Pub.1 2019-2020 Issue 3

E very business owner or manager at some point will have to deter- mine whether one or more of their workers are employees or inde- pendent contractors. For a number of federal and state purposes, this is a critical distinction and raises vexing questions of fact and law. Many employers become aggressive in classifying their workers as independent contractors to avoid payroll taxes and fringe benefits, unemployment insurance, workers’ compensation expenses, minimum wage requirements and labor union issues, to name a few perceived benefits. Employment taxes constitute about 72% of the taxes the IRS collects, so it is no wonder that the IRS and other governmental agencies closely monitor and enforce worker misclassification through penalties and sanctions. Employers must withhold income and Social Security taxes from employee paychecks. Conversely, independent contractors are responsible for reporting and paying their own income and Social Security taxes. As a result, because it is more likely that employers will accurately and consistently withhold and pay taxes, the IRS is constantly on the watch for those who improperly claim independent contractor status. Employers who intentionally misclassify workers can be responsible for all unreported income and Social Security taxes of their employees for all relevant years, in addition to penalties for missed deposits and withholdings and in egregious cases, criminal exposure. In cases where employers unintentionally misclassify workers, the employer’s withholding liability is limited to 1.5% of wages paid and Social Security liability to 20% of the amount otherwise due, which still could be substantial depending on the amount of wages and number of workers involved. Misclassification also results in workers’ loss of benefits (e.g., Social Security, unemployment compensation, etc.) that would have been available had the worker been classified as an employee. Worker Classification. It is a common misconception that someone working part time or earning less than $600 per year should be classified as an inde- pendent contractor. In fact, part time status and the number of hours worked Avoiding Sanctions on Worker Misclassification are generally not factors in determining whether a worker is an employee or independent contractor. Control is Key. An individual generally is an employee if the person for whom services are performed has the right to direct and control the individual performing services (not necessarily actual control). If an individual is subject to the control or direction of another person only as to the result to be accom- plished and not as to means and methods of accomplishment, the individual is not an employee. Each government agency uses its own factors to determine Control is Key. An individual generally is an employee if the person for whom services are performed has the right to direct and control the individual performing services (not necessarily actual control). If an individual is subject to the control or direction of another person only as to the result to be accomplished and not as to means and methods of accomplishment, the individual is not an employee. 24 UP DATE