Guest Article

(From the September 7, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Independent Contractors - IRS Posts Tips for Business Owners

The IRS has initiated a three-year program in which it will select approximately 2,000 employers to undergo a comprehensive employment tax audit, focusing on proper withholding on wages, Social Security tax, Medicare tax and Federal Unemployment tax. A core issue will be whether workers are properly classified as employees or independent contractors.

A recap of the critical issues employers face when hiring workers as independent contractors was recently posted by the IRS. While addressed to small business owners, the rules summarized in "Employee vs. Independent Contractor - Seven Tips for Business Owners" apply to employers of all sizes. In determining whether a worker's relationship with the business is one of an employee or independent contractor, three characteristics are determinative: behavioral control (i.e., whether the business owner has the right to direct or control how the work is done through instruction, training or other means), financial control (i.e., whether the business owner has the right to direct or control the financial and business aspects of the worker's job), and the type of relationship (i.e., how the worker and business owner perceive their relationship).

Employers who misclassify workers as independent contractors can face substantial taxes and penalties but, as the guidance points out, either the employer or worker can request the IRS to make a determination on whether a specific individual is an independent contractor or employee by filing Form SS-8.

Additional resources are cited and linked in the IRS summary for those interested in more information on the worker classification issues.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.