- Find out why properly classifying workers is so important.
- Learn how the IRS classifies independent contractors vs employees.
- Find information regarding Section 530 and how it could help you if you’ve misclassified workers.
- Learn about Form SS-8 and why you should ask for advice before filing it.
Many businesses use independent contractors to help keep their costs down — especially in these times of staff shortages and inflationary pressures. If you’re among them, be careful that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be an expensive mistake.
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, your company must withhold national income and is subject to withholding federal and state income taxes and the employee's share of payroll taxes and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also be required to provide the worker with fringe benefits if it makes them available to other employees.
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).
Independent contractors vs. employees
Who’s 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 specific requirements. For example, the employer must file all federal returns consistent with treating a worker as a contractor. The employer must also treat all similarly situated workers as contractors.
Note: Section 530 doesn’t apply to certain types of workers.
You can ask the IRS but think twice
You can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or an employee. However, you should also be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Businesses should consult their Fiducial representative 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 set up a relationship with workers to treat them as independent contractors so that your business complies with the tax rules.
Workers who want an official determination of their status can also file Form SS-8. Dissatisfied independent contractors may do so because they feel entitled to employee benefits and want to eliminate their 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.
These are the basic tax rules. Want to discuss how to classify workers at your business? We can help make sure that your workers are properly classified. Call Fiducial at 1-866-FIDUCIAL or make an appointment to discuss your situation at one of our office locations.
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