Independent Contractor or Employee

Independant Contractor or Employee The classification of workers as independent contractors or employees can be nebulous at best — there is no bright-line test, but the consequences of misclassification, whether inadvertent or deliberate, can be severe.

That’s why there is a safe harbor (Section 530 relief) and a Voluntary Classification Settlement Program.

Some important factors to be considered when determining whether a worker is an independent contractor or employee:

  1. The degree of control exercised by the principal over the details of the work;
  2. Which party invests in the facilities used by the worker;
  3. The opportunity of the worker for profit or loss;
  4. Whether the principal can discharge the individual;
  5. Whether the work is part of the principal’s regular business;
  6. The permanence of the relationship; and,
  7. The relationship the parties believe they were creating.

Under the Voluntary worker Classification Settlement Program, instituted last year, taxpayers can prospectively reclassify their workers with very limited additional federal employment tax liability for past misclassification. Under the program, the amount owed effectively equals just over 1 percent of the wages paid to the reclassified workers for the past year, with no interest or penalties. Moreover, there’s no admission of guilt by participating in the program – it simply operates as a prospective change in how the employer treats workers.

To qualify for Section 530 relief (Section 530 of the Revenue Act of 1978, which is law but was never made part of the Internal Revenue Code), you would have had to satisfy these three requirements:

  1. You must not have treated the individuals as employees for any period;
  2. You must have consistently treated the individuals as nonemployees on all tax returns; and,
  3. You must have had a reasonable basis for not treating the individuals as employees.

If you did not file the required information returns, including Forms 1099-MISC, for any of the workers in question, they failed to meet all of the Section 530 requirements.

Of course, employers often have legitimate reasons to treat their workers as independent contractors, and that’s where the decision has to be made. Should the employer voluntarily come forward, or wait for an audit with the possibility of having to go to court to resolve the issue? It’s a business decision, but it’s also a no-brainer if there’s any doubt about classification.

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