As you can deduct from the questions above it becomes very difficult to classify a worker as an independent contractor. Also as all companies are subject to possible audit; it is very likely that the IRS will re-classify consultants as employees during this process which ultimately will force the employer to pay taxes & back-tax on behalf of the consultants. Working with BRIDGENEX to manage your Contingent Workforce and utilizing our consultants to work on-site at your company removes the liability for re-classification, taxes, and insurances
The above questions are an interpretation by BRIDGENEX intended to simply the discussion.
Besides the IRS and States, you should also be aware of possible conflicts with Federal Regulations.
Independent contractors have successfully filed charges against their clients claiming coverage as an employee under many labor laws including minimum wage, overtime and nondiscrimination laws. Under the following labor laws, the definition of an employee varies, but is generally less restrictive than the law factors used by the IRS:
The Section 530 safe havens have been the source of much controversy over the years. It is important to note that states are not bound by this act and that interpretations by the IRS have varied. The following is a brief overview of the section. Consult your legal counsel before determining if this section might apply to your situation.
Section 530 applies if an employer has:
1. Never treated the individual in question as an employee in the past.
2. Consistently treated the worker as an independent contractor on all forms.
3. Not treated any other workers holding a substantially similar position to the worker in question as an employee. (Must consider relationship of parties.)
4. Has a reasonable basis for treating the individual as an independent contractor. (*Note: The burden of proof has shifted to the IRS regarding reasonable treatment.) Some of the ways reasonable basis can be established include:
A. Acceptable precedent
- An employer can establish acceptable precedent in the following ways:
1) A judicial precedent
2) A published IRS ruling
3) An IRS technical advice memorandum pertaining specifically
to the worker
4) An IRS determination letter pertaining to this worker
B. A previous IRS Audit - It is not necessary that the audit being relied on was for employment tax purposes.
C. Recognized Long Standing Industry Practice - This safe haven is often very difficult to prove, though it has been used successfully. This can be a safe haven only if 25% of the company's industry classifies workers as independent contractors.
There are also other less common ways to establish reasonable basis under Section 530. It is important to note once again that the state tax authorities are not bound by Section 530 and will often disregard it.
NOTE:Commencing after 1996, the IRS must provide written notice of provisions of Section 530 at/or before an audit involving worker classification issues.
IRS / State Reciprocity Program
Some states are more aggressive in the area of independent contractor compliance than the IRS. In May 1980, the IRS and the states started developing a reciprocal liaison with each other. Under this agreement, once either the IRS or a state has audited your company, that information is then passed to the other tax authority for investigation.
Applications for Unemployment / Worker's Compensation
The single most common trigger for an independent contractor audit is an unemployment claim made by a departing or former independent contractor and second is a worker's compensation claim. Any successful claims will not be covered by your company's current unemployment or workers compensation policies. A claim by one independent contractor within a state, usually triggers the investigation of all workers in similar positions within the state.
Other items you should know about your state's enforcement of worker classification: