Employee or Independent Contractor?

Are you a business owner struggling to classifying workers as employees or independent contractors? The determination can be difficult sometimes and the consequences can be quite severe if the wrong determination is made.

As a quick summary, employees receive a W2 as the end of the year to report their income while independent contractors file their own income tax return claiming their income and expenses for their business. The employer withholds a portion of the employees pay and sends that amount to the IRS along with its portion of the payroll taxes throughout the year at each pay period. Independent contractors must make their own estimated tax payments throughout the year to stay current.

For business owners, it is important to classify workers correctly from the start when the relationship is established between the worker and business. Generally speaking, the worker will be classified as an employee when a business controls or has the right to control the following aspects of the worker:

  • how the job is done;
  • how the worker runs its business or the financials of the worker such as when they are paid and how they are paid or what supplies/tools are used to perform the work;
  • how the relationship is detailed in any written contract such as pay rate, benefits, vacation pay, among others or if the worker performs a key aspect of the business.

When workers are misclassified as independent contractors instead of employees, the following occurs:

  1. The employers share of the payroll taxes are not paid to the IRS and the state employment tax entity.
  2. The employees share of payroll taxes are not withheld and remitted to the IRS and state employment tax entity.

This can have adverse effects to the business owner if the IRS or the state employment tax entity determines that the workers have been misclassified during an employment tax audit. The main consequence is that the employer is assessed for the back taxes for its share of the payroll taxes and the share of the payroll taxes that should have been withheld from the employee for a period of several years with accrued interest and penalties.

This can all be prevented if the right counsel is sought from the beginning when the relationship is formed or can be mitigated if corrected in a timely manner. Please do not hesitate to contact Hone Maxwell LLP to speak to one of our experienced attorneys to confirm that you are classifying workers accurately. We can discuss your options if you are in the middle of an employment tax audit or if you believe that you may have misclassified workers in the past.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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