Payroll taxes are the federal and state taxes that each business is required to withhold for, and pay on behalf, of its employees. Businesses are not required to withhold taxes and pay tax liability for independent contractors. For this reason, many businesses may intentionally, but erroneously, classify a worker as an independent contractor. Incorrectly classifying someone as an independent contractor when that person is really an employee, however, can lead to the imposition of back taxes and substantial penalties related to the non-payment of those taxes.
In order to avoid substantial penalties for both the business and individual worker, businesses must use care when classifying each worker on their payroll as an employee or as an independent contractor. To determine whether a worker is an independent contractor or an employee, that person’s degree of control and independence must be weighed. Businesses must consider who controls what the worker does and how that worker does his job; whether there is a written employment contract; whether employee-type benefits are offered (such as insurance, retirement, and vacation pay); and who controls the business aspects of the worker’s job, such as whether expenses are reimbursed. The business must look at all of the factors surrounding the worker and other special circumstances before deciding whether someone is an employee or an independent contractor. If a business is unsure whether a worker is an employee or an independent contractor, the business may request the IRS to make a determination with respect to that worker.
The classification of workers as employees or independent contractors is complex and the wrong classification can lead to substantial penalties for both the business and worker. By hiring an experienced tax attorney to advise you regarding the classification of workers for tax purposes, you can avoid the penalties and costs associated with a misclassification and subsequent tax audit. If you are the subject of a tax audit related to your classification of one or more workers, it is critical that you contact an experienced tax attorney immediately to protect your rights and obtain the best possible outcome.