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Employment Law Alert: IRS Offers "Fresh Start" to Employers Who Have Improperly Classified Independent Contractors
September 2011 — The IRS recently announced a new program that will permit employers (both businesses and exempt organizations) that have erroneously treated workers as "independent contractors" to get into compliance voluntarily rather than waiting for an IRS audit.
Employers that qualify for the relief would prospectively treat the workers as employees and would pay an amount effectively equaling just over one percent of the wages paid to those reclassified workers for the past year. No interest or penalties would be due on past payroll tax obligations.
How can you determine whether a worker is an employee or an independent contractor?
To determine whether a worker is an employee or an independent contractor, the hiring party must weigh a variety of factors to assess the degree of control it has over the worker. These factors include:
- To what extent does the payer control how, when and where the work is performed?
- What control does the payer have over the financial aspects of the relationship, such as when the worker gets paid or whether expenses are reimbursed?
- What type of relationship is evidenced by written contracts or by the provision (or lack) of employee type benefits?
- How much skill is required to perform the work?
- Is the relationship permanent or temporary?
- How integral to the hiring party's business is the work that is being performed?
No one factor alone determines the type of relationship. Rather, the entire relationship must be considered to make an assessment. The greater the control exercised by the hiring party, the more likely it is that the worker should be classified as an employee.
Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The consequences of classifying workers as independent contractors without a reasonable basis to do so may include back taxes, interest, and penalties.
Employers who are unsure of a worker's status may file for a determination from the IRS. Such a determination may be particularly useful for employers who continually hire the same type of workers to perform particular services.
For businesses and nonprofits seeking more information regarding this issue, please contact our offices.
This information is not intended to constitute, and should not be considered, legal advice. This article is provided as general information that may or may not reflect the most current legal developments.
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