Many Americans enjoy a steady paycheck directly deposited into their bank account every two weeks or so. If you work for a company as an employee, the company’s payroll department has likely already deducted all necessary payroll taxes, including taxes for Medicare and Social Security.
Unfortunately, the process is not so straightforward if you are hired as an “independent contractor.” The employer who hires you will provide you with a 1099 form for the work you have done, but it is up to you to pay taxes to the Internal Revenue Service. Independent contractor classification can be a logistical headache for this reason, but it is often associated with an even more significant problem. Employee misclassification is illegal, and companies who incorrectly classify workers as independent contractors can face severe penalties and additional tax liabilities.
If you are an employee, being incorrectly classified as an independent contractor can mean missing out on important benefits, including having to pay a self-employment tax. ICs are also generally denied overtime pay, company-subsidized health insurance and other perks. Therefore, if you were incorrectly classified as an IC, it is in your best interest to seek employee status.
If you are an employer, the potential benefits of employee misclassification are small in comparison to the consequences. In addition to facing penalties, you could be held personally liable for taxes owed if the IRS determines that you were responsible for the misclassification.
How can you tell whether someone should be an employee or an IC? The specifics vary from occupation to occupation. But according to the IRS: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Some high-profile companies have been embroiled in litigation for years over alleged employee misclassification, including shipping giant Federal Express.
Whether you are an employer or a paid worker, it is in your best interests to make sure that no misclassification has occurred. If you want to learn more about how Baker Law Firm can help you with this or other IRS matters, please visit the worker classification page on our website.