Have you misclassified employees as independent contractors?
An employer may enjoy several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it generally isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws. However, there’s a potential downside: If the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties.
To determine whether a worker is an employee or an independent contractor, the IRS generally considers the following 3 broad categories, in addition to other facts-and-circumstances-based issues.
1. Behavioral. Does the employer control, or have the right to control, what the worker does and how the worker does his or her job?
2. Financial. Does the employer control the business aspects of the worker’s job? Does the employer reimburse the worker’s expenses or provide the tools or supplies to do the job?
3. Type of relationship. Will the relationship continue after the work is finished? Is the work a key aspect of the employer’s business?
The Department of Labor looks at similar issues and also could penalize employers who misclassify their workers. Further, the DOL and IRS share information so that an audit by one agency could trigger an audit by the other.
The IRS offers voluntary correction programs that may mitigate the potential penalties, but even these programs contain potential risks. If you are concerned that you may have misclassified workers, it is important to consult with both your accountant and legal counsel. Your accountant should be familiar with your business and with the IRS procedures. Legal counsel can help you with both the IRS and DOL issues.
About Greg Daugherty
Greg Daugherty is a partner at Porter Wright Morris & Arthur LLP and a featured guest blogger for Whalen & Company. To view his professional bio, please visit http://www.porterwright.com/greg_daugherty/, and link to his blog at http://www.employeebenefitslawreport.com/.