But I Call Them Independent Contractors
We recently published an article about a court case that was won by an independent contractor who successfully proved she was an employee. The IRS and Worker Compensation carriers are using the court system to back their claims that workers who have been classified as independent contractors are actually employees, and they are winning. This is happening more and more frequently.
Recently, the IRS won another case in the U.S. Tax Court where they claimed two workers at Twin Rivers Farm were actually employees, not independent contractors [Twin Rivers Farm Inc. v. Commissioner, T.C. Memo. 2012-184]. The farm owners were required to pay $30,000 in employment taxes and penalties for the past three years.
There was another instance where a Workers Compensation carrier ruled that a horse show barn using braiders at horse shows are in the classification of employee and not independent contract, and their payments are considered wages in the calculation of the premium. Now, they have to fight this ruling to keep from having their premium raised.
So how does a business owner address this issue? Look at the actual rules the IRS uses in their process of classifying a worker (see IRS definition). Look at these and assess whether or not your worker is actually an employee. Some of the major issues are:
1. To what degree of control for the work being done is exercised by the principal;
2. Which party (you as the business owner or the worker) invests in the work facilities used by the worker;
3 What is the opportunity of the worker for profit or loss;
4. Whether the business owner can discharge the worker;
5. Whether the work is part of the principal's regular business;
6. The permanency of the relationship; and
7. The relationship the parties believed they were creating.
Put rules in place for documentation that supports your position that a worker is an Independent Contractor. If you have an outside trainer or braider or other outside vendor, do you require documentation that will help substantiate that the relationship is between two businesses? Do you have any of the following, which will help you in your determination:
- There is an invoice for services presented to you for payment
- You have requested and have on file an I-9 form (Request for Taxpayer Identification Number and Certification)
- You have requested and have on file proof of insurance
- You have a contract which states the services to be provided
These are just a few of the things you can do in order to correctly identify whether someone is an independent contractor or an employee. And if they really are employees, you can no longer afford to classify them incorrectly. In the court case above, it cost the business owner three years' worth of taxes and penalties.
If you have any doubts about whether your workers should be classified as independent contractors or employees, it's time to take a serious look at your situation before you get a notice in the mail, find yourself in an audit or worse, in court. Just because you call your trainer, your braider, your part-time worker an "independent contractor," doesn't make it so.
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