If you have a reasonable basis for not treating an employee as an employee, you may not have to pay labor tax for that employee. To obtain this relief, you must file all required federal information statements on a basis consistent with your employee`s salary. You (or your predecessor) must not have treated an employee who held a position substantially similar to that of an employee for periods beginning after 1977. See 1976, Section 530 Employment Tax Relief Requirements PDF for more information. An independent contractor is a service provider that agrees with an employer to provide the requested services on the basis of an application or project. This person is not educated or controlled by the employer with respect to the performance of his or her work. When hiring a person, it is important to determine whether that person can be classified as an independent contractor or an employee. Many factors determine what we discussed in the entrepreneur vs Employee article. However, in this guide, we focus on the IRS 20 factor test and how it can help employers and employees understand and correctly classify employee status. In determining whether the person providing the service is an independent worker or contractor, account shall be taken of any information demonstrating the degree of control and independence. Companies must weigh all of these factors to determine whether an employee is an employee or an independent contractor.
Some factors may indicate that the employee is an employee, while other factors indicate that the employee is an independent contractor. There is no «magic» or fixed number of factors that «make» the worker an employee or independent contractor, and not a single factor is alone in this provision. In addition, the relevant factors in one situation may not be relevant in another situation. Looking at the following factors, you should be aware that the IRS does not specifically look at a factor, but one factor may be enough to cause the IRS to determine that an employee is an employee. There is no «magic number» of factors that determine status. The IRS, the Department of Labor, and individual state agencies that deal with labor rights use different tests to classify workers. The most common types of tests are the 20-factor IRS test, the ABC test, and the economic realities test. Employees are entitled to certain benefits, protections and rights that self-employed workers do not have, such as health insurance, paid leave, access to workers` compensation and unemployment insurance, protection against discrimination, etc. Workers also have the right to unionize, unlike independent contractors.
Employees who believe they have been wrongly classified as independent contractors by an employer can use Medicare Form 8919, Unpaid Social Security and Payroll Tax PDF to determine and report the employee`s share of unpaid Social Security and Medicare taxes due on their compensation. Form 1099 MISC, previously used to report on the compensation of independent contractors, was a confusing «collection container» for various characterization and reporting issues beyond this status. For the 2020 tax year, employers must use a new reporting form, 1099-NEC Compensation for Non-Employees, which replaces the former 1099-MISC, to report compensation payments to individuals whom the employer qualifies as independent contractors. See Form 1099 NEC, Compensation of Non-Employees, www.irs.gov/forms-pubs/about-form-1099-nec and Form 1099-NEC, available at www.irs.gov/pub/irs-pdf/f1099nec.pdf. The «reasonable basis» test is an excellent tool for employers to prevent the IRS from questioning a person`s status as an independent contractor when certain conditions are met. In this case, the employer has no tax liability for employees under Section 503, and the IRS cannot punish them for misclassification. In this article, we will cover the IRS factor 20 test in its entirety and how it compares to other common tests. OVERVIEW Properly characterizing employees as independent contractors or employees is an issue that cuts across many areas of substantive state and federal law, particularly federal tax law. . . .