Florida Reemployment Tax Audit
The Big Question: Employee or Independent Contractor?
Many employers classify employees as independent contractors to receive economic and business benefits, one of them being lower reemployment tax liability. For workers classified as employees, an employer must pay reemployment taxes, a minimum wage, social security, and provide benefits. Conversely, independent contractors are considered self-employed and as a result, the employer is not required to provide anything not included in the four corners of the contract. Clearly, there are benefits for business owners to classify workers as independent contractors rather than employees and, as a result, this is common practice. However, some companies take this practice too far and classify workers that are clearly employees as independent contractors, which often times leads to a reemployment tax audit. There is a big difference between taking advantage of the benefits of a grey area of law and completely overlooking the law.
As the state is aware of how tempting it is for companies to classify an employee as an independent contractor, it continuously goes after companies with regards to their tax liability for employees. If a worker is classified as an employee instead of an independent contractor, then the employer owes additional unemployment tax. The Department, in an attempt to remedy the misclassification of workers, takes the position that most workers are properly classified as employees and not independent contractors. Unfortunately, as a result of the Department's position on worker status, workers that are clearly independent contractors can still trigger the Department to go after a company. This was the case in a recent reemployment tax audit that our office attained a favorable decision on for our client.
The reemployment tax audit involved a temporary staffing company and the Department attempted to assess additional tax from the company based on its erroneous belief that the workers were employees instead of independent contractors. Specifically, the company is a pharmacy staffing agency that provides substitute pharmacists and pharmacy department managers to its clients, independent pharmacies.
The auditor alleged 57 pharmacists had been misclassified as independent contractors who should have been classified as employees. As a result, the auditor attempted to assess a tax deficiency based on the amount of taxable wages paid to the pharmacists for the audit period. Of course, the state then added interest to bring the balance due even higher. This audit is the result of the Department of Economic Opportunity attempting to classify as many workers as possible as employees, regardless of any agreement or relationship contrary to an employee employer relationship.
As the Department of Labor has recognized the difficulties associated with worker misclassification for both companies and the state departments, the DOL has published a guidance (2015-1) which lays out a new test to determine whether someone is a bona fide independent contractor or employee under the Fair Labor Standards Act. Unsurprisingly, the DOL's position on worker classification also leans more towards a finding for employees rather than independent contractors. What this guidance means for companies is that now they must be even more careful in classifying workers as independent contractors, as this guidance signals a skeptical view of workers classified as independent contractors.
Of course, Florida law also has a test for determining the status of a worker. The common law test the state uses to determine whether an employer employee relationship exists is a ten part test. In the application of the test, special emphasis is placed on the extent of "free agency" of the worker in the means and manner of performing the work. This element of control is the primary indicator of the status of the working relationship. In our firm's most recent reemployment tax case, involving a temporary staffing agency, the Department concluded that the pharmacists were independent contractors after applying the standard test.
In this case, despite the auditor's findings, the Special Deputy determined the most important factor, the requisite control, was met. The company did not direct or control the pharmacists with respect to the methods by which the work was completed. The company was only interested in the end result, not in the details of how the pharmacists performed the work. Additionally, the independent contractor agreement did not establish any right for the temporary staffing agency to control the pharmacists. As control is the most important factor, it was clear from the beginning of the analysis that the pharmacists were most likely independent contractors. The Department concluded in its Final Order, workers for staffing agencies, placement firms, or temporary help firms can be employees of the firm, but they can also be independent contractors. The pharmacists here, signed an independent contractor agreement, could make themselves available for work or not as they chose, could work at other jobs, did not have a schedule, were not paid benefits, carried their own liability insurance, and were issued a 1099 for tax purposes.
The majority of the factors point to independent contractor status throughout the relationship; and because none of the relevant factors point unambiguously toward a finding of employment, the evidence shows that the pharmacists were independent contractors. The Special Deputy held the company met the necessary burden to prove the pharmacists were independent contractors and should not be classified as employees based upon common law tests.
There has also been a push for the Florida Department of Revenue to review whether S-Corporation owners are paid a "reasonable" compensation during reemployment tax audits. Much like the benefits of having independent contractors with regard to employment taxes, distributions to S-Corporation shareholders are not subject to employment taxes. So receiving part of the profits of the business as a distribution instead of sales can save at least 15% in employment taxes for the S-Corporation shareholders. You might ask yourself whether the Florida Department of Revenue's focus on "reasonable compensation" makes any sense because the cap for imposing Florida reemployment tax is only $7,000 at the moment. So reclassification of distributions over $6,999.99 to wages would not result in any more Florida reemployment tax, right? This is very true. However, the problem rests with the fact that the IRS funds the state of Florida to conduct reemployment tax audits and "reasonable compensation" is of great interest to the IRS, so the Department of Revenue bows to the will of the IRS (hurting Florida business owners) by ratting out businesses the DOR auditor believes is not paying himself a large enough salary when compared to the industry averages. We will write a whole separate article on this topic very soon. In the meantime, be forewarned that a $7,000 salary reported on the Florida Department of Revenue Form RT-6 can trigger a reemployment tax audit!
Back to the independent contractor vs employee topic: Employers need to be aware of the risks of misclassifying a worker, as it may serve short term benefits, the long term burdens which may include a reemployment tax audit outweigh these benefits. For companies that are classifying workers as independent contractors, it is important to have an independent contractor agreement that does not give any control to the employer over the manner in which the work is performed, as this is the most important factor of the test. However, if you, as a business owner happen to have workers that fall in a grey area with regards to their status you may eventually be the subject of a reemployment tax audit. If you do become the subject of a reemployment tax audit please call our firm because we can help you. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help you.
ABOUT THE AUTHORS
James Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton's primary practice is Florida tax controversy, with an almost exclusive focus on Florida sales and use tax. Mr. Sutton worked for in the State and Local Tax department of one of the Big Five accounting firms for a number of years and has been an adjunct professor of law at Stetson University College of Law since 2002 teaching State and Local Tax and at Boston University College of Law since 2014 teaching Sales and Use Tax. Mr. Sutton is a frequent speaker on Florida sales and use taxes for the FICPA, Lorman Education, NBI, and the Florida Society of Accountants. Mr. Sutton is also co-author of CCH's Sales and Use Tax Treatise. You can contact Mr. Sutton at 813-775-2131 or JamesSutton@FloridaSalesTax.com or his firm bio.
Paula Savchenko is a law clerk in the Fort Lauderdale office of the Law Offices of Moffa, Sutton, & Donnini, P.A. Ms. Savchenko earned a B.S. in Business Administrations from Nova Southeastern University. Ms. Savchenko played soccer for the University, and was given an athletic scholarship. Ms. Savchenko is currently a Juris Doctorate Candidate at Nova Southeastern University School of Law with an expected graduation date of May 2017. Currently, Ms. Savchenko is in the top twenty percent of her class and is the Treasurer of the Jewish Lawyers Student Association at Nova Southeastern University.
AUTHORITY
Department of Labor's published guidance: 2015-1 http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf
The element of control is the primary indicator of the status of the working relationship. Keith v. News & Sun Sentinel Co., 667 So.2d 167 (Fla. 1995).
Section 443.1216(1)(a)2., Florida Statutes, provides that employment includes services performed by individuals under the usual common law rules applicable in determining an employer-employee relationship.
In Cantor v. Cochran, 184 So.2d 173 (Fla. 1966), the Supreme Court of Florida adopted the tests in 1 Restatement of Law, Agency 2d Section 220 (1958) used to determine whether an employer-employee relationship exists.
Workers for staffing agencies, placement firms, or temporary help firms can be employees of the firm, but they can also be independent contractors. Freedom Labor Contractors of Florida, Inc. v. State Div. of Unemployment Compensation, 779 So.2d 663 (Fla. 3rd DCA 2001).
Florida Department of Revenue Form RT-800063 "What to Expect From a Florida Reemployment Tax Audit" (published April 2015)
ADDITIONAL RESOURCES
FL DOR RT AUDTS – WAGE RECLASSIFICATION IS COMING, published August 16, 2015, by Matthew Parker, Esq.
WHAT SERVICES ARE SUBJECT TO SALES TAX IN FLORIDA, published May 1, 2012, by James Sutton, CPA, Esq.
ORLANDO USED CAR DEALER ARRESTED FOR SALES TAX, published June 3, 2015, by James Sutton, CPA, Esq.