Some companies categorize workers as independent contractors when they should actually consider them employees based on IRS regulations. Although this is a money-saving strategy for these businesses, they pass the burden of payroll taxes to these misclassified workers. In addition, employees treated as independent contractors miss out on benefits like overtime pay, vacation pay and health care.
If you are an independent contractor who suspects you should actually be an employee, read on for a plan of action.
Guidelines for classification
Although the IRS does not maintain a specific formula for classifying employees vs. independent contractors, the agency may use these factors to determine that a person should be an employee:
- Set hours
- A dedicated workspace
- The ability to represent the company to its clients
- Hourly or salaried wages rather than project-based pay
- Close supervision by a manager
- Using the employer’s tools, such as a computer, rather than his or her own tools
By contrast, independent contractors set their own hours and typically work from a home office or outside location with their own equipment rather than at the company’s workspace. They may take on other clients and may receive general guidance about their work, but not close supervision.
What to do about misclassification
When you file your tax return, list the payment amount you received from your employer as wages instead of on Schedule C as self-employment income. You should also file Form SS-8, which provides information to help the IRS determine your correct classification. Keep in mind that this form will initiate a formal IRS investigation of the business in question. For this reason, make sure you talk to your employer before taking this step and offer the opportunity to correct the error.
Consider speaking with an attorney who specializes in employment law to get advice about whether you should take action about your tax classification. Remember that you are not automatically an independent contractor because you work from home, take flexible hours or have signed an agreement to that effect.