payments are to be reported in Box 7. Click here for more helpful filing tips from your friends at the Internal Revenue Service.

Generally, the IRS requires a Form 1099-MISC to be issued for any independent contractor who is paid $600 or more in any year.

How do you know whether you have to file a Form 1099-MISC? The IRS advises that if the following four conditions are met, businesses (or individuals) must report a payment as nonemployee compensation:

  • You made the payment to someone who is not your employee;
  • You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
  • You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
  • You made payments to the payee of at least $600 during the year.

Continue reading