Start-Up Launchpad Blog

Are Your Independent Contractors Really Employees? - September 26, 2011

Jo Ellen Whitney

Jo Ellen Whitney, employment and health lawClassifying workers as employees or independent contractors is difficult.  Even the IRS has noted that there are no bright line tests in this area.


Unfortunately, the ramifications of worker misclassification can be severely damaging to a business.  Among other things, employee classification affects: (i) your withholding obligations; (ii) your direct tax liability; (iii) whether your workers are eligible for certain benefits; and (iv) whether a host of employment laws, rules and regulations apply to you and your workers.  With such broad-ranging implications, a simple worker misclassification can, if it is broad enough or goes on long enough, result in crippling unexpected business expenses. 


Fortunately, the IRS recently acknowledged the difficulty of proper classification and implemented a settlement program that allows employers to re-classify their independent contractors as employees without incurring many of the standard tax liabilities, penalties and interest that would be associated  with a determination by the IRS of improper classification upon audit.


If you are concerned about your classifications, you should consider this program. Additional information is available on the IRS website. If you do not know whether your classifications are defensible, you should look at them more closely. The IRS has also posted educational material on this topic, which can be located here. Either way, you should watch this area closely. State and federal regulators have announced that they will be looking at worker classifications more closely in the near future.