How Should I Properly Classify Independent Contractors?
- Steve Julal
- Jul 21
- 2 min read
Many businesses use independent contractors to remain adaptable and manage expenses, especially during labor shortages and inflation. However, misclassifying contractors as employees can result in IRS audits, back taxes, penalties, and legal action.
Why Worker Classification Matters
Employees and independent contractors are treated very differently under tax law. When a worker is classified as an employee, your business is responsible for:
Withholding federal income and payroll taxes
Paying the employer share of Social Security and Medicare (FICA) taxes
Covering federal unemployment (FUTA) tax
Complying with state payroll tax rules
Potentially offering benefits available to other employees
If a worker is an independent contractor, you aren't required to withhold or pay these taxes. Payments of $600 or more are usually reported on Form 1099-NEC. Contractors often work with several clients, provide their own tools, invoice for work, and assume profit or loss risk.
What Makes Someone an Employee?
Unfortunately, there's no one-size-fits-all rule. The IRS and courts assess various factors, with control being a primary consideration. When a business determines how and when work is completed, the individual is more likely to be classified as an employee. Additional indicators include the use of company-provided equipment and not being responsible for personal expenses.
Some businesses may qualify for relief from reclassification under Section 530 of the tax code if they have consistently treated similar workers alike and filed all required tax documents. However, this relief is not always available.
Be Careful with Form SS-8
You may submit Form SS-8 to request a determination from the IRS regarding a worker's status. However, the IRS frequently classifies workers as employees. Filing this form can raise broader questions about worker classification and may potentially result in an audit.
A smarter move is to consult a tax advisor early. We can help you set up clear contracts, document the relationship, and apply consistent practices across your workforce to minimize risk.
When Workers File Form SS-8
Workers can also submit Form SS-8 if they believe they’ve been misclassified, often in hopes of gaining employee benefits or avoiding self-employment tax. If this happens, the IRS will contact your business and ask for a response. The agency will then decide based on all the facts.
Take the Right Steps
Worker classification presents significant complexity within tax law, and errors can result in substantial costs. If you are uncertain about the appropriate classification of your contractors, your VAAS Pro Tax Consultants is available to provide guidance.
We are committed to helping you align your practices with current tax regulations and minimize potential risks. If you have any further questions or would like personalized advice, please don't hesitate to consult with us.
