Michael F. Yates & Company, Inc.
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HELPING MANAGE YOUR COMPANY'S MOST PRECIOUS RESOURCE
                     ...from the HR Perspective
Human Resource UpdateSeptember 2010
In This Issue
Track Government Spending
Common Plan Mistakes
Plan Reporting Calendar
Qualified Default Investment Funds
IRS Form W-2
Fix those terrible passwords!
eLaws Quick Link
Jump Out of Bed!
Independent Contractor
Relax
Terms of Use
Invitation to MFYCO Facebook
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mh group
 How to Track Government Recovery Spending
 
"The Board shall establish and maintain...a user-friendly, public-facing website to foster greater accountability and transparency in the use of covered funds. The website...shall be a portal or gateway to key information relating to the Act and provide connections to other government websites with related information." 

 
 
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Greetings:
 
Has the Economy Turned?
  
 

One of the things that has seemed constant over the last few months is the erratic nature of all of the economic indicators. Movement has been up and down - usually within a small band. Despite this, there seems to be an indication that positive movement is starting to take place. If that movement develops momentum of any sort it will certainly affect the volume of your business and also the way in which you do business.

During the economic slow-down, most businesses have made cuts in staff either through attrition or layoffs, frozen or reduced pay or bonuses, asked for more overtime from exempt personnel, increase employee contributions for healthcare plans, reduced or eliminated perquisites and amenities, and examined processes to be sure that everything is being done in the most efficient manner. When the economy shows that it is really making a comeback, how will your business be affected by what was done to ensure survival?

People are the heart of every business. When things got rough, where possible and permitted, companies held onto their most valuable and productive staff members. It is probable that those same companies will have treated their remaining staff members to some or all of the cost saving measures mentioned above. The apparent result is a highly capable staff being paid the least amount possible.  The not so apparent result is some of those staff members may have stayed with the company not out of loyalty, but because they were too afraid to jump ship at this time.

When the economy starts to recover, companies will start to look for additional employees. By nature, companies want to get the best employees they can for a job. That means that they will probably try to recruit those who are currently employed, as those are the ones other companies thought had the right stuff to get through the down-turn, have probably grown due to their recent experience, and are up to date on the jobs they are doing. Companies will also realize they will have to offer such prospective employees a better pay package to get them to make the move.

This means that the folks you valued the most to get you through the rough times may also be the ones you have the most chance of losing when the times get better.

While the true sustainable turn in the economy may be in the distance, starting to plan for it now will help your company to profit in the future. We will delve into this subject more next year.

______________________________
 

If you find value in this newsletter please let us know. Feel free to call me with a comment and/or ask a question at any time (908-689-4200) or send me an email ([email protected]). We offer this timely information as another benefit of your relationship with our company. If you feel a friend or colleague would benefit from receiving our newsletter, please feel free to forward a copy.
    

Sincerely,
    Mike
Michael F. Yates
President

PS: You can view all of our newsletters by clicking the 'newsletter archives' link at our company website (www.mfyco.com).
 
______________________________
 

The Fix Is In: Common Plan Mistakes

Periodically the Internal Revenue Service (IRS) publishes an article that it calls "The Fix Is In: Common Plan Mistakes" that presents common mistakes that happen in retirement plans.  These articles describe a common problem, how it happened, how to fix it and how to lessen the probability of the problem happening again.  Over the course of the next several months, we will be reproducing some of those articles that we believe would be helpful to you in the day-to-day administration of your plan.

Correction for Exclusion of Employees for Elective Contributions

or After-Tax Employee Contributions

The Issue

A plan must specify how an employee becomes a participant. In other words, what are the plan's eligibility conditions? IRC ��401(a)(3) and 410(a) establish minimum standards relating to age and service requirements for eligibility purposes. Failure to timely include all eligible employees in a qualified plan will cause the plan to lose its tax-qualified status.

The Problem

If an employee is improperly excluded from a profit-sharing plan, they miss out on any contributions made (with earnings) during the period of exclusion. Calculating the amount that the employee lost in this situation is simple. The allocations of any plan contributions during the exclusion years are recalculated by including the excluded participant and are adjusted for lost earnings. When a plan allows elective contributions or after-tax employee contributions in a 401(k)/(m) arrangement, the calculation of the loss suffered by the excluded employee becomes more complex. When an employee misses the chance to make a deferral or after-tax contribution, the dollars that would have been contributed are still in the possession of the employee. The affected employee has lost the opportunity to put a certain amount of money into a tax-favored account.

The Fix

Improperly excluding an employee from making elective contributions or after-tax employee contributions will cause a plan to become disqualified, resulting in adverse tax consequences to the employer and employees under the plan; however, employers may get relief from these adverse consequences through the Employee Plans Compliance Resolution System (EPCRS)by correcting the failures. The Voluntary Correction Program (VCP) and the Self-Correction Program (SCP) can be used to correct these mistakes.

Prior to the issuance of Revenue Procedure 2006-27, the correction for excluding an otherwise eligible employee from making deferrals or after-tax employee contributions into a 401(k)/(m) plan was for the employer to contribute both:

1.     A Qualified Non-Elective Contribution (QNEC) equal to the average deferral percentage (ADP) for the class of the excluded employee (either Highly Compensated Employee (HCE) or Nonhighly Compensated Employee (NHCE)) times the employee's compensation during the period of the failure, and

2.     additional QNEC equal to the average contribution percentage (ACP) for the class of the excluded employee (NHCE or HCE) times the employee's compensation during the period of the failure.

The above amounts would be adjusted for earnings. The average deferral percentage, or ADP, is determined by averaging the deferral percentages separately calculated for the eligible employees in the �401(k) arrangement. A QNEC is a contribution made by an employer that meets certain vesting, distribution and nondiscrimination requirements.

 

It can be argued that this correction creates something of a "windfall" for affected employees because under the ADP portion of the correction the employee receives both the corrective contribution and the cash compensation upon which the QNEC is made.

Revenue Procedure 2006-27 introduced a new optional correction method based on the principle that the employer should contribute to the plan on behalf of the excluded employee an amount that measures the value of the "lost opportunity" to the employee to have a portion of his or her compensation contributed to the plan. This correction principle applies solely to this limited circumstance. It does not, for example, extend to the correction of:

         A failure to satisfy a nondiscrimination test, e.g., the ADP test pursuant to �401(k)(3) and the ACP test pursuant to �401(m)(2).

         �414(v) catch-up contributions or Roth contributions.

The method of correction cannot be used until after the correction of other qualification failures. Thus, for example, if in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction method described cannot be used until after correction of the ADP or ACP test failures.

The new correction for a failure to include an eligible employee in a 401(k) plan is based on the "lost opportunity cost" to make deferrals. For salary deferrals, the required make-up payment is 50 percent of the pre-tax deferrals the employee would have made had the employee been timely included in the plan. This is based on the employee's compensation times the ADP of the employee's class (NHCE or HCE). The matching contribution for the excluded employee equals the matching contribution that would have been received had the employee made pre-tax deferrals. However, the corrective matching contribution is based on the full amount of deferrals (ADP) and not the 50 percent lost opportunity cost applicable to employee deferrals.  Similar correction rules apply to safe harbor 401(k) plans. However, in calculating the correction amount the plan must apply its safe harbor formula rather than the ADP amounts for the applicable class of employees.

Example:  A NHCE has compensation of $40,000 and is incorrectly excluded for a full year from a plan that provides a match equal to 100 percent of the first three percent of compensation.  The plan has a NHCE ADP equal to five percent. The QNEC for lost opportunity cost to make deferrals is $1,000 ($40,000 x 5% x 50%).  The QNEC for the matching contribution is $1,200 ($40,000 x 3%).

The correction for after-tax contributions is based on a different "lost opportunity cost" - namely, 40 percent of the after-tax contributions the employee would have made had the employee been timely included in the plan. This amount is based on the employee's compensation times the ACP for the employee's class (NHCE or HCE). The applicable ACP in this calculation may be limited to the portion of the ACP that is attributable to after-tax employee contributions (excluding matching contributions).

Making Sure It Doesn't Happen Again

Employers need to have a system in place to ensure that employees are allowed entry into the plan according to the terms of the written plan. Employers should work with plan administrators to ensure that the administrators have sufficient employee data to calculate the proper entry date and rate of deferrals desired by the employee.

However, keep in mind that, despite all of your good efforts, mistakes can happen. In that case, the IRS can help you correct the problem and retain the benefits of your qualified plan. 

 
Plan Reporting Calendar
 

 

2010 FILING DUE DATES FOR
CALENDAR YEAR PLANS
 
This calendar is not intended to be an exhaustive listing of every due date under the Code or ERISA, but rather reflects some of the most common due dates.

View Calendar

 
Qualified Default Investment Funds
 
 

If you sponsor a 401(k) plan, your plan probably lets participants decide where to invest the assets in their accounts under the plan.  Do you know why that practice is so common?  Are the investments available under your plan structured to limit your fiduciary liability as much as possible?

The primary reason that participants are allowed, under a defined contribution plan, to make his or her own choices about where their assets are invested is so that the plan's fiduciaries (trustee, plan administrator, etc) will no longer be liable, under �404(c) of ERISA, for any gains or losses resulting from the investment.  The protection available under ERISA Section 404(c) is generally available for investments made based on a participant's affirmative election.  Unfortunately, new participants do not always provide the needed investment elections.  Even though the participant has not provided the proper investment elections, the plan's fiduciaries are still required under ERISA to invest the participant's assets in a prudent manner.  The investment of these assets is at the discretion of the plan's fiduciaries and therefore falls outside of the protection available under �404(c) of ERISA.  We always advise our clients that while there is no legal requirement for a participant directed plan to offer a default investment fund, trustees and plan administrators should have, for administrative ease, a designated fund in which to place assets when no investment direction has been provided.  If there is not a designated default fund, the trustee or other investment fiduciary must make a separate investment decision every time a new participant fails to provide investment instructions.

The use of a moderate risk "default investment fund" will lessen the likelihood that the plan's fiduciaries will be found to have failed to meet their obligations under ERISA; however, it will not protect the plan's fiduciaries from liability for any losses that the fund may suffer.  With the addition of �404(c)(5), The Pension Protection Act of 2006 extended fiduciary relief under Section 404(c) to investments in certain types of default arrangements in the absence of participant investment direction. However, �404(c) does not provide relief:

1.      To a fiduciary from its duties to prudently select and monitor any QDIA or from any liability that results from a failure to satisfy those duties;

2.      To any fiduciary managing investments in a QDIA for its fiduciary duties under ERISA or from any liability that results from a failure to satisfy those duties; and

3.       To any fiduciary from the prohibited transaction rules of ERISA Section 406 or from any liability that results from a violation of those provisions.

Section 404(c)(5) of ERISA provides a fiduciary safe harbor for defaulted investments in a qualified default investment alternative (QDIA).  To obtain fiduciary protection for defaulted investments, a plan sponsor must satisfy a number of conditions under the QDIA final regulations, including, but not limited to:

         Investment of assets in a "qualified default investment alternative" (QDIA) as defined under the regulations;

      �     Participants must be given the opportunity to direct investments, but failed to do so;

         Participants must be given initial and annual notices that meet specified requirements;

         Certain materials provided to the plan, such as prospectuses, must be passed through to participants;

         Participants must be allowed to transfer investments in the QDIA to other plan investments with the same frequency as participants who elected to invest in the QDIA, but not less frequently than once within any three-month period, and any transfer or withdrawal requested during the first 90 days of an investment defaulted into a QDIA cannot be subject to any fees or expenses (including surrender charges, liquidation or exchange fees, redemption fees and similar expenses charged in connection with the liquidation or transfer from the investment); and

         The plan must offer a "broad range of investment alternatives" as defined under the regulations.

 

Qualified Default Investment Alternative

According to DOL regulations, a qualified default investment alternative (QDIA) is an investment that meets all of the following requirements:

1.      It does not hold or permit the acquisition of employer securities, unless the employer securities are either

a.   held or acquired by a mutual fund or a similar pooled investment vehicle regulated and subject to periodic examination by a state or federal agency in accordance with stated investment objectives, independent of the plan sponsor or an affiliate thereof,

b.   or, acquired as a matching contribution from the employer plan sponsor or were acquired by the participant prior to management by the investment management service, provided the investment management service can exercise discretion over such securities.

2.   It satisfies the requirement that a participant may transfer, in whole or in part, his or her investment from the QDIA to any other investment alternative available under the plan.

      3.   It is:

     managed by an investment manager, within the meaning of ERISA Section 3(38); a trustee of the plan that meets the requirements of ERISA Section 3(38)(A), (8), and (C); or the plan sponsor who is a named fiduciary within the meaning of ERISA Section 402(a)(2);

    an investment company registered under the Investment Company Act of 1940; or

          an investment product or fund that is a so-called short-term or grandfathered QDIA.

4.   It constitutes one of the following types of investment products (a so-called long-term QDIA):

a.   An investment fund product or model portfolio that applies generally accepted investment theories, is diversified so as to minimize the risk of large losses, and is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed-income exposures based on the participant's age, target retirement date (e.g., normal retirement age under the plan) or life expectancy. Such products and portfolios change their asset allocations and associated risk levels over time with the objective of becoming more conservative (I.e., decreasing risk of losses) with increasing age. It is not required to take into account risk tolerances, investments, or other preferences of an individual participant. An example of such a fund or portfolio may be a "life cycle" or "targeted-retirement-date" fund or account.

b.   An investment fund product or model portfolio that applies generally accepted investment theories, is diversified so as to minimize the risk of large losses, and is designed to provide long-term appreciation and capital preservation through a mix of equity and fixed-income exposures consistent with a target level of risk appropriate for participants of the plan as a whole. It is not required to take into account an individual participant's age, risk tolerance, investments, or other preferences (but should take in account the plan's demographics as a whole). An example of such a fund or portfolio may be a "balanced" fund.

c.   An investment management service with respect to which an investment manager, applying generally accepted investment theories, allocates the assets of a participant's individual account to achieve varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures, offered through investment alternatives available under the plan, based on the participant's age, target retirement date (e.g., normal retirement age under the plan), or life expectancy. Such portfolios are diversified so as to minimize the risk of large losses and change their asset allocations and associated risk levels for an individual account over time with the objective of becoming more conservative (I.e., decreasing risk of losses) with increasing age. It is not required to take into account an individual participant's risk tolerance, investments, or other preferences. An example of an investment management service may be a "managed account."

QDIA Notice

The DOL has provided a sample QDIA notice to assist plan administrators in meeting the notice condition described above. [Click on this link to go to the sample notice]  A plan administrator will need to customize the sample notice to conform it to the terms and operations of its plan, by inserting details about the plan's QDIA, as directed in italicized notes, and filling in any blanks as appropriate. Plan administrators must provide initial and annual QDIA notices to participants according to the following rules:

    Initial notices must be provided at least 30 days prior to the date of plan eligibility, or 30 days prior to the date of any first defaulted investment in the QDIA. If the plan is an eligible automatic contribution arrangement (EACA) with a 90-day permissive withdrawal option, the initial notice can be provided on or before the date of plan eligibility.

    Annual notices must be provided at least 30 days prior to each subsequent plan year.

Broad Range of Investment Alternatives

The broad-range requirement is satisfied if the following conditions are met:

1.      Participants are given a reasonable opportunity to materially affect the level of return and degree of risk to which their accounts are subject.

2.      Participants are given the opportunity to choose from at least three investment alternatives that satisfy the following:

a.       Each alternative is diversified.

b.      Each alternative is materially different in terms of risk and return characteristics.

c.       In the aggregate, the alternatives enable participants to achieve a portfolio with aggregate risk and return characteristics at any point within a range normally appropriate for the participants.

d.      Each alternative, when combined with other alternatives, tends to minimize through diversification the overall risk of loss.

3.      Participants must have the opportunity to diversify so as to minimize the risk of large losses, taking into account the nature of the plan investments and the size of participant accounts.

A plan that permits participants to invest in any asset of their choice, rather than from a specified set of funds-should automatically satisfy the broad-range requirement.

 

Click here for a Sample Qualified Investment Alternative (QDIA) Notice
Call: 908-689-4200 to contact a
MFYCO professional consulting associate.
happypeople

Reporting Health Coverage Costs on IRS Form W-2

Under the new health bill The Affordable Care Act, a tiny section (Section 9002) makes a big change to every company's annual reporting responsibilities. Starting in 2011 employers will be required to calculate and report the aggregate cost of employer-sponsored health insurance coverage on employees' IRS Form W-2. This reporting is for informational purposes only, to show employees the value of their health care benefits. The amount reported does not affect the employee's tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income and it is not taxable.

Reportable employer-sponsored costs include:

         Amounts contributed by the employer to a health savings account (HSA) or medical savings account (MSA).

 

         Dental and vision plans (unless an employee may elect dental or vision coverage without being covered by the medical plan).

 

         Employee assistance programs

 

         Health reimbursement accounts (HRAs)

 

         Medical plans

 

         Medicare supplemental coverage

 

         On-site medical clinics if they provide more than de minimis care

 

         Prescription drug plans

 

Employers will not be required to provide a specific breakdown of the various types of coverage; they must only report an aggregate cost. For example, if an employee enrolls in medical, dental and prescription drug coverage, the employer only has to report the total value of all coverage, not a value for each individual benefit.

The following employer provided benefits are not required to be reported on Form W-2 under the The Affordable Care Act:

         Archer MSA or HSA contributions of the employee or the employee's spouse

         Long term care

          Accident or disability income benefits

         Workers' Compensation insurance

         Salary reduction contributions to a Health FSA

         Specific disease or illness policies (such as cancer policies), and hospital (or other) indemnity insurance policies where the full premium is paid by the employee on an after  tax basis.

This information is for educational purposes only.  Please refer to your tax advisor for additional information or guidance. 

 
 
 What would you like to see in a future issue?

Contact our office with your suggestions.

 
 
 Worth Repeating: Fix Those Terrible Passwords!
 
 
Passwords should be changed atleast every 30 days. Have you changed yours since we first ran this article in our August 2009 newsletter?
 

Do you use the same or similar password for several different websites? If you don't, congratulations! If you do, you are not alone.

Do you change your password every 30 days? We all know it is bad to use the same password for different sites but we all do it anyway. Most passwords follow a pattern. First, people choose a full word as the base for their password (for example your first name), when told to add a number or a symbol to make it more secure most people add a 1 or ! to the end of that word. Remembering different passwords can be annoying and writing them down to help you remember them can be unsafe.  You do not have to keep unique passwords for every site you visit but reserve your strongest most distinct passwords for the sites that have your most valuable information - your computer, your bank account and your email.           
 

A few rules to help make your passwords safer are: choose a password that does not contain a readable word, mix upper and lower case, use a symbol or number in the middle of the password, do not use 1 or !, change your password regularly, never write them down or email them to yourself and use different passwords for sites you visit regularly.  While this all might sound difficult and time consuming, it does not have to be. Here is a trick to create passwords that are almost impossible to crack but still easy to remember. Start with a memorable phrase, for example: I enjoy reading this newsletter Monday morning at 10:00 AM. After you select your memorable phrase, turn it into an acronym. The above example becomes: IertnMm@10AM.  Another example would be: Michael F Yates & Company is here to help manage your company's most valuable resource, which turns into: MFY&Cihthmycmvr. It will be pretty hard for hackers to figure out those passwords yet they are easy to remember!


 
 

jumpoutofbed
 HEALTH UPDATE
 
 Your alarm goes off and you slap the snooze button three - no, make that four - times. Just getting dressed and putting on make-up takes a lot out of you. You practically fall asleep on your morning commute, your brain's in a fog most of the day, and you find yourself zoning out in meetings. Or maybe you're bright-eyed when you're at work, but once home, you can barely drag yourself off the couch. Welcome to the life of the 21st-century.

You already know that eating a balanced diet, getting enough sleep, and exercising can give you more oomph. But you may be ignoring a key part of the energy equation: your brain. The mind and body are locked in constant communication through tiny molecules called neurotransmitters. When you're anxious, sad or angry, neurotransmitters tell your body to release chemicals that make you feel tense, stressed and tired. But when you're relaxed, happy or invigorated, the brain signals the production of endorphins and other "happy hormones" that improve your health and give you more zip than you'd ever get from a few cans of Red Bull.

Give yourself a visual aid.
 
Science shows that imagining an activity fires up the same parts of your brain that work when you're actually doing it. Consider this study published in the Journal of Neurophysiology: one group of participants exercised a finger for a month, while another group just imagined exercising it. Without even lifting a finger (literally), the visualising group improved the digit's strength by 22 per cent, while the group that exercised only got a 30 per cent boost. When you hit a slump, visualise yourself as full of energy - delivering a strong presentation in your next important meeting, knocking out an hour of power yoga or flying through a huge pile of paperwork.

Think premium thoughts.
 
Fill your mind with optimal thoughts. Think of these thoughts as premium petrol: high-quality fuel that keeps your body and mind charging forward instead of spinning in place. Next time you're stuck reciting a negative mental script, try putting a glass-half-full spin on things. For example: "He broke my heart, but not my spirit. Next!".


Laugh out loud.
 
According to a study from Loma Linda University, US, just anticipating a good chuckle is enough to lower levels of stress hormones that can sometimes leave you feeling drained. Laughing also increases your heart rate and stimulates the circulatory, cardiovascular and immune systems.


Expand your mind.
 
Meditation lowers your heart rate, eases muscle tension and provides a burst of endorphins that makes you feel happier and more alert. The goal of the practice is to simply exist in the moment. For a few minutes every hour or so, close your eyes or find a pleasant spot to focus on, and breathe deeply and slowly, paying attention only to your breathing. When you're at the bottom of an exhalation, gently contract your lower abs to push every bit of air out, then allow your lungs to slowly fill with air again. Now, doesn't that feel better. (Compliments of MFYCO)
Is The Person Providing Services an Independent Contractor (Self-Employed) or Your Employee?
It is critical that you, the business owner, correctly determine whether the individuals providing services are your employees or 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. If you are an independent contractor and hire or subcontract work to others, you will want to review the information in this section to determine whether individuals you hire are independent contractors (subcontractors) or employees.
Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be:
�   An Independent Contractor - People who follow an independent trade, business, or profession in which they offer their services to the public.  In general rule, an individual is an independent contractor if the person for whom the services are performed, has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
�   An Employee (common-law employee) - Anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
�   A Statutory Employee - Although someone may be considered an independent contractor under the common law rules, he/she may nevertheless be treated as an employee by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.
1.     A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
2.     A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
3.     An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
4.     A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer's business operation. The work performed for you must be the salesperson's principal business activity.   
        �    A Statutory Nonemployee - is usually someone who is in Direct Sales.
 
Common Law Rules
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.  Facts that provide evidence of the degree of control and independence fall into three categories:
1.     Behavioral:  Does the company control or have the right to control what the worker does and how the worker does his or her job?  Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done - as long as the employer has the right to direct and control the work.  The behavioral control factors fall into the following categories:
�   Type of instructions given - An employee is generally subject to the business's instructions about when, where, and how to work.
�   Degree of instruction - means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.  Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.
�   Evaluation systems - If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.  If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.
�   Training - If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way.  This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.
2.     Financial:  Are the business aspects of the worker's job controlled by the payer?  Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker's job.  The financial control factors fall into the categories of:
�   Significant investment - An independent contractor often has a significant investment in the equipment he or she uses in working for someone else.  However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment.  Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures;
�   Unreimbursed expenses - Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business;
�   Opportunity for profit or loss - The opportunity to make a profit or loss is another important factor.  If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work).  Having the possibility of incurring a loss indicates that the worker is an independent contractor.
�   Services available to the market - An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market; and
�   Method of payment - An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
 
3.     Type of Relationship - Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.  The factors, for the type of relationship between two parties, generally fall into the categories of:
�   Written contracts
�   Employee benefits
�   Permanency of the relationship
�   Services provided as key activity of the business
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.  The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in making your determination.
If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker's status.  Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).
Employment Tax Obligations
Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.
Note:  Social Security and Medicare taxes must be withheld from the wages of statutory employees if of the following conditions apply.
�   The service contract states or implies that substantially all the services are to be performed personally by them.
�   They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
�   The services are performed on a continuing basis for the same payer.
Misclassification of Employees
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply).  If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977.
 
