Technology has untethered many from cubicals under florescent lights. For a business who mistakenly classifies a remote worker as an independent contractor, the liability can be significant.
The employee relationship comes with the requirement to withhold and pay FICA employment taxes. Then tack on benefits, for example, a company with more than 50 employees must provide health insurance under the Affordable Care Act.
Eliminating human resources cost may make an independent contractor workforce look preferable, but take time to ensure that workers meet the requirements. The test generally looks at the amount of control an employer has over the day-to-day activities.
IRS Section 530 relief
For those who have run into issues regarding classification, there is a safe harbor provision in the Tax Code. It may be possible to avoid employment tax liabilities through Section 530 by showing your company:
- Consistently treated similar workers as independent contractors
- Filed 1099s for these workers
- Had a reasonable basis – long-standing practice in an industry or an IRS ruling – to support treating workers as independent contractors.
This relief is not available for certain professionals, such as computer programmers, systems analysts, engineers, designers and drafters. One law firm tried to take advantage of this section establishing an S-Corp and making everyone an independent contractor. Unfortunately, the firm failed to issue 1099s and couldn’t establish a reasonable basis for its practice, so was on the hook for employment taxes and assessed a penalty.
Section 530 is not something to rely upon when determining how to characterize workers. If a new position might tip either way, seek the review of a tax attorney before having to answer IRS questions in an audit. If notice of an audit has arrived, get immediate legal advice to limit the consequences.