Employee/Contractor Classification Issues

A business owner that hires a worker to assist with business needs must make a determination if he/she is hiring an employee or an independent contractor. It is usually advantageous for an employer to classify a worker as an independent contractor as that way there are no withholding requirements. If the worker must be classified as an employee, then the employer must pay withholding taxes, FICA, FUTA, and employment Insurance.

Although there are two different classifications for the worker, there are four different ways to get to the right classification. They are an independent contractor, a common-law employee, a statutory employee, or a statutory non-employee. There are a complicated set of laws, rules, regulations, and procedures for determining what classification a worker must falls into.

If the worker does not clearly fall into any of the specified categories it is possible to request that the IRS make a determination. A taxpayer can request a determination by filing a Form SS-8. However, a determination by the IRS under Form SS-8 can take six months or longer.

If the employer had a reasonable basis for treating a worker as an independent contractor rather than an employee it is possible to obtain some relief from the taxes and penalties. You can apply for this relief under section 530.

A worker who believes they have been misclassified as an independent contractor can file Form 8919 to figure out their correct share of uncollected taxes. You can listen to an IRS video at www.irsvideos.gov/properworkerclassification.