A worker’s status as an independent contractor or employee has a significant impact on business profitability. Employees add substantial costs to business in terms of taxes, benefits, human resources, legal compliance, and payroll administration. Independent contractors, on the other hand, add no additional cost beyond sending a 1099-MISC. Independent contractors do not receive benefits, cost the business FICA or unemployment tax, or require workers comp insurance. They do not require additional staff or an outside firm to navigate a web of retirement and employment regulations. They do not receive health insurance, receive overtime, or require payroll clerks and software.
Factors that distinguish an employee from an independent contractor are fluid and imprecise - based on a sliding scale of common law factors that are anything but objective. According to federal (and countless state) regulations, however, workers who tip this factor-scale toward employee must be treated as such. The worker’s employer is required to pay employment taxes, collect and file all required forms, and follow state and federal employment statutes. They are NOT allowed to treat these workers as independent contractors.
Contractor Temptation: The complex and subjective nature of the employee definition and a desire to avoid the headache and cost of having employees provides a powerful incentive to treat workers as independent contractors.
This temptation had historically been experienced by business managers and owners but, no more. The Tax Cut and Jobs Act of 2017 (TCJA) created an irresistible financial incentive for employees to be independent contractors - a deduction called the Qualified Business Income Deduction. This deduction allows most independent contractors to cut their taxable income by 20%! As might be expected, many employees are now urging their employers to treat them as Independent Contractors.
Misclassification Danger: The problem with treating workers as independent contractors is that it does not change the common law definition of employee. Agreement between the payer and the worker has no bearing on this definition. If an independent contractor is later determined to be an employee, the consequences can devastate a business or organization. The government can (and will) retroactively reclassify the contractor (as well as all workers performing similar duties) as an employee. When this happens, the business or organization becomes responsible for a plethora of unfiled returns and unpaid taxes. Those with more than a few reclassified workers also face the danger of a legal and financial pile-on as reclassified workers demand lost benefits and unpaid overtime.
Bottom Line: Employee reclassification can force a business or organization to close its doors forever.
An Inexpensive Solution: Helping businesses and organizations decipher the employee vs. independent mystery AND minimize the consequences of employee reclassification is why we created the Independent Contractor vs. Employee course. This course contains 2 hours of video-based training broken down into eight easy-to-follow lessons. It covers everything you need to know to discern between employees and independent contractors, how to minimize risk of reclassification, AND how to best-deal with reclassification should it occur. Our training edition includes a study outline, lesson-based worksheets, tests & answer key, and even a completion certificate for trainees!
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
Your video class on this issue (HOA taxes) has given me the confidence to go forward.- Desmond, Frederick, MD, 1120-H Basics Course
I was very impressed and happy with the course. It was exactly what I was looking for and the presenter was excellent.- Nick, Chicago, IL, 1120-H Basics Course
Thanks for offering Overnight Accountant!- Josh, Charles Town, WV, 1099-MISC Basics Course
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