A Wolf in Sheep’s Clothing—Is your Subcontractor really an Employee?

I run across this issue over and over. I see employers have subcontractors that really should be classified as W-2 employees. This has become a big hot topic for the IRS. You can get penalized and be charged with the Employer tax portion of the wages you paid a subcontractor if you get audited.

It is now a question on your corporate tax return as to if you hired subcontractors that year. The law is in the grey area in my opinion. I suggest you educate yourself on the rules below and document why you think a subcontractor should be classified as such.

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

For more information, contact Nesha at nesha@paicpapllc.com



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