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 the amount paid to the contractor (if the amount
is $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), individuals are generally
employees if the enterprise they work for has the right to control and direct
them regarding the job they are to do and how they are to do it. Otherwise, the
individuals are independent contractors.
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. Qualified real estate agents and certain direct sellers
are statutory independent contractors.
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 the IRS (on Form SS-8)
to rule on whether a worker is an independent contractor or employee.
If you would like to discuss how these complex rules apply to
your business, to make sure that none of your workers are misclassified, please
contact
us.
