Employee or Contractor – What if you Misclassified?

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If you own a business, you likely have people working for you. Whether they are employees or independent contractors makes a big difference in how you handle their taxes. For independent contractors, you aren’t required to collect or remit payroll taxes on their behalf, but for employees, it’s required.

But how do you tell the difference between an employee and independent contractor? What if the lines blur a bit and you make a mistake?

Prior to Section 530, employers found themselves owing hundreds of thousands of dollars to the IRS in back taxes along with penalties and interest charges. Fortunately, Section 530 put an end to it.

While it’s a complicated act, what you must know about it is that the IRS cannot retroactively ask for taxes or charge penalties or interest if you misclassified an employee as an independent contractor.

If you did misclassify someone, you can pay the appropriate taxes moving forward, but the IRS cannot force you to pay money looking back. To qualify for it, you must:

• File all tax returns on time and they must reflect the individuals as independent contractors, not employees
• Prove that you never treated the workers as employees in the past
• Prove you had reason to treat them as independent contractors versus employees

It’s best if you can prove your decision based on past or current administrative rulings, or what’s typically done in the industry.

We know it can be confusing to determine if someone that works for you is an independent contractor or employee and we’re here to help. The tax proceedings between the two classifications are vastly different, so it’s important to approach it the right way.

Please contact us today at 714-383-2307 to help get clarification on your tax requirements regarding the people that work for you.