The Worker: Employee or Independent Contractor?
Why does it matter legally how workers are classified?
By Coleman Jackson, Attorney, and CPA.
Are your workers employees or independent contractors? Why does it matter legally how workers are classified?
How should you make the determination as to whether a worker is classified as an employee or as an independent contractor?
How does the Internal Revenue Service make the determination? How does the Texas Workforce make the determination for employment tax purposes?
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 United States Supreme 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 will more likely than not 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?
- Are 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 liability for failure to complete the assigned job?
Why does it matter how a worker is classified?
- The cost of 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, the proper worker classification is 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 contractors depending upon all the facts and circumstances.
What about the Texas Work Force Commission?
The Texas Labor Code defines the employee and employer relationship very similar to how this relationship is defined in federal labor law and tax law. The Texas Workforce Commission, (TWC) is tasked with the duties of enforcing the Texas Labor Code. Misclassification of workers is typically investigated after the commission receives a complaint or when TWC audit examinations uncover evidence that an establishment has misclassified workers as independent contractors when in reality the workers are employees. Misclassification of workers has State law and Federal law consequences. The Internal Revenue Service and Texas Workforce Commission can work together in enforcing labor laws as it relates to tax violations.
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 all the facts and circumstances matter in determining whether a worker is properly classified.
If you are an employer and are in doubt as to whether you have properly classified your workforce you should review all of the facts and circumstances with competent tax counsel today since long stretches of time could elapse before you are audited by TWC or the IRS. You see the problem is that both the federal and state government may be short-changed if the taxes are not being properly and timely reported. In 2023 the chances of getting caught for misclassification of workers is higher than in years past because the IRS has been given a lot more money to update its systems, go after tax cheats, and to ensure tax compliance and integrity of the federal tax system.
This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family, or your business.
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