Index - https://steemit.com/tax/@alhofmeister/56nc4n-tax-blog-index
Introduction
Worker classification is a very important issue to those effected by it. The Federal Insurance Contributions Act (FICA) tax is comprised of Social Security (12.4%) and Medicare (2.9%) for a grand total of 15.3%. Regular employees pay half of the tax (7.65%) while employers are responsible for the other half. While the tax is deductible for employers, employees are unable to deduct their portion of FICA taxes.
Contractors (self-employed individuals), on the other hand, are responsible for the entire FICA tax through self-employment taxes that are filed with their individual tax return. Contractors, however, are able to deduct half of the self-employment tax (which would otherwise be the employer's portion) against their taxable income for the year.
This difference in taxation has caused some employers to misclassify their employees as contractors to avoid their 7.65% responsibility. Thankfully, the IRS has released guidance detailing it's interpretation of the classifications and has provided a method for receiving a determination in the event of a disagreement between the worker and business.
Classification
There are 3 main elements that the IRS examines to determine the nature of the relationship between a worker and a business:
Behavioral Control - Behavioral control deals with who is in control of the work performed. Degree and type of instruction, the extent of the evaluation systems, and the level of training provided are key elements. If a business can tell a worker when, where and how a job will be performed, an employee/employer relationship generally exists. Another key element is whether the worker performs the task on the employer's premises.
Financial Control - Financial control concerns the extent to which a business controls the financial aspects of a worker's job. Who owns the equipment, whether the worker has multiple clients, who pays for expenses, and the opportunity for a profit or loss are key elements for determining financial control. If a worker is paid a set amount (hourly, salary, etc.) on a regular basis (weekly, bi-weekly, etc.), they are generally considered an employee. If they are paid by job, they might be properly classified as a contractor.
Relationship - The relationship between the worker and business is the final factor in determining the nature of the relationship. Written contracts, benefits provided to the worker, and the permanency of the relationship are key elements of this factor. If the services of the worker are seen as a key aspect of the business of the company, an employee/employer relationship is more likely to exist.
For any given relationship, it is important to consider all the facts and circumstances in reaching a classification for a worker.
Status Determination
In the event that a taxpayer believes that they are being misclassified as an independent contractor, they may file for SS-8 (link provided below) to receive a determination from the IRS. The form includes a series of questions to be answered by the taxpayer which describes their working conditions and helps the IRS form the basis for a conclusion. To the extent that the IRS finds that the worker was misclassified, they will be entitled to tax relief for the half of the FICA tax incorrectly assessed and will pursue the employer.
If a taxpayer believes that they have been improperly classified, they are entitled to file form 8919 and only pay the employee's half of the FICA tax. Note, however, that this filing position may only be taken if the taxpayer has not already received a determination from the IRS or are awaiting response.
References
https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
https://www.irs.gov/pub/irs-pdf/fss8.pdf
https://www.irs.gov/pub/irs-pdf/f8919.pdf
Disclosure
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.