Employee vs. Independent Contractor – Beware the IRS Audit

One of the most important questions for any business owner is whether to classify a worker as an employee or an independent contractor.

The United States Department of Labor says that the misclassification of employees and independent contractors is one of the “most serious problems facing affected workers, employers, and the entire economy.” This is one problem that an experienced labor and employment lawyer can help you avoid.

Why Is Misclassification Important?

Many laws have been enacted to protect the rights and privileges of employees in the United States.

Some business owners deliberately misclassify employees as independent contractors so they do not have to pay things like payroll taxes or provide certain types of benefits. It can also give business owners more flexibility and power over staffing, hiring, and firing workers.

The IRS requires business owners to withhold taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages for employees. They do not have to withhold or pay taxes on payments to independent contractors.

Some of the claims that can be avoided if workers are classified as independent contractors include:

  1. Claims for overtime compensation, stipulated under legislation like the Fair Labor Standards Act
  2. Claims for harassment and discrimination, as stipulated by legislation like Title VII
  3. Claims for wrongful termination
  4. Claims for alleged violations of legislation like the Family and Medical Leave Act

Additionally, misclassification can result in lower tax revenues, which can put a strain on individual states and the federal government.

What Can Happen If I Misclassify an Employee?

The IRS takes the misclassification of employees extremely seriously, and business owners can get in big trouble with the federal and state governments if they are caught. Businesses who are caught may have to pay big fines, and/or additionally compensate workers, depending on their status.

Additionally, South Carolina law does not provide an established definition of independent contractors. If you are a business owner, or just have questions regarding employee status, working with an experienced business and corporate lawyer will be able to help you navigate the current case law in South Carolina regarding independent contractors

What Can I Do To Avoid An Audit?

The IRS does provide stipulations and definitions to help you classify employees. The key factors that business owners need to consider are:

  1. The degree of control the company has over the worker and their job
  2. The degree of control the workers’ payer has over the business aspects of the job
  3. Any sort of employee benefits or contracts in effect

Employers or workers can also file forms with the IRS if they are unsure about their status. However, it can be a while before a decision is rendered.

The legal stipulations surrounding independent contractors versus employees are often nebulous.  A business or corporate lawyer will be able to advise you if you have any questions, and will be able to use their experience and professional knowledge to help you avoid an IRS audit.

Are You Using Independent Contractors?

Willcox, Buyck & Williams, P.A. assists individuals and organizations with labor and employment issues of all types. Our labor and employment attorneys can help you make the right determination between employees and independent contractors and help keep you out of hot water. Contact us today to schedule your free initial consultation by calling us in either of our offices in Florence at (843) 536-8050 or Myrtle Beach at (843) 461-3020.