Pub. 2 2019-2020 |Issue 2

23 withholding liability is limited to 1.5% of wages paid and Social Security liability to 20% of the amount otherwise due, which still could be substantial depending on the amount of wages and number of workers involved. Misclassification also results in workers’ loss of benefits (e.g., Social Security, unemployment compensation, etc.) that would have been available had the worker been classified as an employee. Worker Classification. It is a common misconception that someone working part time or earning less than $600 per year should be classified as an independent contractor. In fact, part- time status and the number of hours worked are generally not factors in determining whether a worker is an employee or independent contractor. Control Is Key. An individual generally is an employee if the person for whom services are performed has the right to direct and control the individual performing services (not necessarily actual control). If an individual is subject to the control or direction of another person only as to the result to be accomplished and not as to means and methods of accomplishment, the individual is not an employee. Each government agency uses its own factors to determine employee status, and although most are similar, a ruling by one agency does not bind other agencies. For example, for purposes of determining entitlement to unemployment benefits in Utah, State law presumes that a paid or contracted worker is an employee unless the putative employer can demonstrate that the worker (1) is independently established in work of the same nature and (2) has been free from control or direction over the means of performing the work. On the other hand, the IRS relies upon the three general categories of behavioral control, financial control and the relationship of the parties to determine worker status. Like most tests, these IRS factors relate to howmuch control a business has over a worker. Behavioral control addresses whether the business has a right to direct and control how workers perform the tasks for which they are hired. In general, anyone who performs services is an employee if the Employers who intentionally misclassify workers can be responsible for all unreported income and Social Security taxes of their employees for all relevant years, in addition to penalties for missed deposits and withholdings and, in egregious cases, criminal exposure . continued on page 24 employer can control what will be done and how it will be done, even if the employee has freedom of action. Such details include: • When and where to do the work • What tools or equipment to use • Which workers to hire or to assist with the work • Where to purchase supplies and services • What work must be performed by a certain person • What order or sequence to follow Financial control looks at whether a worker has the ability to effect financial decisions. Does the worker have a significant investment in assets or tools? Are there unreimbursed expenses that theworker must bear? Are theworker’s services available to the public?What is the method of payment? Does theworker get paidwhether thework is done or not or get paid only if the job is finished? (Independent contractors can realize a profit or loss on a job, but employees generally cannot.) Can theworker make business decisions that affect his bottom line? Relationship of the parties looks to whether or not there is a contract between the worker and business and how it is worded; whether the worker gets any type of benefits — vacation and sick pay, pension plan and health or life insurance; and the permanency of the relationship such as continuing indefinitely or only for a specific purpose or period. Also, does the worker have his own business which he markets to others? Let the IRS Decide? Because the distinction between employee and independent contractor necessarily involves distinct facts and circumstances in each case, the employer or worker can request the IRS to make a binding determination whether a specific worker is an independent contractor or an employee by filing Form SS-8. It would be best that this step be pursued after obtaining advice of a professional. Although the IRS conclusion may have persuasive effect on other federal and state agencies, they are not required to follow the IRS determination. What If You Are Out of Compliance? A 1978 tax law known as “Section 530” provides relief frommisclassification of a worker if an employer, among other requirements, has classified the worker as an independent contractor for all periods; did not treat any other similar workers as employees; filed all Forms 1099 required with respect to the worker; and has a “reasonable basis” for treating the worker as an independent contractor. Ask your tax advisor if Section 530 relief may help avoid a potential misclassification issue. Also, the IRS has instituted the “Voluntary Classification Settlement Program” (VCSP) to assist employers who have misclassified employees as independent contractors. This program allows employers who meet certain conditions and are not under IRS or Dept. of Labor investigation to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. Regarding previous misclassification, the employer pays the IRS a very small percentage of the compensation paid to reclassified workers. In addition, the employer will not be liable for interest or