These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Indian law and Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.
What is the difference between an employee and an independent contractor?
An employer must generally withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax (if applicable) on wages paid to an employee. An employer does not generally have to withhold or pay any taxes on payments to independent contractors. Independent contractors are self-employed individuals. For a more in depth look at this question (including examples) and related topics, refer to questions 60 through 78.
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How do you determine who is an employee and who is an independent contractor?
When determining whether an individual is an employee or an independent contractor, the relationship of the worker and the tribe must be examined. Within the working relationship, the tribe must look at 1) behavioral control; 2) financial control; and 3) the actual relationship between the two.
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What is behavioral control?
Behavioral control: Does the tribe, as the employer, have the right to decide the following:
When and where the work is done;
What workers to hire or to assist with the work;
What tools or equipment to use;
Where to purchase supplies and services;
What work must be performed by a specified individual, and
What order or sequence to follow
Who provides training?
Determine who provides instructions?
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What is financial control?
Financial control: Does the tribe, as the employer, have the right to decide the following?
The extent to which the worker has unreimbursed expenses;
The extent of the worker’s investment;
The extent to which the worker makes services available to others or to the general public;
How the worker is paid, and
The extent to which the worker can realize a profit or loss
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What is relationship of the parties?
Relationship of the Parties: The relationship aspect of the employer/employee relationship is important. Does the tribe, as the employer, have the right to decide the following:
What contracts are prepared to describe the working relationships of the parties;
Whether the tribe provides the worker with employee-type benefits, such as insurance, pension plan, vacation pay or sick pay, and
The permanency of the relationship/employment
For more information on these classifications, see Publication 15-A, Employer’s Supplemental Tax Guide.
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If a worker has a contract with the tribe, is he/she an independent contractor?
Even after using the above factors, there will be times when it is difficult to make the determination as to whether an individual is an employee or self-employed and should be treated as an independent contractor. Many individuals who have personal service contracts with tribal governments may be employees rather than independent contractors. The mere existence of a contract does not mean the individual is not an employee.
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Does the IRS make determinations as to whether a worker is an employee or an independent contractor?
It is important to the worker that the employment status be determined as quickly as possible so that the earnings can be properly reported. If no determination can be made, consider filing a Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS for a determination. The Form SS-8 will include all pertinent facts relating to the individual’s work arrangement. If a contract has been executed between the worker and the entity, a copy should be included. Once the IRS concludes its review of the facts, a decision will be presented to the employer in the form of a Determination of Ruling Letter.
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What are Some Examples of Employees?
1) The tribe pays Mr. Tom, an individual, $500 per week to clean the tribal office complex. Mr. Tom only works for the tribe. He does not have the right to hire or fire any assistants, and he is required to personally do the work. The tribe provides the supplies and tools. Based on these facts, Mr. Tom is considered an employee and the tribe should withhold income taxes and employment taxes. Mr. Tom will be issued a Form W-2.
2) Mr. Bills works as a deputy for the tribal police department. When Mr. Bills is off-duty, he has been repairing the roof of the tribal hospital. The tribe has determined when the work is to be done, has provided the supplies needed, and has determined how Mr. Bills will be paid. Based on these facts, Mr. Bills is considered an employee for the tribe for both jobs and should be issued a Form W-2 showing the withheld income taxes and employment taxes.
3) Ms. Fran is a tribal member but not a council member. Ms. Fran is on the Beautification Committee. As part of her duties, she is required to attend the Ms. Indian Pageant Committee and is paid $50. Ms. Fran is considered an employee and is subject to withholding of federal income taxes, FICA, and Medicare tax. Ms. Fran will also be issued a Form W-2.
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What is an Example of an Independent Contractor?
The tribe pays Mr. Paul $1000 per week to clean the bingo halls. Mr. Paul operates his own janitorial service that performs work for numerous entities, has the right to hire and fire his own help, and provides his own supplies. The tribe does not have the right to control Mr. Paul. Therefore, Mr. Paul is not an employee of the tribe and would be issued a Form 1099-MISC, Miscellaneous Income.
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When does the tribe have to file a Form 1099-MISC, Miscellaneous Income, for an independent contractor?
When a worker accumulates earnings of $600 or more in a calendar year, the tribe should file a Form 1099-MISC, Miscellaneous Income, to report his/her earnings.
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If a worker is determined to be an independent contractor, what documentation should the tribe maintain?
If a worker is determined to be an independent contractor, the tribe should ask for a completed Form W-9, Request for Taxpayer Identification Number and Certification. Even if the contractor is a corporation, they should provide the tribe with a completed Form W-9. The contractor will provide name, address, and employer identification number, signed under penalties of perjury.
Ensure Forms W-9 are completed correctly to avoid potential Form 1099 penalties.
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What if a contractor does not provide the tribe with a completed Form W-9?
The tribe should backup withhold. The earnings of the contractor are subject to backup withholding if no Form W-9 is provided. The tribe should withhold at the current rate of 28%. The current rate changes from time to time and can be found in Publication 15T, New Withholding Tables.
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What is backup withholding?
Persons (payers) making certain payments to payees must withhold and pay to the IRS a percentage of those payments under certain conditions (Refer to Publication 15, Circular E, Employer's Tax Guide). Payments that may be subject to backup withholding include interest, dividends, rents, royalties, nonemployee compensation, and certain other payments including broker and barter exchange transactions, reportable gross proceeds paid to attorneys, and certain payments made by fishing boat operators.
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What are the reasons for backup withholding? Is there any other type of income tax withholding?
