Proven Strategies: No Horsing Around with Independent Contractors

“Proven Strategies” is a new regular series in the TDN, presented by Keeneland. It is written by Len Green of The Green Group and DJ Stables, who won the 2018 GI Breeders’ Cup Juvenile Fillies with Jaywalk (Cross Traffic).

by Len Green, John Wollenberg & Agnieszka Kagan

It is not uncommon for pinhookers or trainers to employ seasonal workers at sales or around the racetrack. Some of these employees may be considered as independent contractors.

The perception that employers are attempting to circumvent paying payroll taxes by classifying workers as independent contractors has caused the Internal Revenue Service (IRS) to step up its efforts in analyzing this controversial topic more closely.

This article provides an overview of the factors examined by the IRS and offers insight into how to better secure independent contractor status.

The Advantages of Employing an Independent Contractor

Traditionally, many employers have classified workers as self-employed or as independent contractors. There are various benefits to this classification:

1) By positioning themselves as “self-employed” or independent contractors, no payroll or income taxes need to be withheld from paychecks.

2) Independent contractors do not have to be covered under pension plans and employers save on insurance and workmen’s compensation costs.

The IRS Perspective

To help determine whether a worker is an employee or an independent contractor, the IRS has developed a 20-factor control test based on common law principles. The 20-factor test is an analytical tool only, there is no “magic number” of relevant points. The factors are merely points for consideration in evaluating the extent to which the employer can “direct and control” the worker.

Below are some of the more relevant factors to consider when evaluating whether an individual is an employee or self-employed/independent contractor.

Employee Factors

Instructions: A worker who is required to comply with another’s set of instructions is ordinarily considered an employee.

Training: Formal or informal training at an employer’s expense is indicative of an employer relationship.

Integration: Integrating the worker’s services into the business operations generally shows that the worker is subject to control.

Services rendered personally: If the services have to be personally rendered, the employer probably controls the means as well as the results.

Hiring, supervising and paying assistants: Unless workers hire, supervise and pay their own assistants, if any, they are likely an employee.

Continuing relationship: The longer the liaison, the more likely an employee.

Full-time required: A full-time position is indicative of an employer-employee relationship, whereas independent workers choose their own hours.

Oral or written reports: Regular accountability of progress is usually a sign of control.

Payment of expenses: Reimbursement tends to support an employer-employee relationship.

Self-Employed or Independent Contractor Factors

Hours of work: Independent contractors control their own time.

Order of sequence set: Only a nonemployee is free to determine his/her own approach, pattern, priority and schedule.

Multiple assignments: Workers who perform more than one job at a time for multiple different businesses are likely an independent contractor. Exercise riders at tracks tend to fall into this category especially if they rotate among barns or farms. Payment by hour, week or month:Independent contractors are typically paid by the job, not in regular pattern.

Tools and materials: Independent contractors provide their own tools and materials.

Economic loss: A worker who is subject to the risk of economic loss due to a liability for expenses is an independent contractor.

Right to discharge: An independent contractor generally cannot be fired if the contractual specifications are met.

Right to terminate: Employees have the right to terminate their job without incurring liability.

Safeguards to Withstand IRS Scrutiny

Since an IRS audit can result in an assessment of penalties and interest, in addition to the employer/employee payroll taxes that will be due, it becomes incumbent to take measures to preserve the intended working relationship.

Suggestions from The Green Group

1) Apply for an advanced ruling, Form SS-8, entitled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The advantage to this filing is to get clarity as to whether a worker is an employee. The form focuses on behavioral control, financial control and relationship of the worker.

2) Enter into a written consulting agreement with language coordinated to the 20-factor control test. The contract should specify the nature of the work to be performed, discuss the terms and conditions and state the responsibilities of the independent contractor.

3) Utilize practices that are consistent with recognized practices in the horse industry, specifically with farm owners, pinhookers and trainers.

State Interpretations

Please check as to your state’s specific regulations. Since some states apply their own standards, often stricter than the IRS rules in terms of reclassifying independent contractors into employees. Some use a three-prong “ABC” test with the employer having the burden to prove that the relationship is that of an independent contractor, rather than as an employee. In other states, an independent contractor is someone you hire to work on a task unrelated to the field of business you are associated in and whose work you have no control over. While still other states use a “level of control” test.

Department of Labor Audits (DOL)

As if a trainer’s life isn’t difficult enough, the DOL has started extensive audits at racetracks to make sure workers are being properly paid for their hours. Since many trainers do not traditionally use “time clocks” to keep track of hours worked, this becomes an expensive issue.

Our team has had success in this area.

Summary

You must analyze whether a potential employer-employee relationship exists with people who work for you.

Penalties can be imposed for failure to withhold income and employment taxes, and qualified retirement plans could be jeopardized if employees who should be covered are not due to misclassification as independent contractors.

Bottom Line

You should have an accountant who is familiar with the Thoroughbred Industry review your practices. You might need to change your procedures to satisfy the complicated IRS rules. If the IRS challenges you and wins, you may be subject to interest and penalties.

If you have any specific questions, please call us for a free one-hour consultation.

The Green Group

Phone: (732) 634-5100

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New Withholding, Reporting Rules Near Enactment

A document outlining upcoming federal regulatory actions released July 20 by The White House indicates that modernized tax guidance relating to withholding and reporting of pari-mutuel winnings is nearing enactment, the National Thoroughbred Racing Association said.

The “Current Unified Agenda of Regulatory and Deregulatory Actions” describes the Amendment of 3402(q) Regulations providing new rules for pari-mutuel wagering as in the final rule stage.

