The IRS recently issued an updated fact sheet reminding employers of the importance of correctly classifying workers for purposes of employment taxes. Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. Whether a worker is an employee or an independent contractor depends on a number of factors that fall into three categories: behavioral control, financial control and the type of relationship between the worker and the service recipient.
An employer that incorrectly classifies employees as independent contractors may be liable for employment taxes. However, the fact sheet emphasizes measures that may be taken both before and after classification takes place:
- An employer who is unsure of how to classify its workers can file, without charge, a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding;
- An employer that has a reasonable basis for classifying its workers as independent contractors may be entitled to special relief under section 530 of the Revenue Act of 1978; and
- An employer may enter the IRS’s Voluntary Classification Settlement Program that provides an opportunity to reclassify workers as employees for future tax periods, with partial relief from federal employment taxes.
The Fact Sheet also highlights that workers who believe an employer improperly classified them as independent contractors may use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee’s share of uncollected social security and Medicare taxes.
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