Using independent contractors can be risky for many law firms, and remains an age-old concern for businesses in general. The stakes are high, and the classification determines whether an employer must pay and withhold federal income tax, Social Security and Medicare taxes and federal unemployment tax (FUTA) — and possibly incur state and local tax obligations. It is a complex issue whose determination hinges on the facts and circumstances of each case. Improper classification can result in significant penalties and financial hardship for the unwary business owner, particularly if there are a large number of misclassified workers over a period of several years.
This is an area the Internal Revenue Service closely monitors. Rest assured, the IRS will aggressively pursue collection activities against firms that inappropriately classify employees as independent contractors, and consequently fail to remit payroll taxes as required by law. As payroll taxes are deemed trust fund taxes, civil penalties may apply to those responsible for collection and remittance. Therefore, it is essential to understand the factors the IRS uses to accurately classify workers.
