Employers need to be careful and not misclassify employees as independent contractors in an effort to avoid income taxes, Social Security and Medicare taxes, as well as, unemployment taxes.

In deciding whether someone providing a service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. The general rule is that an individual is an independent contractor if an employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. The common-law rule for an employee is, if you can control what work will be done and how it will be done, the individual is an employee. The IRS provides a nice breakdown on what to consider when determining if a person is an employee or independent contractor.

As Dennis Westlind from the World of Work Law blog highlights, ‘It is always risky to misclassify someone who should be an employee as an “independent contractor,” but it will become even riskier for employers in 2011 if President Obama’s budget proposal is passed by the legislature.’
The federal government loses millions of dollars of payroll tax revenue annually due to the misclassification of employees as independent contractors. President Obama’s budget proposal has earmarked funds to target this type of misclassification.

Don’t let your business get caught with misclassified employees. Review the business relationship between you and anyone currently classified as an independent contractor to prevent any litigation or penalties for your business.