The Patient Protection and Affordable Care Act (PPACA) mandates employers to provide affordable minimum essential health care coverage to their employees or risk penalties. IRS Notice 2013-45, issued July 10, 2013, provides transitional relief from penalties until January 1, 2015. The employer mandate affects large employers. The PPACA classifies an employer as large if the company employs 50 or more full-time equivalents. The penalty is generally assessed on full-time employees in excess of a 30-employee threshold established by PPACA. The definition of “employee” is critical in assessing penalties against large employers, and the importance of the definition highlights the traditional challenges of classifying workers as employees versus independent contractors. IRS Notice 2011-36 defines an employee as a worker who is an employee under the common-law test. In U.S. v. Advance Auto Body, LLC, the U.S. District Court considered the following when determining employee status: 1.The extent of the employer’s control and supervision over the worker, including directions on scheduling and performance of work 2.The kind of occupation and nature of skill required, including whether skills are obtained in the workplace 3.Responsibility for the costs of operation, such as equipment, supplies, fees, licenses, workplace and maintenance of operations 4.The method and form of payment and benefits 5.The length of job commitment and/or expectations The less than black-and-white definition of “employee” creates ambiguity. The resulting confusion has caused employee versus independent contractor classification to become a controversial subject between taxpayers and the IRS. Taxpayers often desire decreased payroll taxes and lesser withholding responsibilities, while the IRS wants the consistent payroll taxes. A company that is not certain whether a group of workers are employees or independent contractors should consider the potential future penalties under PPACA, in addition to any unpaid payroll taxes and associated penalties that could result from the reclassification of an independent contractor as an employee. For example, consider an employer with 45 full-time employees and 25 independent contractors. If the company does not provide insurance to its employees and five of the independent contractors are reclassified as full-time employees, the company will face a $40,000 penalty in 2015 under PPACA (50 full-time employees less the 30 employee threshold, multiplied by $2,000). The risk of the IRS reclassifying workers has increased as evidenced by a recent Treasury report that indicates the IRS’s elevated scrutiny of worker classification through increased payroll tax examinations. The IRS has focused on the classification of workers as a way to increase the amount and frequency of collecting payroll taxes and, ultimately, an effort to reduce the “tax gap.” To help alleviate controversies between employers and the IRS, an employer can ask for an official worker classification by filing Form SS-8 with the IRS. An employer does not have to file a Form SS-8 for each employee; rather, the employer needs to fill out one form for each class of worker. With the passing of PPACA, the IRS may look to reclassify employees for not only payroll taxation purposes, but for the employer mandate as well. Employers deciding on whether to provide minimum essential coverage may want to investigate the classification of workers as employees or independent contractors. By overlooking the potential reclassification of independent contractors as employees, companies may be subject to significant penalties under PPACA
Posted on: Thu, 28 Nov 2013 17:14:03 +0000
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