Employers learn valuable lessons from IRS by misclassifying employees

IRS employee classificationEven the smartest, shrewdest, most successful Cleveland business owners make mistakes. Most of them will tell you that part of the reason they are successful is that they learn from their mistakes and develop better ways approaching problems and people.

As we noted not long ago in an article, business owners will sometimes mistakenly identify an employee as an independent contractor. There are sound reasons for classifying workers as independent contractors; the move can save entrepreneurs thousands in unemployment insurance, workers' compensation insurance, health care benefits, vacation and so on. But when the worker is mistakenly misclassified, the error can cost that same employer dearly.

As we noted in our article, the IRS encourages employers to examine three aspects of your relationship with a worker while attempting to determine if they qualify as a contractor: behavior, finances, contract language.

1) Behavior: an independent contractor typically controls how their work on a project is completed; an employee typically does not.

2) Finances: a contractor makes a bid to work on a project and is in business for him or herself. Employees work for a business and don't submit bids for their work.

3) Contract language: while you and the worker might well sign a contract stating that he or she is not your employee, the contract language isn't the only thing that will be examined in a contract dispute. The totality of the relationship will be under the microscope (including behavior and finances) if the Department of Labor or Internal Revenue Service begins an inquiry.

Contact Robert J. Fedor, Esq.

The attorneys at Robert J. Fedor, Esq., L.L.C. can help you determine the proper status of workers before tax problems arise.  We also assist business owners who are struggling with paying employment taxes or find themselves facing an audit or criminal tax charges. Many of these issues are related and require an understanding of law and tax code to fully resolve.