It Could Happen to You! 

Author: Keith Huggett 

We have spoken earlier about the conflict between independent contractors and employees. It's a very hot topic and complex issue, in the tax, benefit, and legal worlds. The EDD and the IRS both have their definition of an employee and an independent contractor and the line between the two is a distinctive shade of grey. But what happens when you cannot, or do not, make the distinction, and the IRS decides to "correct" your choice, usually not in your favor? As you might guess, it generally invoves your business making large payments to the IRS in the form of penalties and interest.  If your workers that were classified as "independent contractors" get reclassified as "employees" by the IRS, here are 5 things you will need to be prepared for:

1. Federal Income Tax Withholding - as with your other employees, you are responsible for withholding income and employment taxes. There may be big liabilities in store for failure to withhold in the past. 
2. Social Security Tax - Employer and Employee each pay half of the FICA tax. OASDI payments are also required at 6.2%. As an employer your company is responsible for one half of the Medicare tax. If your workers were to be recharacterized, the past employment tax liability would quickly add up.
3. Federal Unemployment Tax - FUTA allows for the collection of a federal employer tax used to fund state workforce agencies. With reclassification your company would be responsibile for paying the past taxes along with penalties and interest.
4. State Unemployment Taxes - The state portion of this tax is determined by the state agency and depends on the unemployment experience of each company. If a company's independent contractors are recharacterized, the company would be responsible for paying applicable state unemployment insurance for both past and future, plus penalties and interest.
5. Worker's Compensation Insurance - Worker's Comp varies from state to state, and can even vary from employer to employer. The company involved would most certainly be liable for the past and would have to make premium payments for the future.

Classifying your staff correctly is a very important aspect of your business. While having independent contractors makes things easier at first, because you don't have to deal with the tax issues, problems can arise years later. 

If you are uncertain how to classify your employees, the specialists at the Tax Office, Inc. can provide you with the answers. Contact us to find out more about taxes, the effects of classification of employees on your taxes, accounting, representation services, bookkeeping or payroll.