One of your most critical responsibilities is managing payroll taxes. When it comes to these obligations, the Internal Revenue Service (IRS) is unlikely to accept being overwhelmed, facing tough economic times, or any other excuse for mishandling employment taxes due to worker misclassification. Our free ebook, "Employment Tax Fraud: What Every Business Owner Needs to Know," offers guidance to help you avoid IRS issues.
Some businesses intentionally classify employees as independent contractors to avoid payroll taxes, overtime obligations, unemployment taxes, and employee benefits. Even if the misclassification was unintentional, the IRS may still hold the business responsible for unpaid employment taxes, penalties, and interest.
The IRS provides helpful examples of employee classifications on its website for businesses that are uncertain or confused. The following are explanations of how to classify each type. The key factor is the relationship between the worker and the business.
Employee: Anyone working for you whose services your business has the right to control, including what they do and how they do it.
Independent contractor: A trade, business, or other professional who offers services to you or to the public.
If you are uncertain which category to choose, consider the following:
Does your company control, or have the right to control, what duties the worker performs and how? If the answer is yes, then the worker is most likely legally considered an employee. If the answer is no, because the person independently decides whether they do certain work for you and how they accomplish it, then the worker is most likely considered an independent contractor.
Does your company direct or control all financial and business aspects of the worker’s job? Are they controlled by the person or entity paying them?
If the answers are yes, then they are likely considered employees. Additional considerations include how the individual gets paid, how their expenses are reimbursed, and who provides them with the tools, supplies, and other necessities for performing their duties.
If the answers are no because the worker tells you how and when they will be paid, has their expenses covered, and uses their own tools and equipment to do their work, then they would probably be considered an independent contractor.
Does your business have a written contract with the worker or provide benefits associated with employment, such as a pension or 401(k) plan, paid time off, or health insurance? Is your relationship with the worker continuous, and do they perform work that is an important aspect of your business?
If the answers are yes, then the worker should properly be classified as an employee.
If the answers are no, you do not provide any of these benefits, or the person only works for you during a certain timeframe and on work that is not business critical on an ongoing basis, the worker is likely an independent contractor.
Incorrectly classifying your workers, whether intentionally or by mistake, may land you in serious trouble with the IRS. In some situations, repeated or deliberate misclassification can lead to allegations of employment tax fraud. The IRS could potentially hold you liable for employment taxes for any workers involved, including income, Social Security, and Medicare taxes, as well as unemployment taxes.
If you are concerned about a possible misclassification investigation due to an intentional or accidental filing, the attorneys at Robert J. Fedor, Esq., L.L.C., have the experience to fight for you. Call 440-250-9709 to discuss your situation. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.