Content
The calculation of the IRS’s misclassification penalties can be a little complicated. They can include a percentage of the employee’s income and a percentage of the employee’s share of the taxes. If the violation was willful, the penalties can be even more severe.
The individual performs the services through a business in which the individual has a proprietary interest. If you need help learning more about the independent contractor test, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site.
Employees Have More Legal Protections
However, employees may also incur unreimbursed expenses in connection with the services they perform for their business. If a worker is found to be an employee under the common law test, they will most likely be classified as an employee under the ABC test as well. In short, the key difference between the ABC test and the common law test is that the ABC test assumes the worker is an employee and the burden of proof is on the employer to show that the worker is an independent contractor. The common law test starts with the assumption that the worker is an independent contractor and it’s up to the IRS or other entity to prove that the worker is actually an employee. If a worker is hired for a specific project with a set end date, they’re more likely to be classified as an independent contractor. On the other hand, if there’s no end date or the employer has the option to renew the contract, this is an indication the worker is an employee.
- On the other hand, employees typically have these expenses reimbursed by their employer.
- The independent contractor is responsible for reporting and paying their taxes.
- Employers and workers can also file an SS-8 form with the IRS to request that the IRS make the determination of employment status.
- Whether an individual worker from one of these categories is actually a statutory employee depends on how he or she stands with regard to the test for common law employment, which is described below.
UpCounsel is an interactive online service that makes it faster and easier for businesses to find and hire legal help solely based on their preferences. We are not a law firm, do not provide any legal services, legal advice or “lawyer referral services” and do not provide or participate in any legal representation. To combat companies taking advantage of such situations, the DOL has encouraged courts and legally entities to extend the protections of the FLSA to a broader range of workers that may not completely fit the classification of employee. Their reasoning for this suggestion is that the DOL believes that the economic dependence of a worker is the true signifier of the two categories and not the classification that a company is allowed to give based on their state or IRS tests.
Financial management
There may not be complete state and federal consistency on the issue until a case makes it way to the Supreme Court. No need to spend hours finding a lawyer, post a job and get custom quotes from experienced lawyers instantly. The degree of integration between the individual’s activities and the company’s business. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations. I submitted a project for a lawyer’s help within a day I had received over 6 proposals from qualified lawyers.
- They may be entitled to the protections of employment and labor laws.
- This factor looks at which party controls when, where, and how the work is performed, as well as the degree of instruction and training given to the workers, and how the business evaluates the completed work.
- Treating the contractor as an employee is, perhaps, the most common place where employers trip up and transform the contract relationship into an employee relationship.
- The department will examine the factors that apply to the relationship in making its determination.
The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company’s regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. An employee usually has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else.
Securities Workers
The most widely spread example is the test used by the Internal Revenue Service for federal tax purposes, but other government entities, including state governments, have their own variations. Regardless of whether a misclassification was intentional or unintentional, it could lead to serious legal and financial consequences. This can lead to reimbursement of unpaid wages, paying arrear workers’ compensation, retirement benefits, and other employee benefits. If the independent contractor vs employee worker is paid a fixed hourly, weekly, or monthly wage and the employer deducts taxes from their payments, the worker is likely an employee. If the worker invoices the employer, their payment terms vary, and no tax is deducted from their payments, the worker is probably an independent contractor. As a general matter, a hired party is the employee of the hiring party when the hiring party controls the manner and means of the hired party’s performance of work.
