Trying to figure out who is an independent contractor and who is an employee can be difficult and confusing. It can also have some serious financial ramifications if you mistakenly classify someone as an independent contractor and you get audited by the IRS or EDD.Our good friends at the California Employers Association have put together this very informative newsletter and given you a great link to help you make the determination. For those of you looking for help in dealing with Human Resource issues I highly recommend you consider joining their organization.

Why is this so difficult for employers?
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A recent report from the Treasury Inspector General For Tax Administration (TIGTA), said they found weaknesses in the IRS's procedures for ensuring taxpayer compliance with worker status determinations.

"The misclassification of employees as independent contractors is a nationwide problem affecting millions of employees," J. Russell George, Treasury Inspector General for Tax Administration stated. "Left unchecked, it will continue to grow and contribute to the tax gap. The IRS should do more to ensure that the burden of uncollected taxes is not shifted to compliant taxpayers."

The IRS allows both employers and workers to request determination letters from the agency regarding the worker's tax status as an employee or independent contractor. While this determination is binding, TIGTA reported that employers often fail to withhold taxes even though the IRS has stated that the worker is properly classified as an employee. The IRS created Form 8919 so that employees in these circumstances could report their personal liability for Social Security and Medicare wages. Nevertheless, TIGTA found that employees may be abusing Form 8919 in order to avoid payment of employment taxes and estimated that 74,068 taxpayers avoided $26.2 million in Social Security and Medicare taxes, and the IRS could lose $131 million in Social Security and Medicare taxes over the course of the next five years as a result.

The IRS disagreed with TIGTA's valuation of this amount, pointing out situations where a taxpayer could receive relief when the taxpayer could be ruled an independent contractor by a court and would not have an employment tax liability.

What is really intriguing is why it is so difficult for employers to determine whether someone is an independent contractors or an employee? There are several EDD resources out there and the best one's we’ve found over the years is a simple yes and no questionnaire. Answer too many questions with a “yes” and you know you’ve got an employee on your hands no matter how much you’d wish the person could be classified as an independent contractor.

Both forms are on the CEA website under the Resources/Government Resources, or click here.