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Affordable Care Act
What you should know about worker classification
What we'll discuss
1. What's a common law employee?
2. Why you should care
3. Counting employees
4. The excise tax adds up
5. IRS scrutiny and guidance
6. Evaluate workers from staffing agencies
7. Weighing the factors
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What's a common law employee?Under the IRS definition, your common law employees could include your:
• Independent contractors
• Workers from staffing agencies
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INTRODUCTION
Why you should care
Both types of workers may be considered common law employees by the IRS, and if any of them are, you have to add them to your total employee count in your Affordable Care Act (ACA) calculation.
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Count them…
Here's the formula and the threshold:
• Divide the number of full-time employees who are offered coverage by the total number of full-time employees, including common law employees who work full-time.
• To avoid significant excise taxes, your company must offer health care coverage to 70% of your full-time employees (working an average of 30 or more hours per week) in 2015 and 95% afterward.
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Or pay the price
If you miscount employees in your ACA calculation, you'll risk incurring a hefty excise tax.
• The tax is $2,000 per year times the total number of full-time employees minus the first 80 employees in 2015, and 30 employees after that.
• A company with 250 full-time employees would pay an annual penalty of $340,000 in 2015 and $440,000 after 2015.
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Don't risk it! Get help from our top industry leaders
Scrutiny ahead
Employers misclassify millions of workers as independent contractors instead of employees, according to the IRS.
• The agency views worker classification as a major contributor to the tax gap.
• It has actively audited employment classification — a trend likely to intensify under the ACA.
• The U.S. Department of Labor will promote enforcement and share information about cases of worker misclassification with the IRS.
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What the IRS advises
Generally, the IRS considers individuals to be common law employees if your company is authorized to direct and control the way they perform their services.
• But it isn’t that simple. The Internal Revenue Manual lists many factors to use in identifying common law employees.
• Relevant areas are behavioral control, financial control and the relationship of the parties.
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Weighing the factors
This process represents a facts-and-circumstance test. That means:
• You have to look at all the factors together and understand they aren’t equally weighted.
• A factor such as whether your company has the right to control or direct how the individual performs the work would be weighted more heavily, for example.
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Workers from staffing agencies
• Analyze these workers even if the staffing agencies have them on their payroll or consider them independent contractors.
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Still not clear? View our other ACA resources
You may be surprised that workers from staffing agencies could be your common law employees.
An example
If a staffing firm is offering coverage to a worker at your company and you determine the worker is your common law employee:
• You can count that worker as if you’ve offered him or her coverage.
• You can add the person into the numerator of the formula described previously.
• If the worker accepts the agency's offer, you must pay the agency a higher fee than you would have otherwise.
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4. SELECTION
Get the whole story
In addition to coverage of work classification, our ACA resources include articles on:
• How employers can use their own numbers to figure whether to offer health coverage or pay the excise tax
• How to comply with ACA reporting requirements and identify full-time employees
Included are formulas, examples and forms.
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We can help
Eddie Adkins
Partner, WNTO
+1 202 521 1565
Andy Mechavich
Director, CBC Employee Benefits Consulting
+1 312 602 8167
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Carl Mowery
Managing Director, CBC Employee
Benefits Consulting
+1 312 602 9147
Professionals from our Compensation and Benefits Consulting (CBC) practice are ready to answer your questions.
