Business growth is typically accompanied by increased employee numbers, which in turn is accompanied by growing tax and employee benefit challenges. Many business owners may be tempted to minimize the impact of these challenges by classifying workers as independent contractors rather than employees. However, it is critical that business owners correctly determine that persons providing services are employees or independent contractors.
Business owners have various legal obligations arising from wages, including the responsibility to withhold income taxes, withhold and pay Social Security and Medicare taxes, pay unemployment taxes on wages paid to employees along with various filing and filing of payroll reports. In contrast, the legal obligation for independent contractors is very limited and includes the annual preparation and filing of Form 1099.
A key factor in determining whether a person providing services is an employee or an independent contractor is the issue of control; Consequently, all the information that shows the degree of control and independence must be considered. According to the Internal Revenue Service (“IRS”), the facts that provide evidence of the degree of control and independence are divided into three categories: (1) behavioral: the company controls or has the right to control what the worker does and as it does. the worker does his work; (2) financial: the business aspects of the worker’s job, including how the worker is paid, whether expenses are financed, and ownership of supplies, tools, and equipment, are controlled by the payer, and (3) the type relationship: when the type of work performed by the worker represents a key aspect of the payers’ business; and the worker provides services exclusively in exchange for remuneration; the worker is most likely an employee.
It is critical that business owners look at the relationship as a whole, considering the degree or extent of the right to direct and control the relationship. Additionally, business owners must document the factors used in reaching the determination.
Misclassifying employees as independent contractors can result in significant costs, as the employer may be liable for those employees’ employment taxes. However, if there is a reasonable basis for the misclassification, the employer may obtain a partial waiver of the associated financial liability, subject to compliance with certain IRS corrective actions, such as participation in the Voluntary Classification Clearance Program (“VCSP “). Under the VCSP, taxpayers have the opportunity to properly reclassify their workers for future tax periods, with partial relief from federal employment tax obligations.
