Classifying 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
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.