Classifying workers as independent contractors has plenty of appeal. You’ll have a lot more flexibility in hiring, firing, scheduling and compensating them. You won’t have to withhold income taxes, pay Social Security or Medicare taxes or pay unemployment tax on their wages.
That’s all good if your workers are indeed independent contractors. If they’re actually employees, misclassifying them as contractors without a reasonable basis for that decision could land you in a heap of trouble.
Class-action lawsuits, unwelcome attention from regulators, negative publicity, liability for employment taxes and benefits, and various fines and penalties are just some of the potential consequences of worker misclassification. Examples of industries that have been hard hit include construction, ride-sharing, long-haul trucking, package delivery, newspaper delivery, and professional football.
Misclassifying your employees could land you a class-action lawsuit. Learn the right way to classify your workers Tweet This
Contractor or Employee
The responsibility to classify workers correctly is yours, not theirs. And it’s not always easy.
The IRS defines four worker classifications: independent contractor, employee, statutory employee and statutory nonemployee.
According to the IRS, workers whose employer controls or has the right to control how they perform their duties generally are classified as employees. Workers also may be treated as employees if they deliver certain groceries, pick up dry cleaning or laundry, sell life insurance or annuity contracts, do piecework at home or are full-time outside salespeople.
Professionals (e.g., most doctors, dentists, veterinarians, lawyers and accountants) and others who work independently in a trade or business usually are classified as contractors. Direct sellers, real estate agents and companion sitters also may be treated as contractors for some purposes.
How to Classify Workers
Factors that help determine worker classifications can include:
- Who controls how, when and where workers perform their job duties.
- How closely workers are supervised.
- Who provides workers’ uniforms, tools, supplies and equipment.
- Whether workers also perform duties for other clients.
- How workers are paid.
- Types of benefits workers receive.
- Whether workers have signed employment or contractor agreements.
- Laws that categorize certain workers by statue.
No one factor is more important than any other; rather, it’s all situational and determinations must be made on a case-by-case basis.
A further complication is that other federal agencies and states like California have their own worker classification rules, which might differ from what the IRS says. Some workers might be classified as employees for some purposes, independent contractors for others.
Help is available
If you’re unable to determine a worker’s classification, it may be worthwhile to seek advice from an attorney who specializes in employment issues. Another option is to file Form SS-8, asking the IRS to figure it out—at least for the IRS’s purposes. Expect to wait up to six months for an official determination.
If you’ve mistakenly classified employees as independent contractors, the IRS offers a voluntary settlement program that may grant you partial relief from unpaid employment taxes if you agree to classify workers properly as employees in the future.
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