Employee or Independent Contractor For Tax Purposes?
Taxation is just one of many areas of law involved in disputing a workers status as either an employee or an independent contractor for the purposes of payroll taxes. Because of recent improvements in the exchange of information between federal and state agencies, one investigation into a workers status may trigger another. Or, a dispute by one worker can domino into additional disputes by other workers. If a business owner misclassified a workers status a number of years ago, it could be found responsible for significant federal and state employment tax deficiencies and penalties, as well as a variety of benefits if the worker sues and is ultimately determined to be an employee.
The IRS use the following list of 20 factors to examine the nature of the relationship between a business and a worker and make a determination between employee or independent contractor status. While some consideration is typically given to each particular industry and industry norms, as well as the underlying context of the relationship, typically if you answer "yes" to questions 1-4 this indicates an independent contractor, while answering "yes" to questions 5-20 indicates an employee
Employee vs Independent Contractor Checklist
- Profit or Loss: Can the worker incur a profit or loss as a result of the work, aside from the wage they earned directly from the work? (This indicates economic risk and/or opportunity beyond just getting paid.)
- Investment: Does the worker own the equipment or facilities required to complete their work? (More significant investments tend to indicate independent contractor status.)
- Works for More Than One Company: Does the worker have the freedom to work for companies other than yours?
- Services Offered To The General Public: Can the worker offer services direct to the general public?
- Instructions: Do you tell the worker how, when and where they must perform the work?
- Training: Do you train the worker to perform their job in a particular way?
- Integration: Is the worker an integral part of your business? Are they necessary to the operation of the business?
- Services Rendered Personally: Is it necessary for the worker to personally deliver the services as opposed to being free to delegate the work to other people that they employ?
- Hiring Assistants: Do you have control such as hiring, training, paying and have firing power over any assistants for the worker?
- Continuing Relationship: Is there an ongoing relationship between you and the worker with no defined end point?
- Work Hours: Do you set the work hours for the worker?
- Full-Time Work: Must the worker spend all of their work time performing tasks for your business?
- Work Performed On Premises: Do you control the route or location where the work must be performed?
- Sequence: Do you have the right to control the order in which the worker delivers services?
- Reports: Must the worker provide you with reports accounting for their actions?
- Pay Schedules: Do you pay the worker a fixed salary on a regular schedule by hour, week or month?
- Expenses: Do you pay the business or travel expenses for the worker?
- Tools and Materials: Do you provide the worker with the equipment, tools an materials necessary to perform their tasks?
- Right To Fire: Can you fire the worker?
- Worker's Right To Quit: Can the worker quit at anytime without incurring further liability?
Why Signed Contracts May Not Be Enough To Prove Employee Classification For Tax Purposes
It is not wise to rely exclusively on a contract between you and the worker stating that the worker is an independent contractor. In a watershed case addressing worker classification issues, Vizcaino v. Microsoft, Microsoft was found liable for millions of dollars worth of employee benefits to workers it had classified as independent contractors, in spite of a written agreement that the workers were independent contracts and were not eligible for the benefits.
Because the IRS considers treating a worker as an independent contractor instead of an employee to be a tax loophole, as well as an area of significant noncompliance resulting in billions of dollars in lost tax revenue, it is very likely that there will be increased scrutiny in this area, and harsher penalties imposed, in the foreseeable future.
If you’re currently undergoing an IRS audit involving worker classification issues, the best thing you can do is retain experienced legal counsel and be very cautious in how you respond to the IRS.
As a tax attorney experienced with small business and corporate tax issues, William D Hartsock can identify what your options are to resolve a dispute involving worker status issues. For instance, you may qualify for relief from retroactive assessment of federal employment tax liabilities under the safe-harbor provisions in the tax code if, among other things, you can successfully establish that you had a reasonable basis for treating a worker as an independent contractor, even if that classification turned out to have been incorrect. One way you could satisfy the reasonable basis requirement is to produce sufficient evidence of a long-standing recognized practice of a significant segment of the relevant industry of treating such workers as independent contractors rather than employees. We can help identify such evidence and present it to the IRS in a very persuasive manner.
The Voluntary Classification Settlement Program (VCSP)
If youre not currently involved in an IRS audit, lawsuit, or other challenge of a workers status, dont wait for one to happen. One option that may be available to you is participation in the IRSs Voluntary Classification Settlement Program (VCSP). Instituted in September of 2011, the VCSP allows eligible companies to prospectively reclassify independent contractors as employees with no audit exposure and minimal liability for past taxes. One of the eligibility requirements for participating in the VCSP is that the company cannot currently be undergoing an IRS audit. Others include consistency in your treatment of similarly situated workers and consistency in your previous reporting efforts.
How A Tax Attorney Can Help
Our in-depth knowledge and experience in this area can be invaluable in evaluating the specific facts and circumstances in your case in order to determine whether you qualify for participation in the VCSP. If you do meet the threshold requirements, we can draw on our vast understanding of the relevant statutes, regulations, case law, and other applicable legal authorities in this area to help you weigh the various pros and cons associated with seeking resolution through the VCSP, or whether other options should be pursued.
The Tax Lawyer - William D Hartsock has been successfully helping clients resolve business tax issues and payroll tax matters since the early 1980's. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858)481-4844.