Desperate employers who misclassify workers as contractors in order to avoid paying taxes and benefits could find themselves audited by the IRS and end up paying substantial penalties for failing to pay employment taxes and payroll taxes. Orange County IRS audit attorneys are going to be defending taxpayers more frequently this year over contractor misclassification. The IRS says it will audit 6000 random employers to see how many of them misclassify workers.
Misclassification is tempting for many employers because contractors are not covered by minimum wage, overtime, or anti-discrimination laws. Employers do not need to pay unemployment insurance, workers' compensation, or Social Security taxes for contractors.
The issue of classification of contractors comes down to the right to control the worker in the details of their actions.
The IRS says it uses three characteristics to classify workers:
Behavioral Control, Financial Control, and the Type of Relationship
- Behavioral Control refers to whether the business has the right to direct or control how the work is done through instructions, training or other methods.
- Financial Control refers to whether the business has a right to direct or control the financial and business aspects of the worker's job.
- Type of Relationship refers to how the workers and the business owner perceive their relationship.
Employers and workers can request a determination from the IRS on whether an individual worker is an independent contractor or an employee by filing Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
- Source: irs.gov "Employee vs. Independent Contractor -- Ten Tips for Business Owners" Updated 8/09 aar