Contractors vs. Employees

Please review how you classify individuals as either independent contractors or employees. The Internal Revenue Service has developed Form 8919 which individuals may use to report their misclassification as a contractor by their employer. This form allows the individual to exclude the company portion of FICA taxes from their tax return and alerts the IRS to classification issues. This reclassification could cause back payroll taxes and penalties to be due. Also, they have required employers to retroactively include a reclassified individual in retirement plans. There are many factors to consider in determining whether an individual is an independent contractor or employee. At a minimum, you MUST file 1099s and have valid W-9 forms on file as a means of substantiating an assertion that an individual should be treated as an independent contractor.

Having this required documentation on file does not guarantee that under scrutiny, the IRS may not reclassify the compensation as W-2 wages. Regulations require backup withholding of 28% for subcontractors without a valid W-9 on file. Failure to withhold, you could be responsible for the withholding amounts plus interest. For subcontractors you use regularly, consider executing a written agreement with them. Remember that independent contractors should have their own workers compensation insurance. If they don't, you may have Company and personal liability for injuries.

For additional information, see the IRS 20 Factor test on our website.