Section 530 of the Revenue Act of 1978 (“section 530”) generally allowed a taxpayer to treat a worker as not being an employee for employment tax purposes (but not income tax purposes), regardless of the worker’s actual status under the common-law test, unless the taxpayer had no reasonable basis for such treatment or failed to meet certain requirements. Of course, additional tax reforms since then provided additional clarity with this hot topic, most notably, the Tax Reform Act of 1986 (section 1706) and the Pension Protection Act of 2006 (section 864). With these two changes, approximately 14 years ago, the Internal Revenue Service implemented a 20-factor test to clarify when an individual should be classified as an employee versus an independent contractor. The 20-factor test was again streamlined so the employer or business had more clarity by the test providing evidence of the degree of control and independence with three categories:
- Behavioral – Does the company control or have the right to control what the worker does and how the workers does his or her job?
- Financial – Are the business aspects of the workers job controlled by the payer? This includes how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship – Are there written contracts or employee type benefits, e.g., pension plan, insurance, vacation pay, etc.? Will the relationship continue and is the work performed a key aspect of the business?
If a business classifies an employee as an independent contractor and you have no reasonable basis for doing so, the business may be held liable for employment taxes for the work according to Internal Revenue Service Code section 3509.
The American Rescue Plan Act of 2021 now requires an Internal Revenue Service reporting requirement threshold of $600 in payments with no minimum transaction number for goods and services if a third-party application, like CashApp, Venmo, PayPal or GooglePay is used. If someone is receiving a steady stream of money through a cash application that is greater than $600, and it looks like it’s for retail or other income, the 1099-K will make the unreported business income more visible to the Internal Revenue Service. The goal is businesses voluntarily reporting business income accurately.
Worker Perspective – Which One Am I?
If a worker is unclear about his or her status, the worker or the employer can file Form SS-8 for a determination to be made. An additional alternative if a worker believes they have been improperly classified by an employer, is for the worker to use IRS Form 8919 to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation. The IRS Form 8919 also forces a determination by the Internal Revenue Service.
Business Perspective – Can I Voluntarily Reclassify My Workers?
Businesses can participate in an optional program called the Voluntary Classification Settlement Program (VCSP). The program provides taxpayers an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers or a class/group of workers as employees. The taxpayer must meet certain eligibility requirements, apply to participate by filing IRS Form 8952, and enter into a closing agreement with the IRS.
Speak to your business tax advisor if you believe you may need taxpayer relief utilizing the Voluntary Classification Settlement Program.
Sources
Joint Committee on Taxation (Subcommittee on Income Security and Family Support and the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means), May 2007, Worker Classification Pamphlet, Present Law and Background Relating to Worker Classification for Federal Tax Purposes, https://www.irs.gov/pub/irs-utl/x-26-07.pdf
Department of the Treasury, Internal Revenue Service, May 2021, How Businesses Determine if a Worker is an Employee or Independent Contractor, Publication 5520, https://www.irs.gov/pub/irs-pdf/p5520.pdf
Department of the Treasury, Internal Revenue Service, July 2021, Independent Contractor
(Self-Employed) or Employee? https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee