Misclassifying Workers As Independent Contractors Has Major Tax Implications
During a business audit, the IRS may examine your employee classifications. If the service determines you have misclassified your workers, you will not only be liable for all of the taxes you should have withheld, you will also be hit with large penalties.
Employee Or Independent Contractor?
Misclassifying workers as independent contractors can have substantial tax consequences. Make sure you get it right.The IRS uses a three-prong test when determining whether a worker is an employee or an independent contractor:
- First, the service looks at the amount of control the employer exercises over the worker. The greater the amount of control, the more likely the worker will be classified as an employee.
- Second, the service analyzes the financial relationship. Hourly and salary pay skews more toward employee, while project-based pay indicates an independent relationship.
- Third, the service examines other aspects of the relationship. For example, whether the employer or worker provides all of the tools necessary to complete the work and whether the employer provides benefits to the worker.
The rules regarding classification are complex. Working with an experienced tax lawyer from the get-go to properly classify your workers is the best way to avoid liability.
Voluntarily Reclassifying Your Workers
As working relationships change over time, it may be necessary to reclassify independent workers as employees.
The IRS offers a Voluntary Classification Settlement Program (VCSP) that allows taxpayers to change worker status to the employee. The requirements to participate are complex, but I can guide you through the process.
Protect your business and your bottom line.
Contact me, attorney Brian Coggins, for help with employee classification. I can assist both with the initial classification process and reclassification, and provide protection during audits. Located in Roseville, California, my firm represents businesses throughout the Sacramento area. I have more than 15 years of tax-related experience, both as an accountant, and now as an attorney. I will act as a liaison during worker classification issues with the IRS, helping you prove your classification is correct or minimize your financial liability in the event reclassification is necessary. For help with classification issues, contact my law office. Call 916-270-2895 or contact me online to schedule your free consultation.