Independent Contractors and Co-Employer Agreements

 Can PEOs Protect Against Misclassified Independent Contractors?

There are many questions surrounding Independent Contractors these days. Do services rendered by an individual for your company constitute an act of employment, or are they truly services being provided by an independent party? What types of occupations are clearly recognized as independent contractors in the eyes of the Internal Revenue Service? How can I protect my business when paying independent contractors? What are my risks for misclassification?

IRS enforcement actions against small and midsize corporations for misclassifying employees are on the rise, and the penalty for non-compliance can be substantial. Employers who have misclassified workers are responsible for the payment of all back taxes. This includes not only the employers 7.65% share of federal taxes for Medicare and Social Security, but a portion of the employee’s share of FICA as well. Now add state and local unemployment taxes then compound for 3 or 4 years. When your finished, multiply this figure by 5 or 10 employees and it’s easy to see why so many business executives are concerned when confronting this issue. With the stakes so high, many companies are seeking ways to eliminate this exposure.

Professional Employer Organizations and Independent Contactors

There are several strategies that employers are using to insulate themselves from exposure to the IRS. Some business owners and HR executives have turned to outsourcing the payroll and administration of their independent contractors to administrative employers, employee leasing companies, professional employer organizations, and staffing companies.

The mere fact that a third party handles a company’s payroll administration does not absolve them from their obligation for collecting and paying employment taxes. The decision whether an individual performing a service on behalf of your company is an employee usually comes down to control. Who controls whom, how, where, when and what work is performed. While it is only one of several factors considered by the Internal Revenue, in most cases it is the determining factor.

Engaging the services of a professional employer organization is a matter of contract law. Most of the contracts from the country’s leading PEOs have language in their co-employer agreements which specifically exclude independent contractors. Some PEO’s and many employee leasing companies will provide payroll and administrative services for companies who employ independent contractors, however they are not the employer.

Most co-employment agreements spell out the terms of shared responsibility for employment related functions between the PEO and client company, and assigns responsibilities for each party to the contract. The PEO acts the administrative employer of record. The client or co-employer is the work site employer who assigns where each employee reports, hours they work, and job function. Payroll, employee leasing companies, or professional employers cannot protect employers if audited by the IRS for misclassified employees, the burden of proof and liability is with the business and the employer.

IRS Guidelines for Hiring Independent Contractors

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

 Don’t Guess - Ask the IRS

If an employer or employee is unsure, either party can submit Form SS-8 to the IRS. They will make a final determination and notify you of the worker’s status.

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the form.  

Contact us for additional information on independent contractors and HR outsourcing.

PEO Clients - Did you claim your tax credit?

US Treasury Report - Health Care Tax Credits for PEO Clients Go Unclaimed

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act were signed into law in March 2010.  Among the credits contained in this legislation was the Small Business Health Care Tax Credit.  The credit was designed to encourage small employers to offer health care insurance. It is available only to small employers who pay at least one-half the cost of health insurance coverage for their employees.

The Congressional Budget Office estimated the credit would cost $37 billion over 10 years and that taxpayers would claim up to $2 billion of Credit for Tax Year 2010. However, in a recent report by the US Treaury Inspector General, as of mid-May 2011, just more than 228,000 taxpayers had claimed the credit for a total amount of more than $278 million. An audit to determine whether the IRS adequately implemented and processed the credit found that while their efforts were mostly successful, some improvements are needed since the number of claims for health care tax credits has been much lower than anticipated.

“The Small Business Health Care Tax Credit is an important credit for both small business employers and their employees,” said TIGTA Inspector General J. Russell George in a statement. The IRS sent postcards to businesses that might potentially qualify for the credit to make sure they were aware of it, the IRS did not have ready access to data that would allow it to determine which of these businesses actually offered health insurance to their employees or otherwise qualified for the credit. He believes the report’s recommendations, once adopted, should improve the IRS’s ability to verify claims for this credit.”

Report - Professional Employers Should Identify Clients

While some businesses, such as companies that only process payroll and file tax returns on behalf of other businesses, disclose similar arrangements to the IRS, this is generally not the case for the PEOs. Other arrangements, where one business acts as an agent for another business, are disclosed on the forms for Employer/Payer Appointment of Agent (Form 2678) and the Allocation Schedule for Aggregate Form 941 Filers (Schedule R (Form 941)).  However, the PEO business model is premised on the PEO’s view that it is a legal employer, not the agent of the client business.

The PEO, acting as the employer of the leased employees, files employment tax returns under its own Employer Identification Number, and the client businesses where the employees work claim other employment-related expenses and the related deductions and credits (as long as these were paid by the client business) under their (different) Employer Identification Numbers. One remedy the report recommends is to have the Commissioner, Small Business/Self-Employed Division track PEO relationships by inputting cross-referenced Employer Identification Numbers on the client business tax accounts.

Is your small business using the services of a professional employer organization. Are you the owner of a small firm who is providing health insurance for your employees and paying at least 50% of the premium? Then you may qualify for the “Small Business Health Care Tax Credit”. We suggest you contact the employee benefits department at your employee leasing company or professional employer, or you can click on this link.

Employee Leasing Crook Going To Prison – PEO Clients Protected

Another employee leasing company executive is on his way to jail. Unfortunately, the person who gained the most from the “ill-gotten” gains is still on the loose. Recent articles from my SanAntonio.com report that Patrick G. Mire 49, pled guilty to keeping more than $70 million that small businesses had paid for payroll taxes or insurance. Also said to be under investigation is Charles Edward Pircher, 59, who served five years in federal prison for a $1.2 million savings and loan bank fraud in Austin, TX in the 1990s.

Mire states he operated PEOs from 1995 to 2007 under different names to commit the fraud. The names of the Professional Employer Organiztions included United Capital Investment Group Inc.; Service Professionals Inc.; SSI Management Group Inc.; Service Professionals AK of Nevada Inc.; Employer Liability Services Inc.; Safe Staff Inc.; Service Professionals of Texas Inc.; Service Professionals of Texas; ServPro of Texas LLC; United Focus Inc.; Centerpoint Outsourcing LLC; Synergy Personnel Inc.; and Comal Payroll Plus Inc.

The Internal Revenue Service and FBI claim that Mire and Pircher had management roles in professional employer organizations (PEOs) that collected payroll taxes from clients — usually small businesses like roofing companies and metal fabricators — that were never paid to the government, along with fees for workers compensation insurance that was never provided.

The scheme involved using a phony letterhead and setting up a phone line that gave clients the illusion they were calling an agent for Hartford Underwriters Insurance Co. In reality, callers were talking to a machine at the PEOs’ offices in San Antonio and the PEOs gave clients fake Hartford certificates of liability insurance, the plea agreement states. Hartford had no knowledge of it.

Pircher who has not been charged bought a 551-acre horse-training ranch called Paradise Farms in Medina County with money from United Capital Investment Group, one of the professional employer organization companies named in the current fraud case. He also used money from other PEOs he managed to help pay the $1.2 million restitution of his 1990s criminal case, according to court records.

Prosecutors have said the clients of the PEOs would not be on the hook for the tax losses.

NAPEO, the National Association of Professional Employer Organizations, should be making greater efforts to protect business owners and their employees from unscrupulous operators who treat clients’ payroll tax payments and insurance premiums as their own. Unfortunately, over 95% of employee leasing companies and professional employer organizations are private companies who disclose little or no information about their operations. Rating agencies such as A.M. Best and S & P do not follow or report on the soundness of individual companies or the industry as a whole. Let the buyer beware, do your due diligence or work with professionals who know the industry.

Read more: http://www.mysanantonio.com/news/local_news/article/Guilty-plea-in-70-million-fraud-case-in-S-A-2251031.php#ixzz1cjTRlIBi

Entrepreneurs and Professional Employer Organizations

It’s All About Building Winning Teams

You may think that this is a bold statement, but the reality is that most entrepreneurs achieve success not because they are visionaries, although many are, but because they are intensely focused on doing what they do best. In an earlier blog “No Man is an Island”, I explain how achieving one’s goal of launching a new concept, product or service requires diverse talents and experience that no single person can master.

