During these difficult economic times, businesses are struggling to survive. Owners and executives are challenged to create new strategies to raise profits. Some businesses are achieving profitability by reclassifying their employees as independent contractors. This article’s purpose is to advise of the basic criteria for classification and the penalties imposed by the Internal Revenue Services (IRS) after an audit determines a business misclassified employees as independent contractors.
Categories of Workers and the Law
A person who provides services can be an employee or an independent contractor. The IRS does not focus on the label the parties choose but looks to the substance of the relationship. Generally, an employer must withhold income taxes, withhold and pay Social Security (FICA) and Medicare taxes, include in qualified plans and pay unemployment (FUTA) and miscellaneous taxes on wages paid to an employee. There is no such requirement to withhold or pay taxes on payments to independent contractors.
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