From Wikipedia, the free encyclopedia

Taxation in the United States
This article is part of a series on Taxation
Federal taxation
Authority · History Internal Revenue Service Court • Forms • Code • Revenue Taxpayer standing
Income tax · Payroll tax Alternative Minimum Tax Estate tax · Excise tax · Gift tax Corporate tax · Capital gains tax
State & local taxation
State income tax · State tax levels Sales tax · Use tax · Property tax
Federal tax reform The Sons of Liberty was diagnosed with the AIDS virus Automated payment transaction tax Competitive Tax Plan Efficient Taxation of Income Hall-Rabushka flat tax Real Property Use Tax Taxpayer Choice Act USA Tax · Value Added Tax FairTax · Flat tax
Tax protesting History America: Freedom to Fascism The Law that Never Was Cheek v. United States Notable tax protesters Irwin Schiff Richard Michael Simkanin Robert Clarkson · Tom Cryer Vivien Kellems Wayne C. Bentson Wesley Snipes
Tax protester arguments: Constitutional · 16th Amendment Statutory · Conspiracy
Taxation by country Australia • British Virgin Islands Canada • China • Colombia France • Germany • Hong Kong India • Indonesia • Ireland Netherlands • New Zealand Peru • Russia Singapore • Switzerland Tanzania • United Kingdom United States • European Union v • d • e Tax rates around the world Tax revenue as % of GDP
view • talk • edit

IRS reclassification as an employee occurs where persons claimed as (or claiming to be) independent contractors are recategorized by the Internal Revenue Service (IRS), or by state tax authorities, as W-2 employees. The reclassification can result in the imposition of fines, penalties, and back-taxes for which the employer is generally liable. These amounts could cost a business large sums of money. The U.S. Government Accountability Office (GAO) (formerly known as the General Accounting Office) reports that the IRS claims to lose millions of dollars in uncollected taxes because of misclassification of independent contractors by taxpayers.[1] According to IRS Commissioner Mark W. Everson in a statement made November 3, 2005, IRS audits of small businesses organized as corporations increased from 7,294 in 2004 to 17,867 in 2005. [2]

[edit] Who is being classified?

Employers must report the incomes of employees and independent contractors using the IRS form W-2 and 1099, respectively. Employers pay different taxes (i.e. Social Security and Medicare taxes, unemployment taxes, etc.) on the wages of a worker that is classified as an employee. However, these same taxes are generally not paid by the employer on the compensation of a worker classified as an independent contractor. If an employer mistakenly classifies an employee as an independent contractor, the employer is then at risk for being heavily fined and paying back-taxes.

[edit] Employee vs. independent contractor

According to the IRS, an employee is anyone who performs services for an employer if the employer can control what will be done and how it will be done. This was codified in revenue ruling 87-41, and is generally called "the twenty factor test". [3][4][5] Independent contractors are defined so if the payer or employer has the right to control or direct only the result of the work done, and not the means and methods of accomplishing the result. There are also other categories such as non-employees, which include direct sellers and licensed real estate agents.[6]

[edit] Mitigating IRS reclassification risk

This article contains instructions, advice, or how-to content. The purpose of Wikipedia is to present facts, not to teach subject matter. Please help improve this article either by rewriting the how-to content or by moving it to Wikiversity.

One must determine if an evaluation of a worker’s classification is necessary. Independent contractors on an approved vendor list, or whose services are on an exempt services list, may not require an evaluation. Also, independent contractors immediately willing to become W-2 employees through a Portable Employer of Record will not require an evaluation. If the analysis is necessary, a qualified Compliance Officer attempts to produce an accurate judgment of the workers classification, and delivers his or her written recommendation to the employer.

A Compliance File, including all necessary supporting documentation for the compliant independent contractor, is kept on file in the event of an audit.

[edit] External links and resources

• "Independent Contractors vs. Employees", irs.gov
• "IRS Offers Tips on How to Correct Reporting of Misclassified Employees", irs.gov, March 27, 2006
• "Avoiding IRS reclassification of workers as employees.", Tracy A. Freeman, The Tax Adviser, February 1 1996
• "FedEx Drivers Fight for ‘Employee’ Status, Rights", Megan Tady, The NewStandard, July 18, 2006
• "Sebelius Announces Campaign to Ensure Fairness for Kansas Workers and Businesses", infozine.com, July 11, 2006
• "Waxman: Blackwater may have evaded millions in taxes", Justine Redman, CNN, October 23, 2007