Independent Contractor (Self-Employed) or Employee?

NRS Admin

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.

Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Select the Scenario that Applies to You:

I am an independent contractor or in business for myself
If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our Self-Employed Tax Center.
I hire or contract with individuals to provide services to my business
If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the rest of this page to find out more about this topic and what your responsibilities are.

Determining Whether the Individuals Providing Services are Employees or Independent Contractors

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Form SS-8

If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.

Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).

Employment Tax Obligations

Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.

Employment Tax Guidelines

There are specific employment tax guidelines that must be followed for certain industries.

Misclassification of Employees

Consequences of Treating an Employee as an Independent Contractor

If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.

Relief Provisions

If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. See Publication 1976, Section 530 Employment Tax Relief Requirements (PDF) for more information.

Misclassified Workers Can File Social Security Tax Form

Workers who believe they have been improperly classified as independent contractors by an employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation. See the full article Misclassified Workers to File New Social Security Tax Form for more information.

Voluntary Classification Settlement Program

The Voluntary Classification Settlement Program (VCSP) is a new optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

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Most US Truck Drivers are Misclassified as Independent Contractors

By NRS Admin • July 21, 2015

A report released Wednesday asserts that two-thirds of the nation’s truck drivers who haul goods from U.S. seaports, such as the ports of Long Beach and Los Angeles, are misclassified as independent contractors, a distinction some labor advocates say allows trucking companies to skirt labor laws. The report, titled The Big Rig Overhaul: Restoring Middle-Class Jobs at America’s Ports Though Labor Law Enforcement, says 49,000 of the nation’s estimated 75,000 port truck drivers are misclassified as independent contractors when they should be classified as employees of the companies they work for and enjoy the benefits that come with being an employee, including workers compensation, overtime and the right to unionize. About 25,000 of the nation’s port truck drivers come from California, according to the report generated by advocacy groups The National Employment Law Project, The Change to Win Strategic Organizing Centerworks and The Los Angeles Alliance for a New Economy. Supporters of the report say the misclassification has led to the disintegration of what had been a good-paying job. “Trucking used to be one of the backbones of America’s blue-collar middle class but deregulation and deunionization and misclassification has significantly reduced the quality of jobs in the sector,” Jared Bernstein, senior fellow for the Center on Budget and Policy Priorities and former chief economic adviser to Vice President Joe Biden, said in a conference call with reporters Wednesday. Rebecca Smith of the National Employment Law Project, who co-wrote the report, said the relationship between the companies and the drivers has few of the hallmarks associated with an independent business, that it’s the companies that strictly control the terms of the jobs and not the drivers. Alex Cherin, who represents the Harbor Trucking Association, a coalition of Los Angeles and Long Beach intermodal carriers, said that misclassification assertions are nothing but allegations and that the report is labor-driven. “The vast majority, an overwhelming majority of drivers want to remain independent contractors for the flexibility and the ability to own their own trucks and their own small businesses,” he said. For years, trucking companies have been moving toward hiring independent contractors, especially after the ports of Long Beach and Los Angeles enacted a Clean Trucks Program in 2008 to curb the number of polluting trucks operating at the port by requiring trucks to be 2007 and newer. Because the newer trucks cost more than $100,000, some of the trucking companies have created lease-to-own programs that would allow the companies to act as financiers to drivers who work toward paying off the trucks. In the last two months, more than 100 drivers have successfully completed the program, Cherin said. “Years ago when the Teamsters started criticizing the independent contractor model, one of the things they criticized was the inability of independent contractors to own their own trucks,” he said, adding that the recent success of the lease-to-own program has “taken the wind out of the sails of the Teamsters’ argument.” Not all truckers think the independent contractor model is a successful one, including Dennis Martinez, a driver who hauls goods from the Long Beach and Los Angeles ports who has filed a claim of wage theft against trucking company and logistics provider TTSI. “They make it seem like you would be a real independent contractor and get to be your own boss and get good pay for your work,” Martinez said. “Now I know the truth. I am part of a big scam on this.” Martinez says he sees very little from his paycheck after paying for fuel and other truck maintenance costs. “Sometimes the deductions are so high that almost all my money is gone,” he said. “How can I be an independent contractor when I am totally dependent on the company to work?” He added that he and other drivers have been retaliated against after bringing forth labor issues. Vic La Rosa, president of TTSI, said there has been no retaliation and added that this year Martinez chooses to only work two or three days a week in order to show lower income, according to his records. “Obviously they’re not working, and we have the records to prove it,” La Rosa said. He added that the cost of maintaining the truck is part of the contract drivers sign when they work for TTSI. “If that’s not something you want to do, I encourage you to become a full-time employee at another company,” he said. “When you sign that contract, those are the terms.” Supporters said the misclassification does exist, citing some 400 complaints filed by port drivers to the California Division of Labor Standards Enforcement for wage theft violations involving misclassification. Nineteen of those cases have resulted in an average of $66,240 per driver, according to the report. “It’s clear that these companies are operating illegally,” Smith said. Contact Karen Robes Meeks at 562-714-2088. Originally posted at paulmcinnes.com Source: http://www.presstelegram.com/business/20140219/most-us-port-truck-drivers-are-misclassified-as-independent-contractors-according-to-new-report

Is Your Company On The Independent Contractor Hit List?

By NRS Admin • July 6, 2015

Although companies in virtually every industry that use independent contractors are at risk if they have not structured, documented and implemented their independent contractor relationships in a compliant manner, the Labor Department, the IRS and state workforce agencies have targeted certain industries where misclassification is thought to be most prevalent.