The past year has seen a
rash of natural disasters in the
businesses have hired additional workers to help them meet an increased demand
for their goods or services or simply to help get back up to speed after a
forced closure.
Now, the IRS has issued
a fact sheet to remind employers of their obligation to properly classify these
new workers as employees or independent contractors. Although the new fact
sheet focuses on worker classification for tax purposes, keep in mind that
classification can also affect your wage and hour obligations, as misclassifying
someone as an independent contractor could lead to back overtime liability down
the road.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
Categories of Workers
The agency explains that
most workers fall into two categories: independent contractors or common law employees.
The main factor to use in determining how to classify workers is the degree of
control the business has over them. The more control the business has over a
worker, the more likely it is that the worker is an employee rather than an
independent contractor.
Areas to examine include
the business’s control over both how the person performs the work and the
economic aspects of the work, as well as whether both the business and worker
act as if they believe the worker is an independent contractor. A business must
base its determination about whether a worker is an employee or an independent
contractor on all the facts and circumstances of its relationship with the
worker.
It is critical, says the
IRS, that the business correctly determine whether the individuals providing
services are employees or independent contractors. An employer must withhold
income taxes, withhold and pay Social Security and Medicare taxes, and pay
unemployment tax on wages paid to an employee. In addition, other tax issues,
including providing certain employee benefits, depend on proper worker
classification. The IRS notes that a business generally does not have to
withhold or pay federal taxes on payments to independent contractors. Instead,
the contractors just pay self-employment tax.
Penalties
A business that
incorrectly classifies a worker could be subject to penalties. However, a
special safe harbor may offer relief for employers who want to correct errors
they made by classifying an employee as an independent contractor. A special
IRS publication, IRS Headliner 152, contains tips on correcting classification errors.
Note, though, that
law doesn’t provide a similar safe harbor if you misclassify workers as
independent contractors for state tax purposes.