Legal News by Steven Eisenberg

Read Articles About Tax Law and Estate Planning

Employee Versus Independent Contractor


Posted On: December 14th, 2016

IRS and the State of Florida has announced a new audit program to ensure that workers are being classified properly as employees rather than independent contractors. In these times of economic peril, Employers seeking to reduce their overhead may attempt to reclassify or mis classify workers as independent contractors rather than employees. This reclassification if contested and overturned by the Internal Revenue Service will be a tax tsunami for the Employer. The taxes before penalties and interest an Employer maybe required to pay equal approximately 41.5% of compensation paid to the misclassified workers. In addition, if the Employer maintains any type of qualified retirement plan, the retirement plan maybe disqualified triggering more taxes, penalties and interest.

As an Employer, you should be aware that the IRS and Courts look to the following factors to determine if a worker is an employee or independent contractor: (i) Does the worker have an independent business,(ii) Does the worker have to provide his own tools, supplies and materials to complete the job;(iii)What is the duration of the job and who sets the working hours;(iv) How is the worker paid;(v)how controls the progress of the work other than the final result. In addition, IRS looks to the 20 factors set forth in Rev. Proc.87-41, to determine if the worker is an employee. The state of Florida also follows this approach in classifying workers. In the event your workers are reclassified as Employees, Section 530 of the Internal Revenue Code softens the economic tax burden of the reclassification, if certain conditions are met. .

In essence, the classification of workers is a facts and circumstances situation with the IRS primarily taking the position that there is no such animal as an independent contractor. So, what can an Employer do to try to classify workers as an independent contractor? First step, is to treat all workers performing the same job in the same way(either as an independent contractor or employee). Inconsistent classification treatment of workers performing the same service will result in a finding of "employee" status. Second step, make sure that there is an independent contractor employment agreement in place, that requires at a bare minimum the worker to pay his employment taxes. Third step, always issue 1099's to the worker. Fourth step, have the worker invest in the "tools" necessary" to perform the job (and that may include paying for space or equipment necessary to perform services), Fifth step, pay when the job is completed, not by the "hour". Sixth step, The worker should have his own business, business card, corporation or assumed name, bank account in the business name and any applicable licenses. This list is not all encompassing but highlight the basic steps that should be taken to uphold the classification of workers as independent contractors rather than employees.

Saving the best for last when contacted by either the IRS or Florida authorities who want to discuss the status of your workers immediately go to a qualified tax professional for assistance. Remember the government agencies know the questions to ask to reclassify your workers you do not, so the assets you save could be your own. Should you have any questions regarding the matters discussed herein, please feel free to contact our office at (954) 981-6533.

← Back to All News

The hiring of an attorney is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience. This website is not intended to provide legal advice, nor is it intended to be a solicitation for legal advice. NO visitor to this site should consider this site or the information contained herein to be an invitation for creation of an attorney-client relationship, and you should not rely on information provided. If you have a legal question, you should seek the advice of competent counsel in your state. Mr. Eisenberg is an estate planning and tax lawyer who is licensed to practice in the State of Florida, and expressly disclaims any attorney-client relationship for any other state or jurisdiction. Any link or links contained at this site is for convenience only, and does not constitute a referral to, or endorsement of, the linked services or persons.

IRS Circular 230 Disclosure: Please note that the views expressed herein or in any attachments hereto are not intended to constitute a "reliance opinion" under applicable Treasury Regulations, and accordingly are not intended or written to be used, and may not be used or relied upon, for the purpose of (i) avoiding tax-related penalties that may be imposed by the Internal Revenue Service, or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.