Is Your Independant Contractor Really an Employee?

Do You Know the Difference?

 The IRS estimates that it is losing 1.5 Billion a year over the misclassification of employees as independent contractors. If independent contractors are reclassified as employees the employer will be faced with the following: 

  1) FICA, FUTA, SUI and ETT Taxes 

  2) Under Paid Employee Federal & State Individual Income Taxes up to the amount which should have been withheld. 
 
  3) Disqualification of Pension Plan and Pension Plan Contributions. 

  4) Penalties & Interest for Failure to File Tax Returns, Deposit Payroll Taxes. 
 

 As a result, assessments for reclassification of workers general results in very large assessments. 

 In order to avoid a reclassification of workers, an employer must be able to show the following: 

  1) The employer has a reasonable basis for classifying workers as independent contractors i.e. from previous IRS audits or from supportable industry practices. 

  2) The employer exercised consistent treatment of workers. 
 

 When the classification of a worker is challenged, the following common law factors are considered: 

  a) How are instructions communicated to the worker. 
  b) Whether Training was provided to worker. 
  c) The degree the business depends on the workers services. 
  d) Whether services are rendered by specific individuals. 
  e) Whether the worker hires, supervises or pays assistants. 
  f) Is there is a continuing relationship with the worker? 
  g) The method at which the hours of work are set. 
  h) Is the owner required to devote full time (40 hr/week) to the business? 

  i) Is work performed on premise of employer? 
  j) Is there a specific order that the worker must perform services? 
  k) Is the worker required to submit oral or written status reports? 
  l) Are business & travel expenses reimbursed by the employer? 
  m) Does the employer provide tools and machinery for completion of services? 
  n) Does the worker have adequate facilities for rendering services? 
  o) Is the worker at risk of realizing either a profit or loss as a result of services rendered.

p) Does the worker provide services to more than one company/persons at a time? 
  q) Does the worker make his/her services available to the general public? 
  r) Does the employer have a right to discharge a worker? 
  s) Does the worker have the right to terminate the relationship at any time? 

 As a result, we recommend that proper safeguards be implemented to minimize the risk that an independent contractor is reclassified as an employee by the IRS or EDD. The safeguards must consistent with the common law principles listed above and must also provide proper documentary evidence.