Consider yourself warned: The IRS has said it will crack down in 2008 on organizations that misclassify workers as independent contractors when they actually should be considered employees.
It’s a tricky problem for HR pros, who don’t typically play a role in classifying independent contractors. HR may process the paperwork for new employees, but you might not even be aware that an independent contractor is doing work for your organization, especially if someone in a field office made the arrangements.
Advice: First, find out who in your organization has responsibility for the hiring andof independent contractors. You’ll probably discover that no lone person has a complete picture of the scope and scale of your contractor work force. That probably means that individual managers are making informal arrangements—and classifying workers in ways that might not be by the book.
Second, encourage your organization to set up a formal procedure for reviewing the status of every independent contractor who comes on board.
And make sure whoever has responsibility for determining worker classifications (is that you, now that you’ve raised the issue?) knows the 20 factors the IRS considers when it determines who is an independent contractor and who is an employee.
They’re spelled out in IRS Revenue Ruling 87-41. You can download a copy of the ruling at www.theHRSpecialist.com/RevRule8741. For more information, see “Contractor vs. employee: How to make the call,” in box below.
Still not sure? Let the IRS decide for you. Fill out IRS Form SS-8 (access it at www.irs.gov/pub/irs-pdf/fss8.pdf) to ask the agency to weigh in.
Joseph Tiberio, the IRS program manager for employment tax policy, said the agency will be paying more attention to worker classification issues in 2008 because the number of employees being classified as independent contractors is steadily increasing.
Organizations that misclassify workers could be required to pay state and federal unemployment taxes dating back to the worker’s first day on the job, to make good on company contributions to the employee’s 401(k) and to enroll the person in.
In addition, the IRS announced in November 2007 that it will share the results of its employment tax examinations with 29 states and hopes to extend the arrangement to all states.