Worker classification is an important issue for employers as there are tax implications that have to be considered. For workers classified as employees, there are income taxes that must be withheld or paid, including payroll taxes for Social Security and Medicare. Employers who fail to withhold payroll and income taxes for employees can face issues with the IRS, but there is no such requirement for independent contractors.
One problem in this area is that the difference between employees and independent contractors is not always clear, and is highly dependent on the facts and circumstances surrounding the work performed. Generally speaking, the key factors are the degree of control exercised by the employer and the amount of independence exercised by the worker. The more control the employer has over the worker, the more likely it is that the worker should be classified as an employee.
In some cases, employers can make mistakes about the proper way to classify a worker. When the IRS discovers this in an audit, there can be unexpected tax costs for the employer. When an employer is found to have misclassified a worker, the employer is required to pay employment taxes unless it is able to show that the worker or workers have already done so, which can be a challenge for the employer. When an employer is unable to locate misclassified workers to document their payment of required taxes, employers can end up paying taxes twice.
In our next post, we’ll look at a recent tax case which is favorable for businesses and the importance of working with an experienced attorney on employment tax issues.