HBK would like to remind employers that Florida expanded its new hire and independent contractor reporting requirements. This legislation took effect on October 1, 2021.

What does it mean for Florida employers?
First, the legislation removed the prior 250-employee threshold for new hire reporting. Now all businesses are subject to new hire reporting. Second, the statute imposes a requirement to report independent contractors paid more than $600 in the calendar year. The reporting of independent contractors should occur within 20 days of the contract start date or date of first payment.

Currently, there are no penalties for non-compliance with the reporting requirements. If employers have not yet reported independent contractors, they should report all contractors who have exceeded the $600 threshold in 2022.

More information on reporting new hires or independent contractors in Florida.

The Florida Department of Revenue maintains FAQ reporting requirements on its website.

Manufacturers who hire independent contractors to support their business should be aware of new guidance on how to determine whether a worker is an independent contractor or an employee.

Earlier this month, the Department of Labor issued a final rule providing guidance on when to classify a worker as an independent contractor under the Fair Labor Standards Act (FLSA). The FLSA requires employers to pay non-exempt employees at least the Federal minimum wage for hours worked and overtime for hours in excess of 40 in one week and requires employers to maintain certain records on their employees. It does not mandate the same payment policies or recordkeeping for those who are considered independent contractors.

With the new rule, the Department of Labor has clarified some of the guidance used in classifying a worker as an employee or an independent contractor. First, the guidance reiterates the importance of the “economic reality” test, which determines whether the workers are economically dependent on the employer. This test has two key considerations:

• Does the employer have control over the work to be completed?
• Does the worker have the opportunity for profit or loss based on their initiative or skill and the investments they make in the work?

In addition, the rule addresses additional criteria, which should be used in conjunction with the economic reality test. Specifically, employers may be required to evaluate:

• the skills required to complete the work
• whether the relationship between the worker and employer could be deemed permanent
• whether the work is critical in the manufacture of a product

While the new rule is currently set to go in effect as of March 8, 2021, it is possible that the Biden Administration may prevent it from being implemented. As a result, manufacturers who work with independent contractors, including sales representatives, manufacturing representatives, or other support workers, may consider watching for developments closely and potentially reevaluating the status of their independent contractors. Further, if implemented, it is possible that other rules covering independent contractors, such as guidelines from the IRS indicating whether to withhold payroll taxes or send a Form 1099, may also be changed.

For questions regarding your independent contractors, contact a member of HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com.

In today’s business environment expansion across state lines has become commonplace. Increased corporate tax compliance and sales tax collection are clearly recognized. Conversely with a multi-state presence withholding tax becomes an overlooked state tax obligation.

Becoming compliant in multi-state withholding obligations is something that both employers and their third-party providers need to proactively manage. This starts with an understanding of what constitutes a multi-state presence, what “type” of remote employees the business hires, and a look at the withholding tax obligations for each of the states where the business finds itself in.

This article will provide a brief overview of nonresident withholding, with an emphasis on the construction industry and how nonresident withholding impacts contractors performing work across state lines.

A Brief Overview

Multi-state withholding is often an overlooked issue, but it is one that states have been taking a proactive approach in curbing noncompliance. Noncompliance has two sides; the personal income tax side of the employee and the withholding tax side of the employer. With more and more businesses sending employees across state lines to perform work, a tax responsibility has been created for both the employer and the employee, one that states are seeking to enforce.

Typically, lack of compliance in non-resident withholding stems from a lack of understanding of the employer’s responsibilities, and/or a lack of organizational controls able to isolate these issues as they arise. Many states now target nonresident withholding which can cause a financial strain on businesses not in compliance. A multi-state worker presence can be a complex issue on the employer side, as some states require that the employer withhold personal income tax in every state where the employee works. In some cases, the time worked in a particular state can be as short as one day.

Employer Withholding for Non-Resident Employees

One of the biggest challenges with getting compliant across multiple states is the vast array of rules that each of the states determines is the standard for when employers are obligated to withhold. These standards can be based on the days an employee is in a state, with the number of days ranging from a single day to 30 or more.

For instance, in Connecticut there is no requirement that an employer withhold state taxes from the wages of a nonresident employee who is working in the state of Connecticut for less than 14 days a calendar year. Contrast that with Pennsylvania who requires that every employer who pays nonresidents or residents for work performed in the Commonwealth must have taxes withheld even if that work is performed in Pennsylvania for just one day. Utah has a particularly interesting threshold, their threshold requires that the employer, not the employee, has a presence in the State. With presence in Utah being defined as doing business in the State for more than 60 days in a calendar year before that employee is required to withhold.