The most common situations for backup withholding for Indian tribal governments may be when a vendor or a patron at a gaming establishment does not give their Taxpayer Identification Numbers (TINs) or gives an incorrect TIN.
Another type of withholding occurs with payments made to nonresident aliens, including gambling winnings and per capita distributions. These payments are subject to 30% withholding at the source, in accordance with IRC Section 1441. Per capita distributions based on gaming operations when distributed to nonresident alien tribal members are subject to withholding at the source unless specifically exempt by treaty.
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What report should be filed with the IRS for backup withholding?
Form 945, Annual Return of Withheld Federal Income Tax, is the report used for backup withholding.
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If a contractor is a corporation, does the tribe have to file a Form 1099?
If the contractor corporation is a medical or health care services or legal firm, the tribe has to file a Form 1099 MISC, Miscellaneous Income, to report non-employee compensation. The tribe is not required to file a Form 1099 for other corporate contractors unless backup withholding was done. (See Question 14).
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If a contractor is not incorporated, does the tribe have to file a Form 1099?
If the contractor is not incorporated, the tribe should file a Form 1099 MISC, Miscellaneous Income, to report non-employee compensation earned by the contractor, providing they meet the $600 threshold.
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Are there requirements to file magnetically or electronically when an Indian tribal government is required to file 250 or more information returns (i.e. Form 1099-MISC, Miscellaneous Income) of a single type?
Yes. There is a requirement to file magnetically or electronically. For information regarding Forms 1098, 1099, 5498, and W-2G, see Publication 1220.
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What should I do if I receive a notice from the IRS that my Form 1099 information contains a mismatch or discrepancy?
First, compare the IRS list to your records. Does this list include missing Taxpayer Identification Numbers (TINs)? If so, you should begin backup withholding immediately, if you have not already done so. Be sure to follow the instructions provided in the letter.
You should follow the procedures below as they apply to your situation:
Missing TINs:
Continue or begin backup withholding immediately. At least three solicitations for a TIN are required: 1) Initially when payment was made; 2) First Annual Solicitation by December 31 of the year payment is made (for 2004 payments this date would be 12-31-04); and 3) Second Annual Solicitation by December 31 of the following year (for 2004 payments this date is 12-31-05).
Incorrect TINs:
If the TIN/name combination of the list matches the Form W-9 or other documents in your records, you have 15 business days to send a “B” Notice to the payee. Backup withhold from any reportable payments if the payee does not respond to you within 30 days of the date on the notice. Do not backup withhold if the payee furnishes the required certification. Keep copies of these documents in your files.
If the TIN/name combination on the list does not match with your records, it could be because 1) you put the incorrect information on the return; 2) the information changed after you filed it; or 3) IRS misprinted the information in processing. You should correct and update your records, use the correct TIN/name information for future filing, and make a note of the error in your records.
Detailed information about backup withholding can be found in IRS Publication 1679, A Guide for Backup Withholding for Missing and Incorrect Names/TINs.
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How do I treat foreign persons working as independent contractors?
A nonresident alien may be entitled to claim a tax treaty exemption from withholding on some or all compensation paid for personal services. In order to determine if the treaty exemption is applicable, refer to the section entitled “Pay for Personal Services Performed” in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Persons who wish to claim this exemption should provide you with Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.
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How do we know if an employee is legal to work in the U.S.?
You must verify that each new employee is legally eligible to work in the United States. Both you and the employee must complete the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You may get the form from www.immigration.gov and clicking "immigration forms online" or by calling 1-800-375-5283. Additional information about your responsibilities is also available at that site.
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If we have foreign persons who are working for us as employees, are there any special rules for withholding?
Withhold on resident aliens for federal income tax, social security and Medicare the same as for a U.S. citizen. Reference: Publication 15, Circular E, Employer’s Tax Guide, Section 15, Special Rules for Various Types of Services and Payments.
For nonresident aliens, refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations, to the section on Income Subject to NRA Withholding. To determine if a worker is a resident alien or a nonresident alien, refer to Figure 1-A, Nonresident Alien or Resident Alien, in Publication 519, U.S. Tax Guide for Aliens.
There are different rules for employees working as nonresident aliens (students, scholars, trainees, teachers, etc.) under § 101(a)(15)(F), (J), (M), or (Q) of the Immigration and Nationality Act. Reference Publication 15, Circular E, Employer’s Tax Guide, Section 15, Special Rules for Various Types of Services and Payments.
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What amount should I withhold on a foreign student working as an employee?
Employees working as nonimmigrant aliens (students, scholars, trainees, teachers, etc.) under § 101(a)(15)(F), (J), (M), or (Q) of the Immigration and Nationality Act are exempt from social security and Medicare taxes if the service is performed for purpose specified in that section of the law. These aliens will hold an F-1, J-1, M-1 or Q-1 visa. Please note that social security and Medicare taxes may apply if the employee becomes a resident alien. (Reference: Publication 15, Circular E, Employer’s Tax Guide, section 15, Special Rules for Various Types of Services and Payments.)
These employees are subject to income tax withholding unless excepted by regulations. For income tax withholding, refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. The definition of foreign persons is found under Persons Subject to NRA Withholding section and the qualifications for nonresident and resident aliens are also discussed. The amount of and whether there will be a requirement to withhold Federal income tax will depend if there is a tax treaty between the foreign person’s country of residence and the United States. If there is no treaty or no exemption provision in the treaty, you should withhold at a rate of 30 percent.
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How do I treat nonresident alien individuals who are working as independent contractors?
In order to claim a tax treaty exemption from withholding from some or all compensation paid for personal services (a foreign person who is working as an independent contractor), use Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Refer to the Form 8233 section in the Pub 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
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