 
 
about MFYCO ...

  • Michael F. Yates & Company, Inc. can help you with a variety of services ranging from retirement plans to providing results-oriented survey instruments, training and development programs for your employees. Our products and services are intended to help you maximize the effectiveness of your Human Resources function.

  • These products and services incorporate our years of experience so that you receive rapid results and exceptional value. From onsite consulting, to strategic business integration, to Web enablement, we understand how Human Resources can be applied to solve your problems and achieve your goals. As a result, we can help you get the most out of your investment and turn your most precious resource into a competitive advantage.

  • We offer Consulting, Retirement Planning, Pension and 401(K) both qualified and non qualified Plans, Welfare Plans, Communications, Computer Systems, Executive Plans, Compensation, Mergers, Acquisitions, Divestitures and Other Services. 

    We offer a true and honest, Client Partnership.

Take the Michael F. Yates & Company, Inc. challenge!

Call us today ... 908-689-4200 


 
 (RELAX)
 
 
One day while walking down the street a highly successful Human Resources Manager was tragically hit by a bus and she died. Her soul arrived up in heaven where she was met at the Pearly Gates by St.Peter himself.

"Welcome to Heaven," said St. Peter. "Before you get settled in though, it seems we have a problem. You see, strangely enough, we've never had a Human Resources Manager make it this far and we're not really sure what to do with you."

"No problem, just let me in," said the woman.

"Well, I'd like to, but I have higher orders. What we're going to do is let you have a day in Hell and a day in Heaven and then you can choose whichever one you want to spend an eternity in."

"Actually, I think I've made up my mind, I prefer to stay in Heaven", said the woman "Sorry, we have rules..." And with that St. Peter put the executive in an elevator and it went down-down-down to hell.

The doors opened and she found herself stepping out onto the putting green of a beautiful golf course. In the distance was a country club and standing in front of her were all her friends - fellow executives that she had worked with and they were well dressed in evening gowns and cheering for her.

They ran up and kissed her on both cheeks and they talked about old times. They played an excellent round of golf and at night went to the country club where she enjoyed an excellent steak and lobster dinner. She met the Devil who was actually a really nice guy and she had a great time telling jokes and dancing. She was having such a good time that before she knew it, it was time to leave. Everybody shook her hand and waved goodbye as she got on the elevator.

The elevator went up-up-up and opened back up at the Pearly Gates and found St.Peter waiting for her. "Now it's time to spend a day in heaven," he said.

So she spent the next 24hours lounging around on clouds and playing the harp and singing. She had great time and before she knew it her 24 hours were up and St. Peter came and got her.

"So, you've spent a day in hell and you've spent a day in heaven. Now you must choose your eternity," The woman paused for a second and then replied, "Well, I never thought I'd say this, I mean, Heaven has been really great and all, but I think I had a better time in Hell."

So St. Peter escorted her to the elevator and again she went down-down-down back to Hell. When the doors of the elevator opened she found herself standing in a desolate wasteland covered in garbage and filth. She saw her friends were dressed in rags and were picking up the garbage and putting it in sacks. The Devil came up to her and put his arm around her.

"I don't understand," stammered the woman, "yesterday I was here and there was a golf course and a country club and we ate lobster and we danced and had a great time. Now all there is a wasteland of garbage and all my friends look miserable."

The Devil looked at her smiled and said...

"Yesterday we were recruiting you, today you're an Employee..."
 
 
 
Our staff and firm are proud
members
of the following professional organizations:

Society of Actuaries
 
American Society of Pension Professionals & Actuaries

Society for Human Resource Management

WorldatWork

 American Management Association
 
National Federation of Independent Business

Better Business Bureau
 
 

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P.O.Box 7
Washington, NJ 07882-0007 
 
908-689-4200

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email: [email protected]

 
 
 
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