Independent Contractor

    IRS regulations state that wages paid to an “independent contractor” are not subject to employer withholding. No income tax, social security, medicare or unemployment taxes need to be withheld from independent contractor wages nor does the matching employer share need to be paid. Employers, however, must deduct taxes from employee wages and pay a matching portion.

    It stands to reason then that every employer would want to treat those that work for them as independent. This has led to conflict of course between the employer and the IRS. Until mandatory withholding rules end, employers must be aware of these restrictions and requirements before deciding whether to treat a worker as independent.

    Whether a worker can be classified as an independent contractor really depends on the nature of the business relationship. It is not simply based on a mutual decision between the worker and the business even if the decision is memorialized. Don’t assume that your handwritten, “back of the napkin” agreement will trump the nature of the relationship.

    Relationship factors can include such things as the amount of employer control, types of instructions given, the amount of instruction, how much has been invested in training, the type of payment, perception of relationship, etc.

    Of course some of the factors fall into “gray areas” and the adjudication of them can be clarified by using an IRS Form SS-8 to obtain the IRS’ official determination at the outset of the relationship.

    Determining treatment ahead of time is important as If the IRS determines that an independent contractor relationship does not exist and that the worker should have been treated as an employee, it can retroactivelycharge the employer the entire cost of the missing employment-related taxes as well as penalty and interest. Interest charges alone can be 12 to 35% of the tax bill.

    Where your small business needs clarification about how a worker should be classified or a defense of the treatment, we can help. Call us to discuss your situation for free.