Worker Classification: An Area of IRS Scrutiny |
Background
Nonprofit organizations may not realize they can have issues with the IRS that are not related to their tax exempt status. One potential area of concern is worker classification. The IRS audited approximately 6,800 employment tax returns of both taxable and tax-exempt entities for tax quarters in the years 2008-2010. These audits revealed reporting problems in several areas that led to inaccurate and incomplete returns. Recently, the IRS issued News Release FS-2015-21 to remind employers to correctly determine whether workers are employees or independent contractors.
Why Worker Classification Matters
There are several significant reasons why proper identification of workers as employees or independent contractors is important.
Employers must generally withhold income taxes, withhold and pay Social Security and Medicare taxes, and (except for Section 501(c)(3) organizations) pay unemployment tax on wages paid to employees. Employers are generally not required to withhold or pay any taxes on payments to independent contractors. If an organization classifies an employee as an independent contractor without a reasonable basis for doing so, it (or responsible persons in the organization) may be held liable for employment taxes for that worker.
In addition to the withholding tax issues, there may be obligations under the organization's retirement plan, workers compensation questions, and health insurance coverage requirements under the Affordable Care Act for workers who are considered employees. These requirements typically do not apply to independent contractors.
IRS Methodology
The IRS examines the degree of an organization's control in three general categories to determine the appropriate classification of a worker.
- Behavioral Control: Under common law rules, employees are workers over which the organization may legally control and direct both (a) what must be done, and (b) how it must be done. Independent contractors are workers over whom the organization may legally control but direct only what must be done. The organization cannot control how, when, or where the work is performed. Whether the organization actually chooses to control the worker's performance is irrelevant. It is the legal right to do so that is critical.
- Financial Control: How the worker is paid, whether expenses are reimbursed, and who provides the tools and supplies can affect worker classification. Workers furnishing the tools and supplies necessary to perform the stipulated services are an indication of independent contractor status.
- Type of Relationship: Are there written contracts between the parties or are there employee-type benefits (such as a retirement plan, insurance, or vacation pay)? Will the relationship continue? Is the work performed a key aspect of the organization's operations?
These three categories used by the IRS for worker classification are based on 20 common law factors that courts have applied to such issue. These factors are listed in Rev. Rul. 87-41, 1987-1 CB 296.
Correcting Erroneous Classifications
The IRS currently has two programs that exempt-organization employers can use to settle worker classification issues.
- Classification Settlement Program: This program offers employers under IRS audit the opportunity to pay only a portion of the employment taxes due for the year under audit in which the workers were misclassified.
- Voluntary Classification Settlement Program (VCSP): This is an optional program that eligible employers can apply to participate in. By voluntarily agreeing to treat misclassified workers as employees in future years, the employer's federal employment tax liability for the past nonemployee treatment is usually significantly reduced. One of the eligibility requirements is that the employer must have consistently treated workers (or a class or group of workers) as independent contractors and have filed all required Form 1099s for the affected workers for the prior three years within six months of their due dates (including extensions). An organization applies for this relief by filing Form 8952 (Application for Voluntary Settlement Program) and entering into a closing agreement with the IRS.
Additional details of the VCSP are available by entering "VCSP" in the search feature of the IRS website at www.irs.gov.
Determination of Status
If an organization is uncertain whether a worker is an employee or an independent contractor, that organization can use the 20 factor test mentioned earlier, or it can file Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. The IRS will review the facts and circumstances presented and officially determine the worker status (it will typically take the IRS at least six months to make this determination). There is no fee for a Form SS-8 determination letter.
Conclusion
It is important to have a system in place to identify workers who may be subject to classification questions and to periodically review the determination as an independent contractor, to be sure the classification is still appropriate. Please contact a member of our nonprofit service group with questions.
 Author: Chuck Krueger, CPAContact: 920.684.2547 or ckrueger@hawkinsashcpas.com
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 The Payroll and Other Year-End Reporting Update and Seminar will take place online as webinars in December. The Year-End Update session will address major changes affecting the close of 2015 and beginning of 2016, and is offered at two different times. The Year-End Seminar is a comprehensive three-hour session that will include topics from the shorter session and take a more in-depth look at compliance issues of year-end payroll processing, fringe benefits, multi-state issues and independent contractor issues.
For more information and to register, please click here. |
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Reporting Requirements Under The Affordable Care Act
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The Patient Protection and Affordable Care Act, referred to as The Affordable Care Act (ACA), is health care reform that is extremely complex, and many of the provisions apply to nonprofit organizations. Employers, including nonprofit organizations that provide minimum essential coverage to an individual during the calendar year, are required to provide some form of reporting in early 2016 for 2015 calendar year coverage.
Health insurance issuers, self-insured employers, government agencies, and other entities that provide minimum essential coverage to an individual during 2015 must report certain information about the coverage to the IRS and to the individual covered. For employers that are fully-insured, the Form 1095-B should be issued by the insurance company to the IRS and a copy provided to the covered individual. An example of this is the employer pays premiums to an insurance carrier; the insurance carrier in turn pays the health insurance claims (Blue Cross Blue Shield for example). Your insurance carrier is required to prepare the Form 1095-B. The reporting form requirement is different for employers with 50 or more full-time employees, including full-time equivalent employees (applicable large employers). Instead of filing Form 1095-B, applicable large employers must file Form 1095-C with the IRS and provide a copy to the covered individual. For applicable large employers that are fully insured, the insurance carrier may still prepare Form 1095-B; however, that does not dismiss the employer from needing to file Form 1095-C. If you contract an outside service provider to perform your payroll, Form 1095-C may be prepared for you, but we still recommend you contact your provider to verify. Form 2015 calendar year coverage, Forms 1095-B and 1095-C, along with transmittal Forms 1094-B and 1094-C are due to the IRS by February 29, 2016, if filing on paper, or March 31, 2016, if filing electronically. A copy of Form 1095-B or 1095-C is due to the individuals covered by February 1, 2016. We suggest you contact your payroll provider and insurance carrier regarding the reporting requirements under the ACA. You also may want to discuss this with your Human Resources Department regarding the process for counting full-time employees to determine if you are an applicable large employer. If you are an applicable large employer and do not offer health insurance coverage to your full-time employees, offer coverage that is deemed unaffordable, or offer coverage that did not provide minimum value, you may be subject to the employer shared responsibility payment (penalty).
 Author: Curt Bach, CPA
Contact: 715.748.1351 or cbach@hawkinsashcpas.com
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Let Us Help Make Your ACA Reporting Easier
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 The Affordable Care Act may require you as an employer to provide information return reporting of health insurance coverage not only to the IRS, but also to your employees. Adding one more item to your year-end to-do list, this reporting is like a W-2 for health coverage. Some of our ACA reporting services include: - Assistance determining which version of form 1095 is required.
- Criteria for you to determine which employees need to receive a form 1095.
- Proper preparation of forms with codes and requirements based upon provided information.
- Electronic filing of forms 1095 on your behalf.
- Collection of your employee data from your payroll system or provider.
- Provide calculations to determine whether you have 50 full-time employees.
If you'd like more information about this service, please email us at info@hawkinsashcpas.com. |
| Inspiring and Educational Experiences at the National Eagle Center |
 The National Eagle Center welcomes nearly 80,000 annual visitors and provides education as well as the opportunity to get within feet of its five rescued eagles without glass or cages as barriers. These Ambassador eagles include four bald eagles and one golden eagle. Visitors also spend hours touring 15,000 sq. ft. of exhibit space.
The Center is located in Wabasha, MN, on the banks of the Mississippi River and provides year-round views of the steady population of wild eagles. This area is especially popular to wintering bald eagles, since the river in the area does not freeze over.
"We inform about eagles, but also the environment," said Eileen Hanson, Director of Public Relations for the National Eagle Center. Since eagles are at the top of the food chain, a major part of the organization's mission is to provide education that links the national symbol to the health of the ecosystem.
"The flourishing population of eagles is directly correlated to clean water and healthy fish and bugs, as well as the overall health of the environment," she continued.
The Center is open throughout the year and hosts several special events. Presently, the National Eagle Center is gearing up for its Veterans Day observance, Nov. 7-15. Free admission is offered to active military and veterans during this week. On Nov. 7, the Center, in conjunction with the local VFW, will hold a flag raising ceremony.  "When veterans and active military members come so close to our eagles, their experience is often more personal and meaningful than it is to other visitors. Our Veterans Day observance event is our way of honoring the relationship between our national symbol and the military," said Hanson. With the Wabash, MN, area being the hot spot for winter eagle nesting, the Center offers eagle viewing field trips with its education staff from Nov. to April. March is an especially busy month as the organization celebrates the spring migratory pattern of thousands of eagles passing through Wabash. The organization calls this month-long event Soar with Eagles, and offers eagle viewing and other special events. As it often goes, success is accompanied with challenges. Space is a challenge, and the National Eagle Center is currently exploring solutions. It's the organization's goal to accommodate its growing visitor attendance and to provide appropriate space for its retired eagles and for active eagle training. In addition, the Center has the opportunity to acquire a collection of 20,000 museum-quality items that reflect the eagle's historical and cultural impact in the U.S. The organization will need space to curate the collection at museum standards. The National Eagle Center began as a group of volunteers sharing views of wintering bald eagles with visitors on an observation deck along the river in 1989. From this time, the organization, in partnership with the City of Wabasha, opened its own facility where visitors enjoy magnificent views of wild eagles and educational exhibits along with meeting the organization's resident eagle Ambassadors.
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| Tips to Avoid Tax Consequences of Corporate Sponsorships |
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Accepting a corporate sponsorship to help fund one or a series of events or simply to provide ongoing support for your organization's programs and operations can benefit both the organization and the corporation -- if the sponsorship is arranged properly.
In addition to the corporate sponsor's financial support, your organization may receive in-kind services and/or product donations, along with increased media attention that can boost public support for your mission. For the corporation, the sponsorship offers public recognition of the business charitable activities, which may help it attract new customers and enhance its reputation.
