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Classification of Employees and Independent Contractors. (April-2023)

If you own a business and have someone helping you this article is for you.  Especially, if you classify them as subcontractors and they may actually be an employee.  Be advised, the Internal Revenue Service (IRS) has prioritized this relationship as a priority to investigate.  Worker Classification Remains a Priority for the IRS.  They continue to seek back payroll taxes and penalties from firms that wrongly treat workers as contractors.  There are three tests used to determine the correct classification of workers.  First, the behavioral test looks at whether the firm controls or has the right to control the worker’s job. Key factors for employee status include instructions about doing the work, evaluation criteria and training.   Second, the financial test looks at who controls the economics of the worker’s job.  Being able to work for multiple firms and providing your own tools needed for the job are indicative of independent contractor status.  Some factors favoring employee status are eligibility for reimbursement of travel costs and payment based on hours worked.  And third, the type-of-relationship test examines how the parties perceive each other.  Evidence of an employer-employee setup includes giving paid sick days, vacation days, and retirement benefits, as well as hiring the worker to render services indefinitely, rather than for a specific time period or project.  Written language in a contract stating the worker is an independent contractor isn’t the determinative under this factor. Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor.  With these three test in mind, some factors may indicate the worker is an employee, while other factors indicate that the worker is an independent contractor.  There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination.  Also, factors which are relevant in one situation may not be relevant in another.  If it is still unclear whether a worker is an employee or an independent contractor after reviewing the three categories of evidence, you may file the Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS for their review.  The form may be filed by either the business or the worker.  The IRS will review the facts and circumstances and officially determine the worker’s status.  The Labor Dept. is also getting aggressive about worker classification.  It issued a tougher interpretation of the classification rules for workers under the Fair Labor Standards Act.  The proposed regs would rescind previous rules published by the Trump administration in early January 2021.  The new proposal, which focuses on the totality of the circumstances, has a nonexhaustive list of factors for a firm to consider in determining whether its workers are employees or contractors. The rule, if finalized as proposed, is expected to increase the number of workers that are classified as employees when compared with the 2021 regulations.  In closing, to our clients, THANK YOU!!!.  Because of you, our office had another successful tax season.  Also, to the many of you who read my articles, THANK YOU.  I hope it helps.  For additional details and specific assistance in applying the general information in this article, contact your tax advisor or call us at your earliest convenience.   Provided by Tracey C. Higginbotham, E.A., (321) 632-5726, a member of the National Society of Accountants.