While it can seem daunting that some states require withholding at the first instance of the employee performing work in the state, there are states that are quite taxpayer friendly. Illinois, Arizona and Hawaii all have thresholds at or beyond the 30-day mark before an employer is required to withhold. Additionally, some states have reciprocal agreements with neighboring states allowing the residents to be taxed only by their home state.

Employer Withholding and the Construction Industry

Those in the construction industry may routinely and systematically use Independent Contractors (‘IC’s”) for their remote jobs verses sending their own employees to work in another state, or in many cases use a combination of the two. While the use of IC’s can, in many instances, alleviate employer withholding requirements there are other elements to consider.

The first is whether those IC’s have been properly classified both for federal and state tax purposes. The IRS, along with each state have standards set for deciding as to when an IC crosses over and becomes an employee. Even though historically an employer has referred to a worker as an IC does not mean that they don’t meet the standards set by the state to be considered an employee. Take California for instance, who recently passed AB5 which amended California’s labor code simplifying and streamlining the test for deciding between an IC and an employee. Under this new determination in California many construction subcontractors and other IC’s would be considered “employees” and thus require the employer to withhold for income tax purposes. California in AB5 specifically provided a crucial exception for certain individuals performing work pursuant to a subcontract in the construction industry provided a number of elements are met; such as the contract being in writing, and the subcontractor being licensed by the Contractors State License Board and the work is within the scope of that license.

California is not the only state taking on this issue, and the construction industry should have a heightened awareness regarding these changes and apply each states relevant test to each IC relationship to ensure that under state law they have not inadvertently hired a nonresident employee.

Another element of consideration, beyond the growing concerns of worker classification, is the monetary thresholds certain states have in place that would require employers to withhold tax on all payments to nonresident independent contractors. While these types of provisions are unique, they are heavily enforced. California and Pennsylvania both have provisions to this effect, with Pennsylvania’s being the most recent.

Pennsylvania requires that any non-wage payment made to a non-resident worker in excess of $5,000 during the calendar year (this is cumulative for all payments made to that worker in the relevant calendar year) must have Pennsylvania withholding at a rate of 3.07%. Pennsylvania has specific carve outs for payments made to certain entities or payments in connection with real estate.

However, for those out of state construction contractor businesses who have job sites in Pennsylvania this rule requires that any job that is performed by an out of state company, in Pennsylvania, by non-resident IC’s, in amounts in excess of $5,000, that contractor would be required to withhold Pennsylvania income tax from that IC’s payment. While some states have rules like Pennsylvania, many others have withholding requirements only for specific types of IC’s. Understanding all of the various state rules and applying them can be a heavy administrative burden for any business.

For those in construction, crossing state lines is a routine occurrence, and maintaining a proper record of the employees and IC’s performing work in multiple states can be laborious. The administrative costs of ensuring complete compliance with nonresident withholding can be extremely high and deter taxpayers from seeking out solutions. There are many considerations both at the federal and state level that all employers, but especially those in construction should be mindful of. Please reach out to your HBK Advisor to discuss how this could impact your business.

Classifying workers as either employees or independent contractors (ICs) can have a profound impact on a business’s tax obligations—and not just from a withholding standpoint. Remote employees can have a vastly different impact than ICs on nexus considerations for sales tax as well as corporate income tax. The IRS provides an ABC Test for categorizing workers, but states have not always followed suit, choosing instead to implement some enhanced variation. Following an April 2018 Supreme Court ruling, California adopted Assembly Bill 5 (AB5), a three-pronged ABC Test that became effective January 1, 2020. This article will briefly discuss the ABC Test and the controversy surrounding California’s decision to implement AB5.

A Brief Overview
The IRS has had a longstanding test for deciding when a worker crosses the line from an IC to an employee. The 20-factor ABC Test can be found referenced in more than 20 years of cases and rulings. Classification is based on the financial and behavioral controls on the worker and the relationship between the worker and employer. When a worker is properly categorized for federal tax purposes as an employee, the employer has an obligation to withhold income tax, Social Security and Medicare taxes. California joined more than half of U.S. states when it implemented AB5, its form of the ABC Test.

