“Proven Strategies” is a new regular series in the TDN, presented by Keeneland. It is written by Len Green of The Green Group and DJ Stables, who won the 2018 GI Breeders' Cup Juvenile Fillies with Jaywalk (Cross Traffic).
by Len Green, John Wollenberg & Agnieszka Kagan
It is not uncommon for pinhookers or trainers to employ seasonal workers at sales or around the racetrack. Some of these employees may be considered as independent contractors.
The perception that employers are attempting to circumvent paying payroll taxes by classifying workers as independent contractors has caused the Internal Revenue Service (IRS) to step up its efforts in analyzing this controversial topic more closely.
This article provides an overview of the factors examined by the IRS and offers insight into how to better secure independent contractor status.
The Advantages of Employing an Independent Contractor
Traditionally, many employers have classified workers as self-employed or as independent contractors. There are various benefits to this classification:
1) By positioning themselves as “self-employed” or independent contractors, no payroll or income taxes need to be withheld from paychecks.
2) Independent contractors do not have to be covered under pension plans and employers save on insurance and workmen's compensation costs.
The IRS Perspective
To help determine whether a worker is an employee or an independent contractor, the IRS has developed a 20-factor control test based on common law principles. The 20-factor test is an analytical tool only, there is no “magic number” of relevant points. The factors are merely points for consideration in evaluating the extent to which the employer can “direct and control” the worker.
Below are some of the more relevant factors to consider when evaluating whether an individual is an employee or self-employed/independent contractor.
Employee Factors
Instructions: A worker who is required to comply with another's set of instructions is ordinarily considered an employee.
Training: Formal or informal training at an employer's expense is indicative of an employer relationship.
Integration: Integrating the worker's services into the business operations generally shows that the worker is subject to control.
Services rendered personally: If the services have to be personally rendered, the employer probably controls the means as well as the results.
Hiring, supervising and paying assistants: Unless workers hire, supervise and pay their own assistants, if any, they are likely an employee.
Continuing relationship: The longer the liaison, the more likely an employee.
Full-time required: A full-time position is indicative of an employer-employee relationship, whereas independent workers choose their own hours.
Oral or written reports: Regular accountability of progress is usually a sign of control.
Payment of expenses: Reimbursement tends to support an employer-employee relationship.
Self-Employed or Independent Contractor Factors
Hours of work: Independent contractors control their own time.
Order of sequence set: Only a nonemployee is free to determine his/her own approach, pattern, priority and schedule.
Multiple assignments: Workers who perform more than one job at a time for multiple different businesses are likely an independent contractor. Exercise riders at tracks tend to fall into this category especially if they rotate among barns or farms. Payment by hour, week or month: Independent contractors are typically paid by the job, not in regular pattern.
Tools and materials: Independent contractors provide their own tools and materials.
Economic loss: A worker who is subject to the risk of economic loss due to a liability for expenses is an independent contractor.
Right to discharge: An independent contractor generally cannot be fired if the contractual specifications are met.
Right to terminate: Employees have the right to terminate their job without incurring liability.
Safeguards to Withstand IRS Scrutiny
Since an IRS audit can result in an assessment of penalties and interest, in addition to the employer/employee payroll taxes that will be due, it becomes incumbent to take measures to preserve the intended working relationship.
Suggestions from The Green Group
1) Apply for an advanced ruling, Form SS-8, entitled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The advantage to this filing is to get clarity as to whether a worker is an employee. The form focuses on behavioral control, financial control and relationship of the worker.
2) Enter into a written consulting agreement with language coordinated to the 20-factor control test. The contract should specify the nature of the work to be performed, discuss the terms and conditions and state the responsibilities of the independent contractor.
3) Utilize practices that are consistent with recognized practices in the horse industry, specifically with farm owners, pinhookers and trainers.
State Interpretations
Please check as to your state's specific regulations. Since some states apply their own standards, often stricter than the IRS rules in terms of reclassifying independent contractors into employees. Some use a three-prong “ABC” test with the employer having the burden to prove that the relationship is that of an independent contractor, rather than as an employee. In other states, an independent contractor is someone you hire to work on a task unrelated to the field of business you are associated in and whose work you have no control over. While still other states use a “level of control” test.
Department of Labor Audits (DOL)
As if a trainer's life isn't difficult enough, the DOL has started extensive audits at racetracks to make sure workers are being properly paid for their hours. Since many trainers do not traditionally use “time clocks” to keep track of hours worked, this becomes an expensive issue.
Our team has had success in this area.
Summary
You must analyze whether a potential employer-employee relationship exists with people who work for you.
Penalties can be imposed for failure to withhold income and employment taxes, and qualified retirement plans could be jeopardized if employees who should be covered are not due to misclassification as independent contractors.
Bottom Line
You should have an accountant who is familiar with the Thoroughbred Industry review your practices. You might need to change your procedures to satisfy the complicated IRS rules. If the IRS challenges you and wins, you may be subject to interest and penalties.
If you have any specific questions, please call us for a free one-hour consultation.
The Green Group
Phone: (732) 634-5100
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