The 2019 Guide to Determining Employee Filing Status

Chad Silver

Chad Silver

Managing Partner of Silver Tax Group, author of the book "Stop the IRS". Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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Everything You Need to Know About Employee Filing Status

It can be confusing figuring out how employees should be classified for tax filing, and incorrectly classifying can have consequences. Small businesses should be careful when classifying workers on employee tax forms to avoid penalties and additional taxis.

You need to determine whether works should be classified as regular employees or independent contractors.

Determining Employee Classification When a Worker is Paid

There are a few main factors that go into determining whether someone is a contractor or a form w-4 employee. These three factors include finances, association, and control.

Financial Impact & Tax Liability

The financial impact that an organization has on the worker describes how that worker is compensated. If the worker is given a regular, typically a salary or hourly, wage, then they’re usually considered an employee. If that person is given a fixed rate for a job, that person is typically a contractor.

Another financial clue that a worker may be an independent contractor is if he or she is not reimbursed for expenses. Employees are usually reimbursed for expenses by the company, while independent contractors are not.

Employee Degree of Control

The level of control that the business has over its worker also indicates employee or contractor status. Contractors are typically allowed to work for multiple businesses and may work remotely rather than in-house. In contrast, employees typically have set work hours and locations and are receiving training for the work they perform.

Control can also mean what type of employee reviews are available. Does the worker have a standard evaluation to measure performance? If so, he or she is likely an employee.

Employer-Employee Relationship

The relationship that a worker has with the business also impacts his or her classification. Situations in which a worker is seen as a permanent part of the company usually indicate employee status. In contrast, independent contractors are usually hired on only for the duration of a specific project.

In addition, employees are commonly given benefits as part of their employment contract whereas independent contractors are not. In fact, contractors may not be given a written contract at all.

What Happens When Employees Get Misclassified

One major reason misclassifications happen is because employers are trying to generate tax savings. Employees who are independent contractors do not have Medicare or social security taxes withheld. Therefore; the employer saves on having to pay those taxes.

In addition, the employer does not have to pay overtime. They also do not provide the employee with benefits or pay unemployment tax for that individual.

Another reason employees may be misclassified is to avoid having to provide proof of eligibility to work in the United States. This allows employers to ignore immigration laws and to pay workers lower than the minimum wage.

Businesses also misclassify employees as a way to avoid EEOC laws. When workers are incorrectly classified as independent contractors, they may be exempt from regular employee EEOC laws. This can lead to and allow discrimination in the workplace.

A more benign reason misclassifications occurs is because employers are not provided with the correct resources. Employers need to know how to correctly classify and file their employee’s taxes. Having the proper resources and knowledge to file for freelance employees can help prevent this.

Sadly, many employers use this as a way to cut costs and save money. In the end, however, misclassification can end up costing the business a great deal of money.

When the IRS Finds Out

If a company is misclassifying its workers, eventually the truth does come out. Typically this occurs either through the employee or through the IRS.

When an employee alerts the government to misclassification, this is usually reported through the Department of Labor. In these cases, individuals report an employer for misclassification because they believe they have been incorrectly identified for tax purposes. Another reason employees may alert the government is if they attempt to file an unemployment or workers’ compensation claim.

The other common way that the IRS discovers misclassification is through tax audits. Both the IRS and the Department of Labor conduct regular audits to identify workers who may have been misclassified. These audits can cover periods of up to three years, and often uncover a number of misclassified employees at once.

Penalties for Misclassification

In situations where a misclassification has occurred, there are a number of penalties that business owners will be faced with.

First, the business will be held responsible for a $50 penalty for each W-2 that should have been filed. Incorrectly classifying an employee as an independent contractor comes with a $50 fine.

On top of the W-2 fine, employers may face criminal charges. Employers can be fined up to $1000 per employee who is incorrectly classified and can even face federal prison.

Fines aren’t the only costs facing employers who misclassify; employers are still responsible for the taxes they should have paid. Taxes for each employee have to be repaid in full. In addition employers must pay 40% interest and 1.5% of the wages which should have been taxed.

The longer the misclassification goes on, the more the fines grow, too. For each month that FICA taxes were not paid, employers may owe an additional 25% of the total tax due.

All these fines and penalties can add up fast and result in serious issues for the employer.

Correctly Classifying

The main way to prevent classification errors is to stay educated and understand the status of your employees. Staying on top of labor laws and understanding the classification differences for employees can help avoid serious penalties and fines.

Are you struggling? You can use the Determination of Worker Status for the Purpose of Federal Employment Taxes and Income Tax Withholding Form (Form SS-8). This form will help you properly determine employee status. Correctly filing employee statuses will aid your business in avoiding costly mistakes.

Misclassification is a serious problem that could greatly affect your business. Don’t let it happen to you.

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