Worker classification and its effect on employment tax obligations
For businesses, keeping up on tax obligations is a critical aspect of keeping afloat. Failure to remain in compliance with tax law can threaten a business’ solvency, while careful tax planning and payment of obligations can help a business increase its success.
There are a handful of types of taxes businesses need to deal with on a regular basis. Among these is employment taxes, which include withholding for federal income tax, Social Security and Medicare tax, and federal unemployment tax. Those who work for themselves pay a self-employment tax to cover social security and Medicare obligations.
One important task for employers in complying with federal tax obligations is to ensure that they properly classify their workers. Failure to properly classify workers can result in serious costs for employers, particularly if misclassification practices are widespread. This can be a problem both for businesses which engage in intentional worker misclassification, but it can also be a problem for businesses that do not have a sound grasp of their tax obligations or uniform procedures for remaining in compliance.
Properly classifying workers isn’t always an easy task. All the factors of the work relationship have to be carefully examined. The primary factors businesses need to consider, though, are the degree of control the businesses exercises over the worker, and how much independence the worker maintains in completing work assignments.
Honest mistakes can easily be made in this area, and if an employer has a reasonable basis for making a classification decision, there may not be any problems. In such cases, businesses may be able to file for relief from employment tax obligations by turning in all federal information returns that are consistent with that given classification. When the IRS determines that a business does not have a reasonable basis for a classification decision, though, the business may end up being held responsible for employment taxes for its misclassified workers. We’ll say more about this in our next post, and the importance of working through employment tax issues with an experienced tax attorney.