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Independent Contractor vs Employee: IRS Cracks Down

By Tanya Roth, Esq. | Last updated on

The Internal Revenue Service is cracking down on the "independent contractor vs employee" question in a new program. As a result, small and large businesses alike are on their toes.

Watch out for misclassification of employees and workers.

It's a huge money-saver for a small business to get into the practice of working with independent contractors. There is a lower tax bill, less withholding to be responsible for, and in some states, fewer obligations under workers' compensation requirements.

So, small businesses do what they think is a smart thing to do. They "hire" independent contractors and tell the contractors to be responsible for their own taxes.

Now, the IRS is catching on, while hoping to catch some employers with discrepancies. Although employment law is an area of law that stands on its own, the laws differentiating between employee status and independent contractor status are governed, in part, by tax law concepts.

A new IRS program, launched earlier this year, plans to randomly examine 6,000 companies over the next three years. The purpose of these examinations? To find misclassified employees.

There are several ways to navigate these rules, but in all fairness, the status of a particular worker is a product of the facts and circumstances surrounding the worker. A large factor in determining independent contractor status rests in the degree of control the worker has. An independent contractor would seemingly have more control over his or her hours, as well as the manner in which the work is performed. 

The Vizcaino v Microsoft case was a recent case that dealt with the misclassification of workers. And while I don't intend to delve into the details of this complex employee benefits case, it goes to show you that even a company like Microsoft, who presumably have the best lawyers around, can get it wrong in the eyes of the IRS when it comes to employee classification.

So what's the lesson here? First of all, don't assume that your independent contractors are necessarily "independent contractors," because the IRS and other state agencies certainly won't be making any assumptions that easily. Secondly, learn the rules in your state and on the IRS website.

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