The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Is Your Contract Labor Really Wages?!
Oct 24, 2013
I came across an article in Accounting Today recently discussing states clamping down on misclassified employees (Independent Contractors v. Employers). While this article focuses on the construction industry, it certainly applies to the agriculture industry as well.
Basically, what the employer v. independent contractor boils down to is who is required to pay employment / self-employment taxes and many millions of lost revenue to both states and the IRS due to the loss of payroll related expenses. In a time of budget crises, states and the IRS are taking higher interest in the matter.
The IRS, in Topic 762 - Independent Contractor vs. Employee states you must examine the relationship between the worker and the business and all evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Relationship of the Parties.
Behavioral Control covers facts that show whether the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. This includes:
- The extent to which the worker has unreimbursed business expenses
- The extent of the worker's investment in the facilities or tools used in performing services
- The extent to which the worker makes his or her services available to the relevant market
- How the business pays the worker, and
- The extent to which the worker can realize a profit or incur a loss
Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:
- Written contracts describing the relationship the parties intended to create
- Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
- The permanency of the relationship, and
- The extent to which services performed by the worker are a key aspect of the regular business of the company
Another wrinkle is if an independent contractor is paid more than $600 in one year by any one person or business; a 1099 is to be issued. Also, the IRS recently added an area on all business and rental tax returns where the taxpayer states whether or not they have made payments requiring them to file 1099s and if they have or plan to file them, essentially another way to track and ensure payments to independent contractors are properly reported.
As you can see, some of this can leave a bit to interpretation. Therefore, it is important that if you have any doubt how to treat a worker, talk with your tax advisor.