The ABC Test considers three main elements in the IRS’s 20-factor determination, all of which must be met in order to properly classify the worker as an IC:

A. The worker must be free from direction and control in the performance of the service.
B. The worker’s services must be of the type that would be considered outside the usual course of the employer’s business or outside all of the employer’s places of business.
C. The worker must be customarily engaged in an independently established trade, occupation, profession or business.

While the three main elements remain in play in all state versions of the test, no two states’ tests are the same. Nor does every state that has adopted the ABC Test apply it for every purpose. In some states the test is used solely for matters relating to workers compensation or unemployment insurance; in others the test is applied solely to a withholding tax determination.

AB5
The controversy surrounding California’s adoption of the ABC Test is nothing new. When New Jersey adopted the test back in 2015 the protests were just as noisy. The difference is that California is such a large state with a large concentration of “gig” workers in the arts and entertainment industries and as Uber, Lyft and DoorDash drivers. AB5 broadens the ABC Test California had been using and is projected to cause several million workers to be reclassified as employees.

Most notably, AB5 modifies the key elements of the ABC Test by classifying a worker as an IC only if:

A. The hiring entity does not control or direct the worker in performing the work in fact or under the terms of a contract.
B. The work performed is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

While these elements appear similar to the typical ABC Test, California’s decision to modify the language of element “B” means that it does not matter where the worker works, all that matters is the type of work they are performing. In other states under the ABC Test, element “B” typically means that as long as the worker’s services are considered outside the usual course of the employer’s business or the work is performed outside all of the employer’s places of business, the worker would not be considered an employee. This would allow workers in other states to pass element “B” by simply working outside of the employer’s company premises.

California has not yet determined how broadly or narrowly the “usual course of business” language will be defined. If a worker is re-classified as an employee under AB5, employers will have to reconsider their workers’ compensation, unemployment insurance, and social security tax compliance, as well as other wage-related issues, including overtime and meal and rest periods.

While many gig workers may now fail classification as ICs under elements “B” and “C” of AB5, California has provided numerous exceptions to the test allowing many licensed professionals such as engineers, lawyers, doctors and accountants to apply the historically used tests under Borello, an 1989 case that California has historically used in making worker classifications under a “right to control” test. AB5 also exempts any “bona fide business-to-business contracting relationship” where a partnership, single member LLC or other business entity contracts with and provides services to another business. The exception has criteria that must be met to avoid application of AB5, including the agreement being in writing and the service provider being customarily engaged in independent work of that nature and able to negotiate its own rates.

Controversy
The reason AB5 has attracted so much attention is not because it is a unique bill or a unique test for worker classification. California is merely falling in line with over half of the other U.S. states in applying a local version of the ABC Test. The restrictions imposed by California in its version arguably harm gig workers, and many freelance writers, journalists, and Uber, Doordash, Postmates and Lyft service providers contend the bill will limit their access to work and produce income.

Writers and photographers filed suit over the bill in December 2019, stating that the language of AB5 was unconstitutionally restrictive against free speech and the media. The specific language at issue is the carve out that states freelance writers, editors, newspaper cartoonists, photographers and photojournalists are exempted from the new test as long as they do not provide content submissions to their employer more than 35 times a year, a standard the suit argues is “irrational and arbitrary.” The author of AB5 has taken note of these concerns and has been meeting with freelance journalists and photographers in the hopes they can more clearly and effectively define the exception through amendments to the bill. While changes may come, the effects are already being felt. In December, sports website SB Nation, owned by Vox Media, terminated contracts with hundreds of freelancers in light of the coming January 1, 2020 effective date.

Freelance writers and photographers aren’t the only ones taking issue with AB5. Uber and Postmates filed a lawsuit in federal court challenging AB5. Additionally, the trucking industry has taken issue with the bill as many are concerned that most trucking companies using owner-operator drivers within the state would have to reclassify the drivers as employees. In early January of this year, Judge William Highberger ruled that owner-operator truck drivers should not be reclassified due to a 1994 federal law regulating interstate commerce that speaks to the use of owner-operators as independent contractors. Though many believe his decision will be overturned on appeal, it reflects the contentious environment surrounding AB5.

There is no clear solution in sight for California. Still, the ABC Test has been implemented across the United States for years, and it is paramount for employers to consider not only federal but state worker classification regulations as they conduct business across state lines.