Tax Consequences
However, unless payments from the corporate sponsor are structured properly, your organization could be in for a tax surprise. Rather than being considered a nontaxable charitable contribution, the payments could be classified as taxable advertising payments and trigger unrelated business income taxes (UBIT) for your organization.
When determining whether sponsorship payments are nontaxable charitable contributions, the IRS focuses on whether the sponsor receives a substantial benefit in return for its payments. Your organization can help ensure sponsorship payments won't be taxed by having them meet the requirements of the IRS's qualified sponsorship payments safe harbor rule.
Under this rule, the corporate sponsor must provide the sponsoring funds, property, or services with no arrangement or expectation that it will receive any substantial benefit in return for the use of the sponsor's name in connection with the nonprofit organization's activities. Generally, a substantial benefit includes any benefit except:
- The use or acknowledgment of the sponsor's name or logo in connection with the event.
- Token items or insubstantial goods and services provided to the sponsor by the nonprofit.
Potential Tax Triggers
To avoid UBIT when structuring a sponsorship, be aware of these possible tax triggers:
- Any inducements on your organization's part to buy the sponsor's products or services.
- Free advertising opportunities for the sponsor in your organization's periodic publication that your organization would normally charge for.
- Any requirement making the sponsor's payment to your organization contingent on a certain level of attendance at your event.
Combination Payments
Some sponsorship payments can be a combination of nontaxable qualified sponsorship payments and taxable amounts that are attributable to advertising income or deemed a substantial benefit to the sponsor.
For example, a local business pays your nonprofit $50,000 to sponsor an art exhibit you're organizing. You give the business 15 passes to the event (total value, $225) and 15 passes to a dinner to kick off the event (total value, $1,125). In this situation, $1,350 of the $50,000 doesn't meet the qualified sponsorship exclusion from tax.
The burden is on your nonprofit to make a reasonable and good faith valuation of any substantial benefit. Rely on our experience to help you meet your responsibilities, minimize your tax, and accurately estimate taxes you can't avoid.
IRS To Release Electronic Forms 990
In response to a district court ruling,* the IRS is working on digital technology to make searching for information about nonprofit finances and operations easier for the public. The IRS expects to have the new technology in place by early 2016.
The ruling is in response to a request by an advocacy group under the Freedom of Information Act (FOIA) to have access to data in machine-readable digital format from nine Form 990s filed electronically by certain nonprofit organizations. Shortly after the court granted the group's request, the IRS said in a statement that it was taking steps to allow it to respond to future requests in a similar manner (while still protecting the confidentiality of certain information). Currently, more than half of all Forms 990 are filed electronically.
* Public.Resource.org v. United States Internal Revenue Service (N.D. Cal. 01/29/15)
 Contact: Sandy Jensen, CPA
608.793.3126 or sjensen@hawkinsashcpas.com
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| How to Establish a Successful Board of Directors |
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The board of directors for a nonprofit organization is the governing body that has the ability to direct an organization to success or failure. A board that leads an organization to success has diverse members who are accountable to the organization, have received appropriate training, and are continually rotating.
Skills & Demographics
Finding quality board members can be a difficult task, which sometimes leads to filling open positions with anyone who is interested. While interest is a good trait to have, a potential board member must also have traits beneficial to the organization such as a background in law, finance, or management. Also, be sure to build a board with a mixture of demographics; consider age, gender, and ethnicity. The diversity of skills and demographics will bring various ideas to the table ensuring quality decisions.
Recruitment for a member should be ongoing. During the process, focus more on abilities than titles alone. For example, a CPA who works primarily with gift tax returns may not be as valuable as a non-CPA business manager who has experience in budgeting and reviewing financial statements.
Responsibilities & Training
The board's responsibilities include voting on important issues, creating strategic plans, approving and reviewing budgets and hiring key employees. Potential board members should be well aware of their responsibilities and must be able to commit to attending all meetings and events, barring any unforeseen circumstances. The board cannot be effective if members are consistently absent when decisions need to be made. Consider implementing an attendance policy, excusing members of their duties after too many unexcused absences.
The board should also be active in the organization's events and daily operations. When a board has members who volunteer and are active in the organization, it provides oversight and also helps the board better understand the mission and how to improve services.
Once appointed to the board, a new member will need to be trained. This process can be formal or informal, but it should include activities that allow the new member to become familiar with the governing documents, policies and procedures, and important history of the organization.
Board Rotation
The board should constantly seek new members and retire members who have served for a long time. This will help keep a fresh perspective and prohibit creating a stale board. Establishing term limits is an easy way to keep the board rotating. Consider 2-3 year terms with reappointments possible, and establish a cap on number of terms. Some boards may require a non-officer role before being eligible for a position as an officer. Be sure to stagger member expirations so there are always a few members with experience. This will ensure institutional memory of the board is retained.
The board of directors is a vital part of every organization. Making sure the right members are elected, informed and trained ensures a successful board. If there is anyway we can help you with board development, please contact a member of our nonprofit service group.
 Author: Joe Nurmi, CPA
507.252.6673 or jnurmi@hawkinsashcpas.com
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