Generally, business growth is accompanied by a higher head count, which in turn is accompanied by growing tax and employee assistance challenges. Many business owners may be tempted to minimize the impact of these challenges by classifying workers as independent contractors instead of employees. However, it is basic that business owners correctly determine the individuals providing sets are employees or independent contractors.
Business owners have various statutory obligations arising from wages, including the responsibility for withholding income taxes, withhold and pay Social Security and Medicare taxes, pay unemployment taxes on wages paid to employees along with various payroll reporting and filing requirements. In contrast, the statutory obligation applicable to independent contractors is very limited and includes the annual preparation and filing of form 1099.
A meaningful factor in the determination of whether an individual providing sets is an employee or independent contractor, is the issue of control; consequently all information that provides evidence of 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 fall into three categories: (1) behavioral – the company control or have the right to control what the worker does and how the worker does his or her job; (2) financial – the business aspects of the worker’s job, including how the worker is paid, whether expenses are reimbursed, and ownership of the supplies, tools and equipment, are controlled by the payer and (3) the kind of relationship – when the kind of work performed by the worker represents a meaningful aspect of the payers’ business; and the worker provides sets exclusively to the payer; it is more likely than not the worker is an employee.
It is basic that business owners look at the complete relationship, consider the degree or extent of the right to direct and control the relationship. Additionally, business owners should document the factors used in coming up with the determination.
Inaccurately classifying employees as independent contractors may consequence in meaningful costs, as the employer may be held liable for the employment taxes for those employees. However, if there is reasonable basis for inaccurate classification, the employer may acquire uncompletely relief from the associated financial liability, unprotected to compliance with certain IRS corrective actions, such as participation in the Voluntary Classification Settlement Program, (“VCSP”). Under the VCSP taxpayers are allowed the opportunity to properly reclassify their workers for future tax periods, with uncompletely relief from the federal employment tax limitations.