Business growth is often accompanied by an increased number of employees, which in turn is accompanied by increasing challenges around taxes and employee benefits. 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 the individuals providing services are employees or independent contractors.
Business owners have several legal obligations that arise 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 requirements. declaration and presentation of payroll reports. By contrast, the legal obligation for independent contractors is very limited and includes the preparation and annual filing of the 1099 form.
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 evidencing the degree of control and independence must be considered. According to the Internal Revenue Service (“IRS”), facts that provide evidence of the degree of control and independence fall 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, consider the degree or extent of the right to direct and control the relationship. In addition, 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 inaccurate classification, the employer may obtain a partial waiver of associated financial responsibility, subject to compliance with certain IRS corrective actions, such as participation in the Voluntary Classification Settlement Program (“VCSP”). “). Under the VCSP, taxpayers have the opportunity to appropriately reclassify their workers for future tax periods, with partial relief from federal employment tax obligations.