Jeff Stibel, author of “Wired for Thought” in his article “Entrepreneurship is a Disease” published in the Harvard Business Review Blog offers this observation “What makes some entrepreneurs successful is the same thing that makes others successful: relying on strengths and avoiding weaknesses”.

“To be sure, entrepreneurs have an upper hand (or at least I like to think so): the energy level is higher, the confidence level is higher, and with time, entrepreneurs have a higher tendency to acquire subject-matter expertise. But success comes not from those things alone, but by leveraging core competencies. What makes me successful (sometimes) is that I combine my entrepreneurism with my strengths in taking calculated risks, decision making, and building teams of people I admire.”

So what does this have to do with entrepreneurs and professional employer organizations? Building a great team of dedicated and talented people often requires a structure that involves employees. With the advances in technology, these teams can involve people not only with vastly different backgrounds and skills, but located in different states across the country, or even other countries around the globe. As we know, administering any staff of exceptional people presents employers with a wide range of issues daily. Learn more in our video “Employees Are A Strange Animal”.

Leveraging Core Competencies

Entrepreneurs and small business owners shouldn’t be expected to know all the intricacies’ involved with employee compensation and payroll tax administration. Don’t expect them to stay abreast of changes in government regulations, employment practices and HR compliance issues. Business leaders can’t waste time securing workers compensation and general liability insurance, or developing a comprehensive employee benefits plan that enables their firm to attract and retain the valuable talent required to ensure success. Successful entrepreneurs outsource these functions to comprehensive HR outsourcing companies called professional employer organizations.

Many entrepreneurs engage the services of companies like ADP Totalsource, Alphastaff HR, Insperity and TriNet. These companies provide small and growing firms with a “turn-key” package of payroll administration, HR compliance, risk management, and a Fortune 500 employee benefits package for all of their employees. Professional employer organizations allow small business owners to eliminate multiple vendors, gain expertise and streamline HR operations; reduce exposure by minimizing costly mistakes, transferring risk and liability. These are only a few of the advantages that enable small business owners and entrepreneurs to save time and money. The most important benefit of outsourcing HR administration is it allows busy executives and entrepreneurs to focus their attention on what they do best …..

Building a winning team.

Find a Professional Employer Organization at PEO.com

Leading Website to Locate PEOs and Employee Leasing Companies

Are you a small business owner or busy executive searching for assistance with managing your employee administration, benefits, and HR compliance responsibilities? Discovering the right solution has never been easier. Today, help finding an employee leasing or professional employer company is just a click away. Just type PEO on Google, Bing, Yahoo or your favorite search engine. Usually PEO.com appears first or second in the natural search, testimony to the site’s authority, content, and duration.

Click on the logo above to go the the PEO.com website  

The website is the brainchild of industry veteran and visionary Rod Diekema, who developed and launched PEO.com in 1997. The interface has changed over the years, with each new version contributing to an easy and safe user experience for the busy HR manager or business owner. Vistors to the site are treated to a soft and welcoming home page which offers the choice of searching for an HR outsourcing company by location or keyword. Trying to find local employee leasing companies in your state? Simply scroll down and pick the city nearest you.

Does your company require the services of a large national professional employer?  A search of PEO.com’s extensive database reveals Accord HR headquarted in Oklahoma City, OK has offices in Littleton, CO, New York and Syracuse, NY, Tampa, FL, and Tulsa OK. Boise, ID based Employers Resource serves clients with offices located from Anaheim CA, Atlanta, GA, to Dallas, Houston and San Antonio, Tx.

Maybe your the owner of a  small family business who is looking for a local “hands-on” HR company to relieve you of your payroll, HR administration, and employee benefit problems? High touch, high service professional employers like St. Louis, MO based Simploy HR or Employee Capital Management serving Michican and Illinois can be found with the click of a mouse.

Don’t take my word for it. Find an employee leasing firm or professional employer company that is right for you at PEO.com today. Not sure which types of PEO or HR organization is right for you? No problem. Knowledgeable PEO consultants and industry veterans are available to advise you of all your HR outsourcing options, and will help you find the best personnel management company for your company.