IRS Subcontractor Section Update Adds Government Employees

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn

Updated IRS Subcontractor Section – Great Subcontractor vs. Employee Status Rules

Last month, the IRS Subcontractor Section was updated with new information.   As promised, the IRS updates to these pages will appear in this blog as I find them.

irs subcontractor section logo
Copyright IRS

For premium audits, make sure that all subcontractors are noted so the premium auditor does not mix them with your employees.  We have seen this situation occur quite a few times.   We receive calls and emails often after subcontractors were counted as employees at the workers comp audit that occurred within the last few days.

One area which was added to the page was a consideration that a hiree may be classified as a government worker.   If your company hires a subcontractor even occasionally, then you should bookmark this link  

The IRS Subcontractor section has great information when making a determination on the status of an employee/contractor when you hire them.  The Government Worker Section is new to the page.    The new page that covers Government workers is below this paragraph.

Each state has its own determinations on what to consider when making the determination between employee, contractor, or other types of workers.

Tax Withholding for Government Workers

In most cases, individuals who serve as public officials are government employees. Therefore, the government entity is responsible for withholding and paying Federal income tax, social security and Medicare taxes. They must also issue a Form W-2, Wage and Tax Statement, to a public official. These facts and relevant examples are discussed in detail in Publication 15-A, and on the Independent Contractor or Employee? page.

Public Officials, Elected Officials and Public Officers

Internal Revenue Code section 3401(c) indicates that an “officer, employee, or elected official” of government is an employee for income tax withholding purposes. However, in some special cases the law or a Section 218 Agreement may specify otherwise.

The courts generally define “public official” and “public officer” to mean anyone who exercises significant authority pursuant to public laws. This includes any official who administers or enforces public laws whether the public elected the individual or an office appointed them.

Regulations for section 1402, addressing the applicability of self-employment tax, indicate that performance of the functions of a public office does not constitute a trade or business. Therefore, holders of “public office” are not subject to self-employment tax. An exception applies for certain public officials paid solely on a fee basis (see below). All other holders of public office, paid on a salary basis, are excepted from self-employment tax and are presumed to be employees receiving wages.

Definition of “Public Office”

The following facts indicate that an office is a “public office”:

  • The constitution, legislation, or a municipality or other body with authority conferred by the legislature created the office
  • The office was delegated a portion of the powers of a government body
  • Legislative authority or law defined, either directly or indirectly, the powers conferred and the duties to be discharged by the office

Section 218 Agreement Common-law rules

  • Government Worker Classification
  • The office performs its duties independently and without control of a superior power other than the law
  • The office has some permanency and continuity
  • The officer takes an official oath

Examples of public officers include:

  • President and the vice president
  • Governor or mayor
  • Secretary of state
  • A member of a legislative body such as a state legislature, county commission, city council, school board, utility or hospital district
  • A judge, a justice of the peace, a county or city attorney, a marshal, a sheriff, a constable, and a registrar of deeds
  • Tax collectors and assessors
  • Members of advisory boards and committees like boards of education, water boards, and other boards and commissions

If there is not an authority in public law to hire or elect an individual to fill a position, a determination must be made about the employment status of that position under the general common-law rules.

Fee-Basis Officials

A fee-basis public official receives and retains remuneration directly from the public. This work is considered self-employment under IRC 1402(c)(2)(E) and these individuals are not employees with respect to this work. An official who receives a salary, even if it’s called “fees,” is a common-law employee and is subject to social security and Medicare withholding. Fee-basis public officials are subject to self-employment tax.

A position compensated by salary and fees is considered a fee-basis position if the fees are the principal source of compensation unless state law provides that a position for which any salary is paid is not a fee-basis position. A Section 218 Agreement may provide an exclusion from social security tax for individuals.

Emergency Workers

Individuals hired on a temporary basis in case of fire, storm, snow, earthquake, flood, or other emergencies are excluded from social security and Medicare under IRC 3121(b)(7)(F)(iii). This does not include permanent employees, both full time and part time, who work regularly in response to emergencies; these individuals are subject to social security and Medicare if they are common-law employees.

Election Workers

Election workers are common-law employees; however, under IRC 3121b)(7)(F)(iv) an exception from FICA is provided for election officials and workers who earn less than a specified amount for a calendar year ($1,700 for 2016). See Election Workers: Reporting and Withholding for details and relevant examples.

Medical Residents

Most medical residents meet the tests to be common-law employees and are therefore employees of the hospital where they work. However, under IRC 3121(b)(10), enrolled students who work less than full-time and for whom education, not employment, is the primary purpose of the relationship, may be excepted from FICA. See Internal Revenue Bulletin: 2005-2.

Refer to Publication 963 (PDF), Federal State Reference Guide for details on Section 218 Agreements, and all classes of workers mentioned above.

 

©J&L Risk Management Inc Copyright Notice

 

 

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn

Table of Contents

Related...

James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

Subscribe

Get the latest workers' comp news FREE!

Name
This field is for validation purposes and should be left unchanged.