The U.S. Department of Treasury, and the Internal Revenue Service (IRS), expects employers to correctly determine whether an individual providing service to the company is an “employee” or an “independent contractor,” i.e., self employed. Those individuals working as independent contractors are commonly known as “working as a 1099;” this is in reference to the fact that businesses who hire independent contractors report the cost on an IRS Form 1099.

The IRS expects employers to withhold income taxes, withhold and pay Social Security and Medicare taxes, as well as unemployment taxes, on wages paid to employees. For individuals determined to be “independent contractors,” this is usually not the case.

The IRS rules pertaining to classification of an individual as an independent contractor get very complicated. When an employment situation is unclear, the company or the individual can request IRS clarification by completing an IRS Form SS-8. The IRS is then authorized to determine a worker’s status (this process can take six months or more).

Companies that misclassify employees as independent contractors can be, and have been, held liable for unpaid employment taxes and worker’s compensation plus penalties and interest on past work wages. This presents a significant risk to the company; one that is taken very seriously.

At Absolute Consulting, our goal is follow the letter and intent of laws related to correct classification of employees. For more information on determining worker status, visit www.irs.gov and search for information on independent contractor or Form SS-8.