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Is your Independent contractor really an employee?Warning: Te Internal Revenue Service (IRS) is crackingdown on employee misclassifcation, and there are seriousconsequences i youve done so.

Te IRS and the U.S. Department o Labor (DOL) are cracking down

on employers who pay workers without withholding and remitting the

proper employer payroll taxes. In act, over the past year, many states

have signed on with the eds to exchange inormation. Tis means that

i you are audited and ound delinquent in your ederal employment

taxes, you will almost certainly be audited by the state(s) that you

operate in or vice versa and have to pay them as well.

Reporting and Tax responsibilitiesWhy is it important to determine i a worker is an employee or an

independent contractor? Te payer/employer has certain reporting and

tax responsibilities depending on the type o relationship that exist with

the worker, and they are as ollows:

1. Reporting and tax responsibilities of an independent contractor

relationshipUnder this type o arrangement:

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Request or axpayer Identifcation Number and Certifcation.

Tis orm is used to request the correct name and axpayer

Identifcation Number (IN) o an employee. A IN can be either aSocial Security Number or an Employer Identifcation Number. Te

payer must retain the W-9 or at least our years.

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provided during the year, a Form 1099-MISC needs to be completed

and fled, and a copy o this orm must be provided to the

independent contractor by Jan. 31 o the year ollowing payment.

2. Reporting and tax responsibilities of an employer/employee

relationshipUnder this type o arrangement:

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as well as Social Security and Medicare taxes rom his or

her employees wages. Te employer must also report and

pay his or her portion o the Social Security, Medicare,

Federal Unemployment ax as well as other state tax and

withholdings.

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employee withholdings, there are several quarterly flings

as well as annual flings that need to be prepared. Payments

to the IRS and the state are usually done electronically at

prescribed periods based on amounts due.

So, based on the reporting and tax payment rules above, why would

anyone classiy a payee as an employee? Ater all, the reporting and tax

rules associated with an independent contractor is minimal and on the

employer side, the employer taxes associated with an employee could

cost as much as $1.15 or more or every dollar paid to an employee.

Independent contractor vs. employeeLets take a look at the dierences between an independent

contractor and an employee.

rF*34irs.gov) says an independent contractor or employee

depends on the acts in each case. Te general rule is that an

individual is an independent contractor i the payer has the right

to control or direct only the result o the work and not what willbe done and how it will be done.

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contractor i you perorm services that can be controlled by

an employer (what will be done and how it will be done). Tis

applies even i you are given reedom o action. What matters

is that the employer has the legal right to control the details

o how the services are perormed. I an employer-employee

relationship exists (regardless o what the relationship is called),

you are not an independent contractor.

Tere are several criteria that can be applied to determine the

2 PLANET News Jan/Feb 2013

Employee?

Employee?Independent

contractor?

Independent

contractor?

Independent

contractor?

(PSOR\HHPLVFODVVLFDWLRQBy Daniel S. Gordon, CPA, owner of Turfbooks.com

7/28/2019 Employee Misclassification

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dierence between an employee and an independent contractor, but,

essentially, i you answer yes to any o the ollowing, you have an

employee and not an independent contractor relationship:

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among other things, do you control the time and place the work gets

done?

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hourly rate, i there are benefts, how expenses are reimbursed, etc?

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I youd like, the IRS can make a determination or either the payer

or the payee. All you have to do is fle orm SS-8. It may well take up to

six months ater fling to receive a response, so fling an SS-8 only makes

sense i an employer is continually hiring the same types o workers to

perorm the same types o work.

Caveat: A payee can request a determination without the payers

knowledge. I the determination is made that the payee is actually an

employee but is being paid as an independent contractor, the payer is

more than likely to be audited in the uture.

Potential cost of misclassification

So, what is the potential cost o misclassiying an employee as

an independent contractor? First, there are the ederal and state

tax liabilities that should have been paid i the worker was properly

classifed. Second are a series o civil and criminal penalties as well as

interest that could potentially accrue. Tese penalties include ailure to

fle and deposit taxes, accuracy, and willul neglect o tax payments due

among others. Te penalties and interest relating to misclassifcation

could be several times the actual taxes themselves and there could alsobe criminal sanctions.

While the previously mentioned penalties and interest are an

extreme case, the monies due can be signifcant. Te IRS and the states

may have several voluntary programs where a prior violator o proper

classifcation can report properly and, in many cases, penalties can be

reduced. I as an employer you have such misclassifcation issues, this

may be a way to minimize the potential liabilities. y

Daniel S. Gordon is a CPA in New Jersey and owns Turbooks.com,

an accounting frm that caters to landscape contractors throughout the

United States. He can be reached atino@turbooks.com.