Independent Contractor or Employee? Employer Beware
At the end of last December, FedEx was given a tax bill for $319 million following the Internal Revenue Service’s ruling that the company had misclassified about 13,000 drivers as independent contractors when, according to the IRS, they really were employees.
It appears that the dispute, in essence, centers around FedEx’s claim that the drivers were contractors who operate their delivery routes as independent businesses, even though the drivers use FedEx equipment, wear FedEx uniforms and work under explicit FedEx rules.
This case will be closely watched, because it will have far-reaching ramifications for employers and employees alike. Briefly, from the employers’ perspective, the difference between classifying a worker as an independent contractor, as opposed to an employee, is as follows: with regard to the independent contractor, the employer is not only exempt from paying workers compensation or federal unemployment and disability taxes, it is released from matching 7.65% Social Security and Medicare taxes; moreover, the employer is saved the burden and cost of income-tax withholding.
Independent contractors don’t qualify under minimum-wage laws and have no government rights to a safe work environment. Finally, and perhaps most importantly, independent contractors do not qualify for employee benefits.
For employers who are caught misclassifying, they can not only be subject to monetary penalties, they can also be criminally charged with evasion of payments, filing of false tax returns and conspiracy.
In order to help clarify their thinking as to whether a worker is more properly classified as an employee or as an independent contractor, the IRS has published Form SS–8, which sets forth a multi-factorial test.
There is also new legislation on the horizonThe Independent Contractor Proper Classification Act.
In short, employer beware.
Tags: employee, independent contractor, tax