Employee or Independent Contractor
Why Does Classification of Workers Matter?
Blog Written By: Coleman Jackson, Esq. | www.cjacksonlaw.com | 214-599-0431 and Spanish 214-599-0432.
July 18, 2013
How should you make a determination?
How does the Internal Revenue Service make a determination?
Typically when Internal Revenue Service auditors examine a business for the purpose of determining worker classification, the Service will generally follow the United States Supreme Court’s 1947 decision in a case called, United States vs. Silk.
In the Silk case, the Court said that whether a worker is properly classified as an employee or independent contractor turns on all the facts and circumstances. The Court delineated 20 factors, which if a majority of the factors can be answered yes, then the Internal Revenue Service is more likely than not, will classify the worker as an employee. These 20 factors are as follows:
- Is the worker required to comply with instructions about when, where, and how the work is to be done?
- Is the worker provided training that would enable them to perform the job in a particular way?
- Must the worker perform the services personally?
- Is there a continuing relationship between the worker and the entity that hired the worker?
- Are the services provided by the worker an integral part of the business’ operations?
- Does the entity hire, supervise or pay assistants to help the worker on the job?
- Does the recipient of the worker’s services set the work schedules?
- Is the worker required to devote his or her full time to the person for whom he or she performs services?
- Is the services performed at the place of business of the entity or at specific places designated by the business?
- Does the recipient of the services direct the sequence in which the work must be done?
- Is the method of payment hourly, weekly or monthly as opposed to commission or by the job?
- Are business and/or traveling expenses reimbursed by the business to the worker?
- Are regular oral or written reports required to be submitted by the worker?
- Does the company furnish computers, work tools and supplies used by the worker?
- Has the worker failed to invest in equipment or facilities used to provide services?
- Does the arrangement put the worker in the position of realizing either a loss or profit on the work?
- Does the worker perform services exclusively for the entity rather than working for various other entities at the same time?
- Does the worker make the worker’s services available to the general public?
- Is the worker subject to dismissal for reasons other than nonperformance of contract specifications?
- Can the worker terminate the relationship without incurring a liability for failure to complete the assigned job?
Why does it matter how a worker is classified?
- The cost for misclassification of workers can be tremendous.
- First and foremost your employees could be erroneously carrying the burden of self-employment taxes.
- Misclassification of your workers means that you (the employer) are not paying your fair share of taxes and that may subject you to back taxes, interest and penalties. The Service wants the taxes to be paid by the proper party. Noncompliant entities could be eligible for certain safe-harbor provisions of the Internal Revenue Code.
- There are also certain State of Texas consequences for failing to properly classify workers. Therefore proper classification of workers is both a federal and state tax law issue. There could be civil and criminal consequences for failing to properly classify workers in the State of Texas.
- It is important that immigrants pay their fair share of taxes. It is also fair for immigrants to be properly classified as employees or independent contracts depending upon all the facts and circumstances.
Why Risk Being Caught – Act Now!
If you are a worker and don’t know how you should be classified, you should contact a tax attorney to discuss all the facts and circumstances of your particular situation because we only discuss general principals in this blog.
If you are an employer and want to do the right thing and avoid possible huge consequences in the future for misclassification of your workers, get legal representation to review your situation today.
COLEMAN JACKSON, P.C.
Professional Legal Services Corporation
Immigration & Tax Law Firm