IRS Employee Reclassification: Independent Contractor vs Employee

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Small businesses often prefer to hire workers as independent contractors, rather than as employees, in order to avoid payroll taxes, benefits, and other related burdens. This is a perfectly acceptable practice, unless the worker would be considered an “employee” in the eyes of the IRS. Advice from a Texas employment attorney can help you make the right determination about the status of your workers, and potentially save you significant fees and fines that could result from IRS worker reclassification.

Employee vs Independent Contractor Myths

There is no black-and-white checklist to determine whether you have an employee or an independent contractor. Each case depends on the facts of your company, its operations, and the functions, duties, and control of the worker. Some of the most common myths that employment lawyers hear from small businesses include:

“The contract says ‘Independent Contractor.’” Putting it in writing does not make it true in the eyes of the IRS. The IRS will look at the factual situation, not the employment contract.

“The worker used his own tools.” This can be good supporting evidence if there are other strong arguments favoring independent contractor classification, but it’s not a strong argument on its own.

“The worker worked from home.” A worker doesn’t have to report to an office or workspace to be an employee. Modern technology enables employers to exercise a high level of control and supervision over employees remotely.

Distinguishing Employees & Independent Contractors

While there is no clear-cut formula for the difference between employees and independent contractors, there are two questions that can help you address the fundamental issues:

Are the worker’s duties central to the operation of your business?

Is the person working under your management, control, or supervision?

If the answer to these questions is a clear yes, then there should be little questioning the status of the employee. However, if there are grey areas or questions, don’t hesitate to consult a Texas employment lawyer.

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