IRS is Watching How You Classify Workers

This comes up quite frequently, but it is still important enough for the IRS to issue a reminder about correctly determining whether the individuals providing services to businesses were employees or independent contractors. Keep in mind that an employee performs services that a business controls. Independent contractors offer their services to multiple businesses or the public in general. While businesses have a right to control the details of the services performed, they don’t have as much control over a contractor as an employee.
Classification depends on the:
  • Company’s control on what the worker does and how the job is performed
  • Business’ direct control of the financial and business aspects of the worker
  • Relationship of the parties in terms of written contracts or employee-type benefits

Misclassification of Workers

Businesses could be held liable for employment taxes if an employee is misclassified without a reasonable basis.

Workers can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report their share of uncollected taxes due on their compensation if they believe they have been improperly classified as independent contractors

Voluntary Classification Settlement Program

Taxpayers can reclassify their workers as employees for future tax periods through the Voluntary Classification Settlement Program. Taxpayers must fulfill eligibility requirements, apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

Self-employed individuals must file an annual tax return and pay quarterly estimated taxes. Since they do not have an employer who pays their taxes for them, they must pay self-employment tax (Social Security and Medicare tax) and income tax. If self-employed individuals work from a home office, they may take a home office deduction.

Gig Economy

Taxpayers must report gig economy income on a tax return even if the income is part-time, temporary or side work. Remember that the companies that use gig workers must report these payments to the IRS, so it doesn’t pay to try to cheat on your taxes.