The question of whether
a worker is an independent contractor or employee for federal income and
employment tax purposes is a complex one. It is intensely factual, and the
stakes can be very high. If a worker is an employee, the company must withhold
federal income and payroll taxes, pay the employer's share of FICA taxes on the
wages plus FUTA tax, and often provide the worker with fringe benefits it makes
available to other employees. There may be state tax obligations as well. These
obligations don't apply for a worker who is an independent contractor. The
business sends the independent contractor a Form 1099-MISC for the year showing
what he or she was paid (if it amounts to $600 or more), and that's it.
Who is an “employee?”
There is no uniform definition of the term.
Under the common-law
rules (so-called because they originate from court cases rather than from a
statute), an individual generally is an employee if the enterprise he works for
has the right to control and direct him regarding the job he is to do and how
he is to do it. Otherwise, he is an independent contractor.
Some employers that have
misclassified workers as independent contractors are relieved from employment
tax liabilities under Section 530 of the 1978 Revenue Act (not the Internal
Revenue Code). In brief, Section 530 protection applies only if the employer:
filed all federal returns consistent with its treatment of a worker as an
independent contractor; treated all similarly situated workers as independent
contractors; and had a “reasonable basis” for not treating the worker as an
employee. For example, a “reasonable basis” exists if a significant segment of the
employer's industry has traditionally treated similar workers as independent
contractors. Section 530 doesn't apply to certain types of technical services
workers.
Individuals who are
“statutory employees,” (that is, specifically identified by the Internal
Revenue Code as being employees) are treated as employees for social security
tax purposes even if they aren't subject to an employer's direction and control
(that is, even if the individuals wouldn't be treated as employees under the
common-law rules). These individuals are agent drivers and commission drivers,
life insurance salespeople, home workers, and full-time traveling or city
salespeople who meet a number of tests. Statutory employees may or may not be
employees for non-FICA purposes. Corporate officers are statutory employees for
all purposes.
Individuals who are
statutory independent contractors (that is, specifically identified by the
Internal Revenue Code as being non-employees) aren't employees for purposes of
wage withholding, FICA, or FUTA and the income tax rules in general. These
individuals are qualified real estate agents and certain direct sellers.
Some categories of
individuals are subject to special rules because of their occupations or
identities. For example, corporate directors aren't employees of a corporation
in their capacity as directors, and partners of an enterprise organized as a
partnership are treated as self-employed persons.
Under certain
circumstances, you can ask IRS (on Form SS-8) to rule on whether a worker is an
independent contractor or employee.
If you'd like to discuss
with me how these complex rules apply to your business, to make sure that none
of your workers are misclassified, please call to set up an appointment to
discuss this or any other aspect of your taxes. If you found this Tax Tip
helpful, please share it through your social media platforms.
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