Independent Contractor VS. Employee

Just because you call something a cat doesn’t mean it is. If it looks like a duck, walks like a duck, quacks like a duck, then you can bet the state and federal government are going to call it a duck –regardless of whether or not you have paperwork stating it’s a cat.

Misclassifying employees is one of the easiest ways to find yourself in trouble. If the worker you deemed an independent contractor was actually an employee, then you can be hit with failure to withhold taxes, interest and penalties including even criminal penalties.

Unfortunately, it’s not as simple as whether or not they are a 1099 independent contractor versus an employee you give a w-2 to at the end of the year. There are a series of tests at both state and federal agency level that are part of the determination. One branch’s determination does not affect or influence the result of another’s.

The easiest way to distill the tests down is one word: control. The more you control the individual the more likely they are an employee. Is the worker allowed to determine how the job is done? Are you controlling the rate of pay and whether they are profitable? Is there a contract? Are they responsible for their own equipment? If you have little or no control over the way workers do the work, they generally are considered to be independent contractors.

Conversely if the worker is required to be in an office for specific hours every day, uses your equipment and supplies to complete assignments and generally is reimbursed for you for expenses, they would most likely be considered an employee. It would be advisable to run questionable worker situations by your tax advisor or attorney.

But what if you already did it wrong? Are you in trouble is there any way to fix it? Short Answer: there might be! Consult your tax advisor. Long Version there might be relief available under Section 530 of the Internal Revenue Code.

When does it apply? It applies to periods under audit and all future periods as long as specific requirements are met. It provides what is known as a permanent cure for an employer’s tax liabilities relating to a particular group(s) of workers. It is not necessary for the business to claim Section 530 relief for it to be applicable. An examiner looking into the possible misclassification must first explore the applicability of Section 530 even if the taxpayer does not raise the issue. What requirements need to be met to obtain relief?

Section 530 Relief May Be Available

Fortunately, there may be another way to avoid trouble associated with worker misclassification: the Section 530 safe-harbor rule. This provision, which is from a largely forgotten 1978 law, may possibly be used if the IRS assesses back taxes and penalties on your company for misclassifying workers as independent contractors.

You must meet three requirements to obtain Section 530 relief: reporting consistency; 2) substantive consistency; and 3) reasonable basis. Reporting consistency: Refers to having filed all your federal tax returns consistent with your treatment of the workers as independent contractors. For instance, you must have provided them with Form 1099s, not W-2s, in the past. You cannot have changed midway through their multiyear employment.

Substantive Consistency: This can also be referred to as Employment status consistency. Your business must have consistently treated these workers and all workers of the same type— as independent contractors. There’s no exception to this rule.

Reasonable basis: Your company needs a “reasonable basis” for treating workers as independent contractors, not employees. This basis might, for example, be established by a relevant court case, IRS ruling or prior audit.

So, in short, determine what your workers are up front, pay them according to the law and make sure you classify them correctly. But don’t be alarmed currently if you recognize you may have been doing something incorrectly and look to remedy things now.

About Christine Taylor

Christine Taylor is a Partner at The Towne Law Firm, P.C. (headquartered in Albany, NY) who focuses her practice in the areas of Hospitality, Business, Labor and Employment, Real Estate Law, Estate Planning, and Litigation. Ms. Taylor grew up within the outdoor hospitality industry as her parents have owned three campgrounds, her experience within the industry gives her insight from both the legal and camping perspectives. Ms. Taylor has spoken at various outdoor hospitality conferences including the Glamping Show Americas, KOA, CONY, NCA, ARVC, PCOA, as well as the Mid-Atlantic conference. She additionally authors a column that appears in Woodall’s Campground Management.

Christine Taylor