Tax Lawyer's Blog

For decades small business owners have been trying to treat their workers as independent contractors instead of employees for the following reasons:

1. The employer saves the FICA and medicare combined matching tax of 7.65% of the independent contractor’s annual compensation;

2. The employer does not have to provide workers’ compensation coverage for an independent contractor;

3. The employer does not have to include the independent contractor in any health plan or retirement benefits package;

4. The employer does not have to pay unemployment insurance on a non-employee’s compensation and an unemployment insurance claim cannot be brought by an independent contractor since he is considered self-employed.

The abuses in this area are legion and the IRS has beefed up its enforcement program to target the abusers.

Why would any worker ever want to be treated as an independent contractor instead of an employee?  Well, there are several reasons.

1.  The worker may not intend to file a tax return reporting the compensation he received from his “employer.”

2.  The worker may have to incur significant expenditures in order to generate the income and he wishes to get the full benefit of the deduction of those expenses;

3.  His spouse may have insurance coverage and other benefits provided by her employer.

We have represented hundreds of workers seeking to have their independent contractor status redetermined by the IRS via the filing of a Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  Generally, this occurs after the employee has ceased working either because he or she was injured on the job, quit the job or was fired. We have also represented hundreds of “employers” who have been on the other side of such disputes.

It is often difficult to determine whether or not an individual worker is an independent contractor or an employee. The IRS uses a list of 20 common law factors to evaluate a worker’s status in an SS-8 case. 

Employers who misclassify workers are subject to substantial penalties in addition to the federal tax withholding and FICA and Medicare withholding that is deemed to have been withheld from the employee’s pay, plus the employer’s matching share of FICA and Medicare tax.

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