I

s your Independent contractor really an employee?

Warning: Te Internal Revenue Service (IRS) is cracking
down on employee misclassifcation, and there are serious
consequences if youve done so.
Te IRS and the U.S. Department of Labor (DOL) are cracking down
on employers who pay workers without withholding and remitting the
proper employer payroll taxes. In fact, over the past year, many states
have signed on with the feds to exchange information. Tis means that
if you are audited and found delinquent in your federal employment
taxes, you will almost certainly be audited by the state(s) that you
operate in or vice versa and have to pay them as well.
Reporting and Tax responsibilities
Why is it important to determine if a worker is an employee or an
independent contractor? Te payer/employer has certain reporting and
tax responsibilities depending on the type of relationship that exist with
the worker, and they are as follows:
1. Reporting and tax responsibilities of an independent contractor
relationshipUnder this type of arrangement:
- e employer must have the contractor complete Form W-0,
Request for Taxpayer Identifcation Number and Certifcation.
Tis form is used to request the correct name and Taxpayer
Identifcation Number (TIN) of an employee. A TIN can be either a
Social Security Number or an Employer Identifcation Number. Te
payer must retain the W-9 for at least four years.
- If an independent contractor is paid $000 or more for services
provided during the year, a Form 1099-MISC needs to be completed
and fled, and a copy of this form must be provided to the
independent contractor by Jan. 31 of the year following payment.
2. Reporting and tax responsibilities of an employer/employee
relationshipUnder this type of arrangement:
- An employer generally must withhold federal income tax
as well as Social Security and Medicare taxes from his or
her employees wages. Te employer must also report and
pay his or her portion of the Social Security, Medicare,
Federal Unemployment Tax as well as other state tax and
withholdings.
- As for reporting and paying employer payroll taxes and
employee withholdings, there are several quarterly flings
as well as annual flings that need to be prepared. Payments
to the IRS and the state are usually done electronically at
prescribed periods based on amounts due.
So, based on the reporting and tax payment rules above, why would
anyone classify a payee as an employee? After all, the reporting and tax
rules associated with an independent contractor is minimal and on the
employer side, the employer taxes associated with an employee could
cost as much as $1.15 or more for every dollar paid to an employee.
Independent contractor vs. employee
Lets take a look at the diferences between an independent
contractor and an employee.
- e IRS (irs.gov) says an independent contractor or employee
depends on the facts in each case. Te general rule is that an
individual is an independent contractor if the payer has the right
to control or direct only the result of the work and not what will
be done and how it will be done.
- Further, the IRS states that you are not an independent
contractor if you perform services that can be controlled by
an employer (what will be done and how it will be done). Tis
applies even if you are given freedom of action. What matters
is that the employer has the legal right to control the details
of how the services are performed. If an employer-employee
relationship exists (regardless of what the relationship is called),
you are not an independent contractor.
Tere are several criteria that can be applied to determine the
22 PLANET News Jan/Feb 2013
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By Daniel S. Gordon, CPA, owner of Turfbooks.com
diference between an employee and an independent contractor, but,
essentially, if you answer yes to any of the following, you have an
employee and not an independent contractor relationship:
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among other things, do you control the time and place the work gets
done?
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hourly rate, if there are benefts, how expenses are reimbursed, etc?
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aspect?
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If youd like, the IRS can make a determination for either the payer
or the payee. All you have to do is fle form SS-8. It may well take up to
six months after fling to receive a response, so fling an SS-8 only makes
sense if an employer is continually hiring the same types of workers to
perform the same types of work.
Caveat: A payee can request a determination without the payers
knowledge. If the determination is made that the payee is actually an
employee but is being paid as an independent contractor, the payer is
more than likely to be audited in the future.
Potential cost of misclassication
So, what is the potential cost of misclassifying an employee as
an independent contractor? First, there are the federal and state
tax liabilities that should have been paid if the worker was properly
classifed. Second are a series of civil and criminal penalties as well as
interest that could potentially accrue. Tese penalties include failure to
fle and deposit taxes, accuracy, and willful neglect of tax payments due
among others. Te penalties and interest relating to misclassifcation
could be several times the actual taxes themselves and there could also
be criminal sanctions.
While the previously mentioned penalties and interest are an
extreme case, the monies due can be signifcant. Te IRS and the states
may have several voluntary programs where a prior violator of proper
classifcation can report properly and, in many cases, penalties can be
reduced. If as an employer you have such misclassifcation issues, this
may be a way to minimize the potential liabilities. y
Daniel S. Gordon is a CPA in New Jersey and owns Turfbooks.com,
an accounting frm that caters to landscape contractors throughout the
United States. He can be reached at info@turfbooks.com.