Certified Public Accountants

Employee Vs. lndependent Contractor

During the last few years, the IRS has been steadily increasing its audit of businesses using workers identified as independent contractors. The result, in many cases, is a costly reclassification of the worker as an employee.

If an employer/employee relationship exists, FICA must be deducted from the wages of the employee. The business must pay the employer portion of FICA, as well as federal and state unemployment taxes. The worker's wages are also subject to wage withholding.

On the other hand, if the worker is an independent contractor, these taxes are not paid by the business and wage withholding is not required. Moreover, fringe benefits, such as health insurance coverage, normally provided to employees, do not have to be given to independent contractors.

The controversy over whether a worker is an employee or independent contractor is not just the province of the IRS. Now, the State of Illinois Department of Employment Security has been increasingly auditing companies to determine if there are workers who can be classified as employees rather than independent contractors. If a worker is reclassified, the company will be liable for retroactive unemployment compensation tax and penalties.

IRS Form SS-8 can serve as a useful reference in evaluating independent contractor status under IRS common law test. If you use independent contractors in your business, you should seek the advice of accountants in structuring the working relationship to minimize exposure to payroll tax liability.