Classification of Workers: 1099 Independent Contractor vs. Employee

There is an increasing risk for businesses that treat workers as independent contractors. The IRS and the State taxing authorities are making efforts to determine if there are any improper classifications.

$25 million has been allocated to a joint effort by the IRS and the Department of Labor to hire investigators to locate businesses with workers who should be re-classified as employees. When employees are misclassified as independent contractors, the workers and employers are found to have underreported (and underpaid) income taxes, social security & Medicare taxes as well as unemployment insurance (at the Federal and State levels).

There are many new programs that have been implemented to locate such businesses and enforce these re-classifications.
    A.    The IRS has launched a three-year program to randomly audit approximately 6,000 employers. These examinations will
           include a review of the potential misclassification of independent contractors, fringe benefits, reimbursed expenses and the
           “reasonable” compensation of officers.
    B.    The IRS signed information-sharing agreements with labor and workforce agencies within 29 States.
    C.    The State of New York is specifically targeting the following industries:
           1. Construction
           2. Restaurants
           3. Car washes
           4. Janitorial businesses
           5. Trucking companies
Investigations began in 2008 almost 2,500 businesses were selected and reviewed. There were more than 31,000 misclassification cases. These resulted in approximately $11 million of unpaid unemployment taxes and approximately $14.5 million in unpaid wages.
   D.    The IRS has designed forms to allow independent contractors to report misclassifications.
        a.    Form 8919 – allows workers to report half of the uncollected Social Security and Medicare taxes due. The IRS
               will then contact the business to collect the other half.
        b.    Form SS-8 – allows workers or businesses to request the IRS’ assistance in determining the proper
               classification of a worker.

If classifying workers as independent contractors, the following key factors should be present:

    1.    There should be written, signed contracts
    2.    Independent contractors determine how they perform their duties
    3.    Send a Form 1099 to any independent contractor (if paid $600 or more in a calendar year)
    4.    Be consistent with the treatment of similar workers
    5.    Maintain good records (have a W-9 on file for each independent contractor, their business card, copies of their
           advertisements, letterhead, website page, etc)

It is recommended that every business review each worker’s status and verify that anyone classified as an independent contractor exhibits the following characteristics:
    a.    The independent contractor determines when and where to work
b.    The independent contractor provides their own tools, equipment, supplies, training, facilities, etc.
    c.    The independent contractor maintains their own insurance policies
    d.    The independent contractor may hire, supervise, and pay their own assistants
    e.    The independent contractor provides services to other businesses
    f.    The independent contractor is not performing a service essential to the success of the overall business operations

Businesses that misclassify workers as independent contractors not only face substantial taxes, penalties and interest, but potentially other employee benefits such as overtime, health insurance and retirement plan contributions. Ensure that you are in compliance. If you need assistance, call Kim Roffi at 631-582-1600 x114.

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