The regulation, detailed by the Internal Revenue Service and U.S. Treasury in the Dec. 30, 2016 Federal Register in a section titled “Withholding on Payments of Certain Gambling Winnings,” accomplishes goals started and spearheaded by the NTRA three years ago.

“We are pleased to see this latest indication that the regulation continues to make its way toward final approval,” said NTRA president and CEO Alex Waldrop in a release. “We take nothing for granted, though, and will continue to work closely with our allies in Washington, D.C., to get this important change completed. We urge Treasury and the IRS to act quickly so horseplayers, the racing industry, and the federal government can all start benefitting from these landmark rules.”

The proposed regulations, developed with the NTRA’s guidance, clarify “the amount of the wager” to include the entire amount wagered into a specific pari-mutuel pool by an individual—not just the winning base unit as is the case today—so long as all wagers made into a specific pool by an individual are made on a single tote ticket if the wager is placed onsite. The proposed regulations would have the same positive results for advance deposit wagering customers and would not impact how those wagers are currently made.

Currently a $1 trifecta wheel of 10 combinations is viewed as 10 bets of $1 each. If a payout of $600 or more at odds of 300-1 or higher is awarded, that payout must be reported to the IRS. If that same wager pays $5,000 or more on odds of 300-1 or higher, some of the winnings must immediately be withheld for taxes.

The change would affect how the 300-1 threshold is determined. Under the change, the $10 ticket in the scenario above would be considered a $10 wager. To reach 300-1 odds, the payout must be more than $3,010, which means far fewer big payouts will need to be reported.

The NTRA said the regulations will positively impact a significant percentage of winning wagers, particularly those involving multi-horse or multi-race exotic wagers, and result in tens of millions of dollars in additional pari-mutuel churn.

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Twelve Congressmen Sign Letter Urging Treasury To Enact Recently Proposed Tax Reporting, Withholding Regulations

LEXINGTON, Ky. (Wednesday, April 12, 2017) – Twelve members of Congress from a number of key racing states have signed a letter delivered to the Department of Treasury requesting that recently proposed Internal Revenue Service (IRS) regulations relating to the way pari-mutuel winnings are calculated for tax withholding and reporting purposes be finalized as soon as possible.

The letter was in response to actions taken by the Treasury and Internal Revenue Service (IRS) in late December when the Treasury issued proposed regulations relating to withholding and reporting of pari-mutuel winnings. The 31-page Treasury document, entitled “Withholding on Payments of Certain Gambling Winnings,” accomplishes the goals championed by the NTRA nearly three years ago to modernize regulations related to pari-mutuel winnings. The proposed regulations will positively impact a significant percentage of winning wagers, particularly those involving multi-horse or multi-race wagers, and are expected to result in tens of millions of dollars in additional pari-mutuel wagering.

The proposed regulations clarify ‘the amount of the wager’ to include the entire amount wagered into a specific pari-mutuel pool by an individual—not just the winning base unit as is the case today—so long as all wagers made into a specific pool by an individual are made on a single totalizator ticket if the wager is placed onsite or through a single account if the wager is placed electronically.

The letter, which garnered bipartisan support, was co-authored by Rep. John Yarmuth (D-KY) and Rep. Patrick Meehan (R-PA). The additional signatories are Rep. Andy Barr (R-KY), Rep. James Comer (R-KY), Rep. Brett Guthrie (R-KY), Rep. Donald Norcross (R-NJ), Rep. Devin Nunes (R-CA), Rep. Bill Pascrell Jr. (D-NJ), Rep. Hal Rogers (R-KY), Rep. Thomas Rooney (R-FL), Rep. Kurt Schrader (D-OR), and Rep. Paul Tonko (D-NY).

“As you know, these regulations would update existing Treasury rules (Treas. Reg. Sec. 31-3402(q)-1) governing the reporting and withholding of certain pari-mutuel wagers. These rules have not been updated since the 1970s and we were pleased that Treasury responded to our requests to bring these regulations up to date,” the Congressmen wrote in a letter dated April 4, only days after a 90-day public comment period concluded. “The proposal better reflects the current pari-mutuel wagering environment and will lead to increased compliance while reducing burdensome paperwork, creating an overall system that will be more accurate and equitable for taxpayers.

“We look forward to these modernized rules being fully implemented and request that you act on this matter as quickly as practicable,” the letter concluded.

A copy of the full letter can be accessed at the following link: https://www.ntra.com/wp-content/uploads/2017.04.04-Treasury-Pari-Mutuel-Winnings.pdf

“There is widespread agreement that these newly proposed Treasury regulations will reduce burdensome paperwork while creating a new system that is more accurate and equitable for taxpayers,” said NTRA President and CEO Alex Waldrop. “Throughout this process, the issue has received bipartisan support from members of Congress and we thank Representatives Yarmuth and Meehan, along with the other co-signatories, for leading the effort to modernize these regulations related to pari-mutuel winnings.”

About the NTRA

The NTRA, based in Lexington, Ky., is a broad-based coalition of more than 100 horse racing interests and thousands of individual stakeholders consisting of horseplayers, racetrack operators, owners, breeders, trainers and affiliated horse racing associations, charged with increasing the popularity, welfare and integrity of Thoroughbred racing through consensus-based leadership, legislative advocacy, safety and integrity initiatives, fan engagement and corporate partner development. The NTRA owns and manages the NTRA Safety and Integrity Alliance, NTRA.com, the Eclipse Awards, the National Handicapping Championship, NTRA Advantage, a corporate partner sales and sponsorship program, and Horse PAC, a federal political action committee. NTRA press releases appear on NTRA.com, Twitter (@ntra) and Facebook (facebook.com/1NTRA).

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