In this day and age, small businesses frequently use independent contractors in lieu of “employees.” If done correctly, it is an arrangement that can work well for both parties. The contractor maintains a sense of independence, and usually commands a higher hourly rate. At the same time, the company avoids payroll taxes, including the contractor in its benefit plans, and paying unemployment claims when the relationship ends. The IRS, however, frequently disagrees. It would seem the IRS presumes companies use contractors to dodge taxes, and it is on the hunt to root out offenders. This can be a dangerous dance indeed…
Consequences to “Employer” and “Employee” of Misclassification
Pure and simple, the IRS wants tax dollars… it needs tax dollars. But with respect to taxes, businesses win – and the IRS loses – when workers are classified as independent contractors. If the IRS can reclassify an independent as an employee, then the employer will be liable for the taxes that should have been withheld and paid, the employer’s benefit plans may be invalidated, and late fees and penalties may be assessed. In Georgia, the back taxes alone would be a whopping 15.3% of payroll.
The 20-Factor Test
Determining whether a worker is an independent contractor or an employee is quite subjective. However, there are twenty factors that the IRS generally looks to in making this determination. Workers are generally considered to be employees if they:
None of the above factors are controlling, and there is no mathematical weighing of the factors. Again, it is a very subjective determination. Regardless, the IRS is very concerned that employers are misclassifying employees as independent contractors. Ultimately, a reclassification of workers by the IRS can sink a business.
If you are facing an IRS audit or would like to discuss the potential ramifications of misclassification and how to avoid it, please contact Matthew J. Simmons, Esq. at Shepherd Law, (404) 492-8871, msimmons@shepherdlaw.net.