Upon hearing an auditor remark, “I’m only here to do my job.”; I always wonder, “Who wrote the job description?” And, do they understand that they work for you, me, and that group, so eloquently defined by President Lincoln as, We the People?!
This is a story about our Government in action. It is a real story told through my correspondence to the Commissioner of the Montana Department of Labor and Industry. Brace yourself; Truth is stranger than fiction!
The purpose of this correspondence is to ask for your assistance in providing relief from hardship being incurred by Montana Small Business, as a result of audit efforts by the Department of Labor and Industry.
Recent experiences with small business owners clearly demonstrate that their treatment by the Montana Department of Labor and Industry is different than your public message:
Our mission is to promote the well being of Montana’s workers, employers, and citizens, and uphold your rights and responsibilities. We, at DLI, do this by remaining steadfast to our core values of customer focus, individual responsibility, individual growth, ethics in the workplace, and continuous improvement.
Quite simply and to clearly communicate the seriousness of the matter, without your intervention to promote an equitable approach to a relatively new law, Montana employers will not be able to continue in their businesses. At a time of historical high unemployment, I ask for your patience as I present this issue for your consideration.
The Issue: Employee vs. Independent Contractor
As foundational information, please refer to my recent Blog Post: Have Your Papers
Of the many Montana Small Business owners who are working hard to be in full compliance with labor laws, we will examine the fact pattern of one, who has reached out to me for help.
This small Company has provided employment to at least a dozen Employees for the last fourteen years that it has been incorporated. Its history of service and value to the Billings community goes back many years prior to that. To properly manage its business obligations, the Company uses the most recent release of QuickBooks accounting software and pays extra for the Enhanced Payroll Subscription. In recognition of the Company’s excellent employment practices, the DLI has assigned a Zero unemployment tax rate for the year of 2008.
In audit, the practice of this Company in hiring independent contractors (in addition to its Employees) is being challenged in ways far beyond a test to the actual Montana Law, and Administrative Rules. This business owner, an older lady, is having her core persona attacked.
She has diligently received contract documents from those holding themselves out to her as independent contractors, asked for invoices and statements of account, and furnished Forms 1099-MISC to these contractors. The technical aspects of the AB Test have been met.
The only thing, of which she was unaware and lacking in this story, is the Independent Contractor Exemption Certificate.
Before moving forward to take a look at the requirement for an Independent Contractor Exemption Certificate, let’s consider two activities which appear to require a Certificate; yet, are not being challenged by DLI.
1.) Bank Director Fees
2.) National Guard Recruiting Fees
In preparing many personal income tax returns for the Directors on the boards of Montana banks, I know for a fact that they receive Forms 1099-MISC reporting their remuneration as Non-employee Compensation. That income is, then, properly reported within their individual income tax returns on Schedule C, Profit or Loss from Business.
This last tax season revealed another twist to compensation paid to a Montana Guardsman by an Alabama company. This young man enlisted in the National Guard. He was encouraged to get his buddies to sign up, too. The “compensation” for doing so was reported on a Form 1099-MISC as “Non-employee Compensation” from a Company who, evidently, provides services for the U S Military.
The question that begs to be answered: “Why is it OK for a multi-million dollar company to make payments and report them as Non-employee Compensation to a Montana resident; yet, a small Montana Company is being accused of improprieties?!”
On behalf of the small Montana Company, I ask for fairness in negotiating through the audit issues of the past, to provide this business owner the opportunity to continue to be a good citizen and a great employer.
The Facts: Government vs. Montana Company
1.) This new law was not administratively practical (ARM 24.35.141) until August 12, 2005.
2.) There is still ambiguity for Hiring Agents. Specifically, please, see the first two cites for the Montana Supreme Court Decisions applicable to this issue. Montana employers are given the impression that they can rely on the Independent Contractor Exemption Certificate; yet, ”an employer has the obligation to make an initial good faith inquiry to determine whether the worker is an independent contractor in fact, as opposed to merely in name.” (If the State of Montana, with all of the taxpayer resources at its disposal cannot decisively make that determination, after asking for a sworn affidavit from an applicant, what hope is there for the Employer?!)
3.) Yet, the Montana Company, above, did just that: they made a good faith inquiry and determined that those whom they hired as Independent Contractors did, indeed, meet the factual test in more than name, or certificate.
4.) The audit representative for DLI expressed the Department’s approach by stating, “While we acknowledge this is a relatively new law and provided a grace period for the years 2006 and 2007, we are now putting the hammer down.”
5.) The lady in the story, above, and her Company have never before been audited.
6.) Of those she compensated as contractors for the years of 2008 and 2009, the majority have, now, obtained their status as Registered Independent Contractors, recognized by the Montana Department of Labor and Industry as such.
7.) Since the UI Contribution Rate for her Company is Zero, the real issue is the assessment of Worker’s Compensation rates, Social Security, Medicare, and other Federal taxes against payments she made to other Business owners for the value of their services, who have reported and already paid the taxes on their business income.
Our country was formed in revolution against “Taxation without Representation”. An even greater curse is “Double Taxation through Misrepresentation”.
The solution to all of this is to use the Audit Process to educate, not to punish.
In your words:
“We, at DLI, do this by remaining steadfast to our core values of customer focus, individual responsibility, individual growth, ethics in the workplace, and continuous improvement.”
That’s all I ask for the benefit of Montana Employers. I am available to facilitate an equitable resolution in the case above.