The IRS has given an employee worker wrongly clas­si­fied as an inde­pen­dent con­trac­tor a very loud whis­tle to blow and employ­ers the means to obtain an advance deter­mi­na­tion of worker clas­si­fi­ca­tion to avoid future dis­putes and tax liabilities.

When is a worker an employee or an inde­pen­dent con­trac­tor for fed­eral income tax pur­poses?   Dis­putes over employee or inde­pen­dent con­trac­tor clas­si­fi­ca­tion fre­quently arise and the out­come is usu­ally very impor­tant to one and very expen­sive for the other.   Mis­takes are some­times made, but more often, employ­ers will incor­rectly clas­sify an employee as an inde­pen­dent con­trac­tor for sev­eral rea­sons.  The most com­mon rea­son  is to avoid the pay­ment of the employer’s por­tion of employ­ment  taxes (usu­ally about 7.5% of gross).   The sec­ond rea­son is to avoid the prepa­ra­tion and fil­ing of quar­terly 941 employ­ment tax returns. Another rea­son is to avoid mak­ing employ­ment tax deposits.  Some­times, employ­ers may not under­stand the legal and tax dif­fer­ence between an employee or inde­pen­dent con­trac­tor and clas­sify the worker in what­ever way the worker suggests.

A worker who should be clas­si­fied as an employee may want to be treated as an inde­pen­dent con­trac­tor so that  pay­roll taxes and fed­eral income taxes are not with­held from his or her earn­ings.  More com­mon is the sit­u­a­tion where a worker who is clas­si­fied as an inde­pen­dent con­trac­tor wants to be treated as an employee so that more of his or her earn­ings are reported to the Social Secu­rity Admin­is­tra­tion.  The more income reported as earned, the higher the monthly retire­ment ben­e­fit.   In cer­tain trades and busi­nesses, such as con­struc­tion, land­scap­ing, house­keep­ing, jan­i­to­r­ial, farm­ing, ranch­ing, fish­ing, repair and maintenance-where work­ers tra­di­tion­ally earn piece­meal or by the job and are often unskilled and less edu­cated –the worker sim­ply has no choice as to whether they are clas­si­fied as an employee or as an inde­pen­dent contractor.

The IRS pro­vides Form SS-8 -Deter­mi­na­tion of Worker Sta­tus for Pur­poses of Fed­eral Employ­ment Taxes and Income Tax With­hold­ing– for use by an employer when the employer is not sure how to clas­sify a worker.    Upon sub­mis­sion of the SS-8, the IRS will make an advance deter­mi­na­tion of how the worker should be clas­si­fied, which gives the employer a safe har­bor if the worker ever com­plains or if the wrong clas­si­fi­ca­tion is made.

In addi­tion, the IRS pro­vides Form 8819– Uncol­lected Social Secu­rity and Medicare Tax on Wages- to a worker who believes that his or her employ­ment clas­si­fi­ca­tion is incor­rect.   Form 8819 is the big, loud and often very expen­sive whis­tle, that when sub­mit­ted with Form SS-8, alerts the IRS to a pos­si­ble improper clas­si­fi­ca­tion and per­mits the employer’s por­tion of social secu­rity and medicare taxes to be cred­ited in advance to the worker’s social secu­rity record.

If the IRS ulti­mately agrees that the whis­tle blow­ing worker has been mis­clas­si­fied, the actions of the employer will be care­fully scru­ti­nized.  An employer who improp­erly clas­si­fies an employee as an inde­pen­dent con­trac­tor may be sub­jected to an audit.  The books and records of the employer will be exam­ined and work­ers may be ques­tioned.  In addi­tion to an after the fact assess­ment of the employer’s por­tion of employ­ment taxes, the employer who mis­clas­si­fies a worker or work­ers may be sub­jected to ordi­nary civil fail­ure to deposit, fail­ure to file and fail­ure to pay when due (delin­quency) penal­ties, the more seri­ous civil fraud penalty and the most seri­ous of all, a fed­eral crime.   None of these out­comes are good for busi­ness, even in the best of times.

If you are an employer that is unsure of how to clas­sify a worker, that has dis­cov­ered cer­tain work­ers have been mis­clas­si­fied, or that has inten­tion­ally mis­clas­si­fied work­ers, seek legal assis­tance imme­di­ately.  If you are a worker who believes that he or she has been mis­clas­si­fied and wants some recourse, don’t wait to blow the whistle.

The area of worker clas­si­fi­ca­tion can be very con­fus­ing.  Mis­takes are com­mon.  Mis­clas­si­fi­ca­tion of worker sta­tus to keep costs low or for exploita­tive pur­poses fre­quently hap­pen.   The law firm of Peter G. Milne, P.C. is here to help.  Don’t wait until its too late.  Con­tact us right now.