In 2020 and 2021, many companies have experienced “workforce fluctuations.” If your business has engaged independent contractors to address staffing needs, be careful that these workers are properly classified for federal tax purposes.
The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. Often, a business must also provide the worker with the fringe benefits that it makes available to other employees. And there may be state tax obligations as well.
These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).
The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.
Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.
The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)
Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.
Consult a CPA before filing Form SS-8 because filing the form may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules.
In January 2021, the Trump Administration published a final rule revising the Fair Labor Standards Act’s employee classification provision. The rule change was considered favorable to employers.
The Biden Administration initially delayed the effective date and then issued a Notice of Proposed Rulemaking (NPRM) to withdraw the rule. After reviewing approximately 1,000 comments submitted in response to the NPRM, it withdrew the rule change before the deferred effective date.
If you have any questions regarding the information above or need help with employee classification, please contact your E. Cohen tax advisor.
Cookie | Duration | Description |
---|---|---|
cookielawinfo-checkbox-advertisement | 1 year | Set by the GDPR Cookie Consent plugin, this cookie is used to record the user consent for the cookies in the "Advertisement" category . |
cookielawinfo-checkbox-analytics | 1 year | Set by the GDPR Cookie Consent plugin, this cookie is used to record the user consent for the cookies in the "Analytics" category . |
cookielawinfo-checkbox-functional | 1 year | The cookie is set by the GDPR Cookie Consent plugin to record the user consent for the cookies in the category "Functional". |
cookielawinfo-checkbox-necessary | 1 year | Set by the GDPR Cookie Consent plugin, this cookie is used to record the user consent for the cookies in the "Necessary" category . |
cookielawinfo-checkbox-others | 1 year | Set by the GDPR Cookie Consent plugin, this cookie is used to store the user consent for cookies in the category "Others". |
cookielawinfo-checkbox-performance | 1 year | Set by the GDPR Cookie Consent plugin, this cookie is used to store the user consent for cookies in the category "Performance". |
ep201 | 30 minutes | This cookie is set by Wufoo for load balancing, site traffic and preventing site abuse. |
PHPSESSID | session | This cookie is native to PHP applications. The cookie is used to store and identify a users' unique session ID for the purpose of managing user session on the website. The cookie is a session cookies and is deleted when all the browser windows are closed. |
viewed_cookie_policy | 1 year | The cookie is set by the GDPR Cookie Consent plugin to store whether or not the user has consented to the use of cookies. It does not store any personal data. |
Cookie | Duration | Description |
---|---|---|
__cf_bm | 30 minutes | This cookie, set by Cloudflare, is used to support Cloudflare Bot Management. |
Cookie | Duration | Description |
---|---|---|
_ga | 2 years | The _ga cookie, installed by Google Analytics, calculates visitor, session and campaign data and also keeps track of site usage for the site's analytics report. The cookie stores information anonymously and assigns a randomly generated number to recognize unique visitors. |
_ga_4JQW09H0BS | 2 years | This cookie is installed by Google Analytics. |
_gat_gtag_UA_539141_3 | 1 minute | Set by Google to distinguish users. |
_gid | 1 day | Installed by Google Analytics, _gid cookie stores information on how visitors use a website, while also creating an analytics report of the website's performance. Some of the data that are collected include the number of visitors, their source, and the pages they visit anonymously. |
CONSENT | 2 years | YouTube sets this cookie via embedded youtube-videos and registers anonymous statistical data. |
vuid | 2 years | Vimeo installs this cookie to collect tracking information by setting a unique ID to embed videos to the website. |
Cookie | Duration | Description |
---|---|---|
VISITOR_INFO1_LIVE | 5 months 27 days | A cookie set by YouTube to measure bandwidth that determines whether the user gets the new or old player interface. |
YSC | session | YSC cookie is set by Youtube and is used to track the views of embedded videos on Youtube pages. |
yt-remote-connected-devices | never | YouTube sets this cookie to store the video preferences of the user using embedded YouTube video. |
yt-remote-device-id | never | YouTube sets this cookie to store the video preferences of the user using embedded YouTube video. |