Many businesses use independent contractors. If you are among them, make sure that these workers are properly classified for federal tax purposes. If the IRS were to reclassify them as employees, the change in classification could be expensive.
Determining whether a worker is an independent contractor or an employee for federal income and employment tax purposes can be complex. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may be required to provide the worker with fringe benefits if they offer them to other employees. In addition, there may be state tax obligations.
On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).
Your Rudler advisors are here to help you in determining the proper classification.
What are the factors the IRS considers?
Who is an “employee?” Unfortunately, there’s no uniform definition of the term.
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors.
Note: Section 530 doesn’t apply to certain types of workers.
Should you ask the IRS to decide?
Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Consider consulting with your Rudler advisor before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit.
It may be better to properly treat a service provider as an independent contractor so that the relationship complies with the tax rules.
Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.
If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
In addition, the U.S. Labor Department has recently withdrawn a non-tax rule introduced under the Trump administration that would have made it easier for businesses to classify workers as independent contractors.
Contact your Rudler, PSC advisor at 859-331-1717 if you’d like to discuss how to classify workers providing services to your business.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Evan Kandra, Staff Accountant and Audrey Goetz, CPA, CVA.
If you would like to discuss your particular situation, contact Evan or Audrey at 859-331-1717.
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