Never Misclassify As Independent Contractor
Businesses have to determine whether their workers are considered independent contractors or employees for tax purposes.
This decision is usually made at the outset of the relationship, when the terms are being drafted between the employer, and the individual (Employee or Independent Contractor).
Outlined are key differences to classifying individuals as employees or independent contractors:
Does the company control or have the right to control what the worker does and how the worker does his or her job?
Are the business aspects of the worker’s job controlled by the payer?
Are there written contracts or employee type benefits? Will the relationship continue and is the work performed a key aspect of the business?
Per the IRS website, employers must weigh out the above factors in order to determine whether or not the individual should be considered an employee.
Employers must take a broad look at the entire relationship and document how they used the factors to come to their determination.
If the employer cannot make a determination, Form SS-8 can be submitted to the IRS in order to assist with determining the individual’s status.
“Misclassification” occurs when a worker, who is an employee under the law, incorrectly classified as something other than an employee.
If the individual is misclassified, and there is no reasonable basis behind the misclassification, then the employer may be held liable for employment taxes per IRC section 3509. The IRS may also impose penalties and fines if the employer is found liable.
Intentional misclassification can result in penalties and/or an investigation by the Department of Labor and IRS.
- From an economical perspective, these federal agencies are concerned about this misclassification because it results in a loss of tax revenue and increases Medicare/Social Security costs.
- Per the Department of Labor website, misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces.
- For example, independent contractors are generally not eligible for unemployment benefits so they cannot make a claim with their state’s Unemployment Agency if they are laid off.
The DOL website provides helpful links and FAQs for workers and employers in order to better understand this issue and prevent misclassification from occurring.
Employers should ensure that they clearly document their process of determining whether or not their employees are in fact employees and not independent contractors. Misclassification can result in a substantial loss to workers if they are denied the wages and benefits that they rightfully deserve.
Feel free to email us or message us if you have any other tax preparation tips or ideas!
Written By: Nushin Zarrabi