Pub. 4 2014 Issue 4

11 independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Caution: If you incorrectly classify an employee as an inde- pendent contractor, you can be held liable for employment taxes for that worker plus a penalty. Who is An Independent Contractor? A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contrac- tor and not the means and methods of accomplishing the result. Example: Steve Smith, a window tinter, is laid off fromCapital Window &Glass. MegaGlass agrees to pay Steve a flat amount to complete a one-time project tinting windows on a group of cars. MegaGlass provides Steve with no instructions beyond the specification for the finished windows themselves. Steve and MegaGlass have a written contract which provides that Steve, who is considered to be an independent contractor, is required to pay Federal and state taxes, and receives no benefits fromMegaGlass. MegaGlass will file a Form 1099-MISC. Steve does the work with new high-end tools which cost him $7000. Steve completes the work from his garage and is not expected or allowed to attend employee meet- ings at MegaGlass. Steve is an independent contractor. Who is An Employee? A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. Example 1: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week and is on duty in Bob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue. Example 2: Matt is a shuttler worker for Skye Enterprises. He is required to work an assigned shift totaling 40 hours per week and is re- quired to pick up and deliver cars and trucks to various auction houses throughout his state. Matt is paid a flat rate of 50 cents for every mile driven. Matt is considered an employee of Skye Enterprises. For additional information on how to determine whether an individual providing services is an independent contractor or an employee, see Publication 15-A, Employer’s Supplemental Tax Guide. (PDF) If the IRS concludes that your independent contractor is an employee, the cost of taxes assessed and penalties imposed against your business could be quite expensive, particularly if you have several such employees. And if the business cannot afford the taxes or penalties, the business owner can be held per- sonally liable. Each dealership should review its policies used to determine whether workers are categorized as employees or independent contractors. Also remember that an independent contractor who is paid in excess of $600.00 in any year must be issued a 1099. The IRS can penalize you for each 1099 not filed by your business. Additional guidance can be found at www.irs.gov . Department of Labor The U.S. Department of Labor can also investigates whether employees are properly classified to ensure that minimumwage, overtime, family and medical leave, and other benefits are prop- erly paid. Additional information about the Department of Labor’s employee misclassification enforcement can be found on its website at: http://www.dol.gov/whd/regs/compliance/ whdfs13.htm.  Protect your business and reduce your risk of violating regulations with LAW® F&I Compliance Documents from Reynolds Document Services. © 2014 The Reynolds and Reynolds Company. All rights reserved. Printed in the U.S.A. 6/14 » Standard Forms » Common Defenses » Managed Risk » Streamlined Processes To learn more about LAW Universal Document Solutions, contact your local Reynolds Document Services Consultant, call 800.344.0996 , or email ids_mktg@reyrey.com . ® The Brand You Can Trust n Employee Classification — continued