Worker Classification

One of the most common employment tax issues that employers face involves the classification of workers.  Employers and workers often become involved in controversies with the IRS surrounding the worker’s classification as either an independent contractor or as an employee.

Employee vs. Independent Contractor

Both the employer’s and the worker’s tax responsibilities differ based on whether a worker is classified as an independent contractor or as an employee.

For instance, a worker who is classified as an independent contractor is expected to handle his or her own tax reporting and payments.  The worker must pay the full share of Social Security taxes.  Employers are not required to pay any Social Security taxes relative to amounts paid to independent contractors, and they do not have to deduct or withhold taxes from payments to independent contractors.

If a worker is classified as an employee, on the other hand, the employer must pay a share of Social Security taxes, withhold taxes (income and the employee’s share of Social Security taxes) from the employee’s wages, pay workers’ compensation taxes, and pay the withheld taxes to the government in a timely manner.

Consequences of Classification and Misclassification

Whether a worker is classified as an employee or an independent contractor has serious tax consequences.

Employees who are misclassified as independent contractors are often find themselves owing more tax, in the form of self-employment tax, than the worker should not owe if he or she was correctly treated as an employee.  Similarly, if a business misclassifies an independent contractor as an employee, the business will be required to withhold taxes from the worker’s wages and pay Social Security tax on the misclassified wages, which requirements the business should not have if the worker was properly treated as an independent contractor.

Some independent contractors don’t make provisions for the payment of their taxes, and often find themselves owing at tax time.  Independent contractors who fail to make required estimated tax deposits or pay their full share of Social Security taxes may be subject to penalties or criminal charges for such failures.

In additional to facing disputes with their workers, employers may face an IRS audit and penalties if they misclassify their workers as independent contracts in an attempt to avoid withholding taxes from payments to a worker, paying a portion of Social Security taxes, or providing other benefits such as health insurance, retirement benefits and paid time off (vacation) to a worker.

Worker classification is highly scrutinized by the IRS.  Accordingly, businesses and employers must be mindful of how workers should be classified and how and when wages should be reported.

Contact an Employment Tax Attorney at the Politte Law Offices

The Politte Law Office’s tax attorneys work closely with our clients, which include both employers and workers, to advise them on the various worker classification factors used by the IRS in ascertaining whether a worker is an employee or independent contractor.  Our tax attorneys are knowledgeable and experienced in structuring employment arrangements between employers and workers that comply with federal tax laws and are reflective of our client’s business needs.

Additionally, the employment tax attorneys at the Politte Law Offices handle a wide variety of employment tax disputes, including worker classification disputes and employment tax audits.  We work quickly and aggressively to protect our clients’ interests.

If you have questions or concerns regarding worker classification, or are facing or are in the middle of an employment tax or worker classification dispute, contact the employment tax attorneys at the Politte Law Offices.