It can be a huge money-saver for a small business to get into the practice of working with independent contractors. Using independent contractors will lower a companies tax bill, require less withholdings, and in some states, reduces the obligations under workers’ compensation requirements. As a result, many small businesses advantageously hire independent contractors and tell such contractors they are responsible for their own taxes.
Some companies push the line, however, and classify as independent contracts many workers who are in fact employees. The IRS is catching on and hoping to catch employers with discrepancies. A new IRS program, launched in early 2010, plans to randomly examine 6,000 companies over the next three years. The purpose of these examinations is to find misclassified employees. This new program makes the decision of how to categorize workers even more important.
In general the status of a particular worker is a product of the facts and circumstances surrounding the worker. A large factor in determining independent contractor status rests in the degree of control the worker has. An independent contractor would seemingly have more control over his or her hours, as well as the manner in which the work is performed. FindLaw, an internet website which compiles legal documents, publishes a twenty-factor checklist to help determine if a worker is an employee or independent contractor. To access this checklist click here.
Employers should think twice before classifying a worker as an independent contractor or employee, or risk writing a big check to the IRS for unpaid taxes, penalties and fines. In addition, an employer that misclassifies workers should be prepared to provide access to benefits retroactively for such misclassified workers. One example of this was the class action federal lawsuit filed against Microsoft Corporation, Vizcaino v. Microsoft Corp., the result of which was Microsoft having to pay approximately $ 97,000,000 to thousands of employees as well as the massive legal bill accumulated during the case.
The lesson is that employers cannot assume that independent contractors are necessarily “independent contractors” simply because that’s what their agreement states. The IRS and state agencies certainly will not be making this assumption. Employers should make an effort learn the rules in their respective state and on the IRS website or consult an attorney. If you want your independent contractor classification to be respected by the IRS, you need to tailor your relationship with your workers so that it meets the guidelines set forth by the IRS.