The IRS is taking a closer look at companies that use contractors. The federal government predicts its new crackdown on employee misclassification will produce at least $7 billion in federal revenue over the next 10 years. The DOL hired 100 new auditors solely to investigate misclassifications and state investigators are also scrutinizing much closer. The IRS estimates that 80% of workers classified as “independent contractors” are actually employees.
Independent contractors provide benefits to employers that result in the same work, lower costs, less hassles; however, reclassifications could result in huge tax, wage and benefit payments to these workers if misclassified.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Now is a good time to review the rules and evaluate your workers’ status.
The IRS provides this helpful guide which includes information on Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding: http://www.irs.gov/pub/irs-pdf/p1779.pdf