Employment Tax Bulletin (May 2011)
Ten Steps to Reduce Future Exposure
and Similar Issues
By Lawrence L.
Hoenig, a tax partner
in the San Francisco office
of Pillsbury Winthrop Shaw Pittman
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A company could be at risk with respect to tax and labor law exposure on employee misclassification, executive compensation, expense reimbursement and section 409A deferred compensation issues. This checklist may help reduce that exposure starting today.
The IRS, Congress and the President have indicated that they plan a major focus on correcting employee-independent contractor misclassification. As part of this effort, the IRS has created an Employment Tax National Research Project and is conducting a series of more intense employment tax audits in addition to the usual enforcement actions. Companies should be reviewing their compliance in this area to reduce the potential for significant tax, penalty and interest exposure.
Here is a list of ten important steps a company can and should take today to reduce future tax and labor law exposure on employee misclassification as well as similar executive compensation, expense reimbursement, and section 409A deferred compensation issues.
- Review the treatment (i) by each division or business group to see whether such division or group has any service providers not treated as employees, and (ii) across the divisions or business groups to confirm that the treatment of service providers providing similar services is consistent.
- With respect to service providers not treated as employees, make sure that there is a written contract in place for each such service provider.
- With respect to such contracts, make sure that each form of contract helps to establish why such service provider is an independent contractor under the 20-factor and other relevant tests. Pay careful attention to service providers claiming to be independent contractors but using SSNs (rather than EINs), who are likely subjects of agent inquiries in the event of an audit.
- With respect to such contracts, make sure that the service provider has been told and accepts the fact that he or she will not be entitled to any benefits, stock plan rights, medical coverage, etc., which are limited to employeesand include this exclusion in the contracts.
- Consider whether it would be possible to have some or all of the independent contractors hired by a third-party employer and then contract with that employer to provide the services.
- Confirm that the company is complying with the various tax reporting requirements for independent contractors, primarily the issuance of Forms 1099.
- Confirm that the company is complying with the various federal and state tax and labor requirements for all employees, including issuance of Forms W-2, filing of Forms 940 and 941, etc., and overtime requirements under wage and hour laws.
- For publicly held companies, confirm that the company is in compliance with the Internal Revenue Code section 162(m) rules and documentation requirements for performance-based executive compensation.[*]
- Review expense reimbursement policies and confirm compliance.[*]
- Identify "deferred compensation" arrangements subject to Internal Revenue Code section 409A and confirm compliance with the documentation requirements effective December 31, 2008, or that such documents have been corrected in accordance with IRS Notice 2010-6.[*]
* Steps included because they deal with issues that are also subject to audit under the IRS's Employment Tax National Research Project focusing on worker misclassifications.[return to text]
This material is not intended to constitute a complete analysis of all
tax considerations. Internal Revenue Service regulations generally
provide that, for the purpose of avoiding United States federal tax
penalties, a taxpayer may rely only on formal written opinions meeting
specific regulatory requirements. This material does not meet those
requirements. Accordingly, this material was not intended or written to
be used, and a taxpayer cannot use it, for the purpose of avoiding
United States federal or other tax penalties or of promoting, marketing
or recommending to another party any tax-related matters.
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