In the last decade, many corporations have been trying to figure out creative ways to control cost and to increase production. One popular way has been to “outsource” certain tasks to workers who are not employees of the company. This trend includes getting workers of other companies to perform specified tasks, bringing in temporary workers (“temps”) who don’t receive full benefits and/or reclassifying existing employees as independent contractors. It is debatable whether any of these moves actually increases production, but in most instances, corporations have definitely saved money. By reclassifying its workforce, some corporations have been able to avoid paying certain payroll and income tax withholdings, workers compensation premiums and other costs associated with full-time employees. While the transition of these workforces is often legal, quite often it is not.
If a corporation doesn’t follow the law when transitioning its workforce, it can create costly mistakes for both the employer and employee. Whether you are a business owner or an employee, if you have recently seen a reclassification of employees in your company, you may want to check the IRS regulations. The IRS generally looks at three things when determining if an individual is an employee for tax purposes:
In short, the IRS asks, can the person do what they want, when they want? If the corporation trains and/or directs the individual on the work to be performed, including when it can be performed, the person may be an employee. Similarly, if individuals use tools, equipment or software provided by the corporation the worker is likely an employee. If the worker can set his or her own hours and works with little or no direction or training, he or she is probably an independent contractor.
The IRS looks to see if the person is financially beholden to the employer for income. This consideration also looks at how the worker is paid and whether the worker may work for other companies at the same time. The IRS will also look to see if the individual can incur a profit or loss. A person that is paid a salary or is restricted from working for others is probably an employee.
Types of Relationship
One of the relevant questions here is whether the work is continuous in nature or temporary. The more continuous the relationship, the more likely the individual is a worker, not an independent contractor. If the individual worker has a specific contract that may indicate independent contractor status, but not by itself. A similar issue is whether the work being performed is directly related to the company’s core mission. Lastly, if the worker is allowed to participate in any benefits offered by the corporation they are most likely an employee.
If you have any questions as to whether you have classified an employee correctly under the IRS regulations, you can file a form SS-8 to request a determination. Importantly, the IRS assumes that a worker is an employee and it is up to the corporation to prove otherwise. If you need more information on any of the above, contact Roman Shaul, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Roman.Shaul@beaselyallen.com.
Source: Workforce classifications: IRS guidelines critical for review
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