CT DOL help needed

[michaelmars]

Connecticut Dept of Labor reclassified some people as employees. We don't agree and feel we have a good case under the IRS Guidelines but you never know. The employers wants to pay the CT assessment since its not that large. Under IRS rules the penalties would be astonomical and would cause all the "employees" to loose their own pension plans etc. MY question is, does a CT reclassification become binding on the IRS? and does CT report to the IRS under a recoprocity agreement? At the state level the employer would like to pay the assessment but at the federal level, he would have to fight it all the way to court. Protesting the Ct assessment would cost more than its worth unless it avoids any IRS issues down the road.

Anyone have any thoughts?

[GeneInAlabama]

If they are employees with the state and contractors with the federal, how would you handle future payroll?

[Pacun]

States and the IRS share information but most of the time the states pay attention to what the IRS is saying. The IRS doesn't pay that much attention to what the states are saying. You should make up your mind now about what they are based on the rules.

[jainen]

>>we have a good case under the IRS Guidelines<<

Fine, but how good is your case under the Conneticut guidelines? They are a separate, unrelated set of laws. It is possible to be an employee under state law but a contractor under federal law. One does not necessarily imply the other. (In fact, even within state law there can be different definitions. For example, in many states real estate agents are mandatory employees of the broker, but can still file as independent contractors for tax and other purposes.)

Here are some of your many choices.

1) Accept the state determination and don't worry about the federal unless the IRS asks. If your payroll service can't figure out how to post a different amount to state wages, get somebody else 'cause it's no big deal.

2) Appeal the state ruling. That takes an attorney specializing in the issue, who should be easy enough to find. Expensive, but maybe the pension managers would help you out since they may be the ones with the most to lose.

3) Get a jump on the IRS by initiating the federal inquiry yourself. And if you really want the workers to look independent, I wouldn't let what you call "the employer" pay any state assessment related to the workers. Doesn't the written contract require the workers to act as independent contractors, and indemnify the company for any costs incurred by a breach?

4) Or, gee, how about changing procedures to conform to state law? Then you can pay the small back assessment and move on.

[Lion EA]

CT is definitely one of the states where the CTDOL has a reciprocity agreement with the federal DOL. In fact, the DOL turns CT and other states loose to pursue misclassification of employees and then acts on the results (turns their leads over to the states to pursue first). From what I remember from a seminar, CT's regulations are similar to DOL's but the penalties are much stiffer. I think the labor-law specialist that spoke re the "audits from hell" was Eric L. Green, Esq., Convicer & Percy, LLP, in Glastonbury, CT: 560-657-9040 or [email protected]. Tell him you heard about him from a CtSEA meeting. Good luck.

[Lion EA]

Found a few notes from that seminar.

CT's DRS set up the Business Employment Tax Audit (BETA) Unit with 10 employees. It was so successful at bringing in money, that it was increased to 30 employees by 2009. If an employer does not have a signed and dated CT-W4 on file for an employee, they will be charged 5% of all wages paid plus interest and penalties; obviously a given if the employer treated the employee as an IC. If the Attempt to Evade penalty is imposed, it's another 25%.

[michaelmars]

Thanks for the info Lion, its a problem for sure. And to answer Jainen, this issue is only for 3 years under review. the client operated this way for over 20 years but in 2009 he went a head and got the formal contracts etc. Under both guidelines {fed and state} we are pretty confident these people are independent contractors but from a monetary point of view, it would be cheaper to just pay the state and move on. But if paying hte state opens a can of worms for the feds then now is the time to fight it.

[jainen]

>>paying the state opens a can of worms for the feds<<

You can avoid that with a bit of planning and excellent documentation. States are notoriously tougher, which is why the IRS generally lets them handle it first as Lion says. The IRS will take any easy pickings when their turn comes, but they don't want to invest anything more. "Cheaper to just pay the state" is a line they hear a lot and they understand it. Heck, they try to get you to say that about their own bill. But now they know it won't cost YOU anything more to fight the bigger federal assessment, because you've already got the complete work-up done. (At this point show them the index to your documentation, with a brief citation of the relevant difference in state and federal law.)

That will take care of the last three years. What about the next three? Once you pay the state you must keep going, payroll tax and all. You'd better start planning for the next audit, with all new contracts, significantly revised accounting, third-party documentation like insurance riders, and a TOTALLY different marketing strategy backed by genuine training. Even then, you will never be completely safe.

On the other hand, what's so bad about exercising control over the agents that represent the company? The only reason you've given so far is that independent contractors have their own IRA's, which is a pretty lame excuse. I mean, anytime someone falls back on "This is how we did it 1989" I have to wonder just what the real story is.

[michaelmars]

>>>On the other hand, what's so bad about exercising control over the agents that represent the company? The only reason you've given so far is that independent contractors have their own IRA's, which is a pretty lame excuse. I mean, anytime someone falls back on "This is how we did it 1989" I have to wonder just what the real story is. <<<

There is of course much more to the situation but i didn't think the rest was relevant to my question. This is basically a bunch of doctors with different specialties, sharing an office an overhead, but all the overhead is on one doctors corporation and each week he pays the doctors, what they earned less a vig for overhead. So liability, and other issues are already in play. Each of these doctors also have either other jobs part time or other offices but each specialty will spend 1 or 2 days at my clients location per week, or if not needed, they might skip the week. For example, the GP looking at a broken finger might say, i have a hand specialist here on Tuesdays, i would like you to see. If the hand specialist gets the referral he shows, or if he scheduled his own patients for that location on that day he shows, otherwise he might not.

[jainen]

>>each week he pays the doctors, what they earned<<

You didn't think it was relevant the way they are paid, how their schedules coordinate, and how they present the organization to the paying customers? I wonder what reasoning you thought was relevant, that the state so firmly rejected?

By the way, you say the corporation doesn't want the liability. You can't even convince some old government bureaucrat, but you figure the malpractice lawyers will just roll over when they see the "formal contracts etc." Yeah, that's the way it was last century.

[jainen]

>>the way it was last century<<

Sorry, my previous post was a bit too sarcastic. I get frustrated at questions about what the taxing agencies will do, without considering the facts and circumstances involved.

Those things you think are not relevant are at the CORE of the state's position. When they say the basic factor is how much control the corporation has, they aren't talking about the doctors' professional skills. They mean the business relationship. No doubt the corporation's lawyer drew up very fine contracts, but now it's time to consult with a labor attorney. The tax issue has already been settled.