Employee Versus Independent Contractor
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