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 begin_of_the_skype_highlighting 1-800-375-5283 end_of_the_skype_highlighting.
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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