small business articles

Worker classification remains a priority with the IRS

factoryworkersThe IRS continues to seek back taxes and penalties from businesses that wrongly treat workers as contractors.  Unreported or underreported employment taxes make up a big chunk of the overall federal tax gap.  The Labor and Justice departments and the states also have vital roles to play in ensuring that workers are properly classified by the businesses they work for.

The stakes have always been high…lost taxes for federal and state governments and fewer benefits for workers who are improperly treated as contractors.  And their importance is magnified with the growth in freelance service gigs…much of it through the sharing economy with Uber, Rover, Grubhub and the like.

To classify workers, the IRS uses three tests, each made up of multiple factors:

The behavioral test focuses on whether the company controls or has the right to control what the worker does and how to do the job. Key factors for employee status
include instructions about performing the work, evaluation criteria and training.

The financial test looks at who controls the economics of the worker’s job. Being able to work for multiple businesses and providing your own tools needed for the job are indicative of independent contractor status. Some factors favoring employee status are eligibility for reimbursement of travel costs and payment based on hours worked.

The type-of-relationship test examines how the parties perceive each other. Providing paid vacation and retirement benefits indicates a worker is an employee, as does hiring to provide services indefinitely rather than for a specific time period. Written language stating the worker is an independent contractor isn’t determinative.

A Senate proposal on worker classification is drawing praise from business.  The bill from Sen. John Thune (R-SD) would provide a new safe harbor based on three criteria that, if met, would qualify workers as independent contractors: The relationship between the respective parties, the existence of a written contract, and the location of the services or the means by which the services are provided. The measure lists objective factors that would satisfy each of these categories.

Additionally, the proposal makes changes to the Form 1099 reporting rules.  Currently, the 1099-MISC is required when payments to a nonemployee exceed $600.  Third-party networks must send a 1099-K to payees who have over 200 transactions and were paid more than $20,000. Compliance with these rules is haphazard at best.
Many third-party networks file 1099-Ks. Others use the 1099-MISC. Some send both.

Thune would have third-party networks in the gig economy use the 1099-K, while payers in traditional independent contractor relationships would file the MISC. Reporting on the 1099-K would be required on annual payments over $1,000 to contractors. This idea would raise boatloads of money, something that tax writers will look on favorably as they eye revenue-raisers to offset lower tax rates in tax reform.  And the threshold for filing the 1099-MISC would increase to $1,000.

For more information on, or if you have questions about, worker classification issues in your company, please contact a Dugan & Lopatka professional at This email address is being protected from spambots. You need JavaScript enabled to view it. or (630) 665-4440. 

From the Kiplinger Tax Letter of September 22, 2017. 

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