Finally the IRS addresses a problem experienced by some employers and not-for-profit organizations: the misclassification of workers in “sheltered workshops” as independent contractors rather than employees. IRS Revenue Ruling 65-165 clarifies the treatment of disabled workers in the following situations:
- Individuals in training in a rehabilitation program designed to prepare them for placement in private industry. The intent of the training, which averages 16 weeks in length, is to accustom the individuals to industrial working conditions. These workers are not considered employees of the workshop for employment tax purposes while they are being trained.
- Regular workshop employees who have completed training and are capable of performing one or more jobs in the sheltered workshop temporarily, if awaiting placement in private industry, or permanently, if unable to compete in regular industry. These individuals are paid by the workshop, which provides working conditions and pay scales comparable to those in private industry and fixes working hours and production schedules so an employment relationship is intended. The trained workers in the workshop are treated as employees for federal tax purposes.
- Individuals working at home who are incapable of working in the workshop, who are able to produce salable articles and may sell them wherever they please. These individuals are not considered employees because no employer-employee relationship exists under common law.
Bottom line: With some advance tax planning, your business can maximize the tax benefits available for accommodating disabled people. Consult with a professional tax adviser at Crippen for implementation of these rules. You can reach us at 352-732-4620 or Mail@CrippenCPA.com.