The IRS remains focused on an issue that doesn’t seem to be going
away: the misclassification of workers as independent contractors rather
than employees. Recently, the IRS issued still another fact sheet
“reminding” employers about the importance of correctly classifying
workers for purposes of federal employment taxes (FS-2017-9). Generally,
employers must withhold income taxes, withhold and pay social security
and Medicare taxes, and pay unemployment tax on wages paid to employees.
They are relieved of these obligations entirely for independent
contractors, with usually the only IRS-related responsibility being
information reporting on amounts of $600 or more paid to a contractor.
Weighing the factors
Whether a worker is an employee or an independent contractor depends on a number of considerations that fall into three categories: behavioral control, financial control and the type of relationship between the worker and the service recipient. Within these categories, the IRS has identified 20 factors that can be used to determine whether an individual is an independent contractor or effectively an “employee.”
The determination of independent contractor versus employee status is based on all of the facts and circumstances surrounding the relationship. None of the identified factors is determinative. In addition, not all factors are present in all employee or independent contractor relationships. Frequently, the relationship of a worker is clear cut using these factors; but sometimes a worker can fall into a gray area.
The Form SS-8 route
An employer who is unsure of how to classify its workers can file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. There is no fee for requesting a worker classification determination. Because worker classification has become such a “hot” audit trigger, many employers opt for the Form SS-8 route, particularly because penalties on top of back employment taxes can result from a classification misstep.
After emphasizing in its latest Fact Sheet that employee misclassification as independent contractors exposes the employer to employment tax liability, the IRS also highlighted two ways to escape or ameliorate liability, even for an after-the-fact classification: “Section 530 relief” and relief under the Voluntary Classification Settlement Program.
Section 530 relief: An employer that has a reasonable basis for classifying its workers as independent contractors may be entitled to special relief under section 530 of the Revenue Act of 1978. “Section 530 relief” protects taxpayers who have consistently treated workers as independent contractors and have a reasonable basis for doing so. The rule covers workers who are common law employees, but it does not cover certain third-party-arranged technical service workers.
A reasonable basis for classification for purposes of Section 530 relief generally includes an employer’s treatment of the individual based on any of the following: