The classification of Independent Contractor (“IC”) is an assertion by a company that an individual performing the work meets the criteria established by the tax authorities to be so classified. This classification has serious implications for both the company and individual.
Why it matters:
This is a very hot topic with both the IRS and EDD in California. While this issue has been an audit topic for years it has risen near the top of audit reasons. Government agencies want their share of the money collected through payroll and they want workers to be covered by both unemployment and disability insurance.
A worker classified as an IC must file a business tax return and is subject to Self-Employment Tax (16.75% of taxable income is a basic guide).
Additionally, the worker is not covered by unemployment or disability insurance. This really means an IC in business for themselves regardless of their intent. This classification also has implications in other areas such as general liability insurance, auto insurance coverage, and city business license requirements.
Do you want to be in business for yourself? Self-employment is not for the faint of heart!
The primary issue is control (a nod to Janet Jackson). If the company has control over the individual then the worker should be classified as an employee. The tax agencies begin with the assumption the company has control and the burden of proof is on the company, not the worker.
Salient issues to consider pertaining to the work:
- Who controls when and where the work is performed?
- Does the company supervise the work?
- Who determines the procedures to follow to complete the work?
- Who provides the equipment and tools required?
- Is the worker prohibited from providing services to other companies?
Assuming the worker is being treated as an IC:
- Does the IC provide services to additional companies?
- Does the IC have a business license?
- Does the IC carry appropriate insurance for a business?
- Does the IC have an investment in their company?
- Does the IC have a risk of loss?
Here’s how we can help:
Our experience can help you navigate this complex area.
While we cannot prevent an audit, we can assist with establishing appropriate procedures and documentation.
An audit on this topic will typically cover three years which is a costly process.
Don’t expose your business to unnecessary risk with inappropriately classified workers!
Give us a call at (714) 998-9244 if you’d like to find out more.