The controversial question of who is and who isn’t an independent contractor (aka service provider) continues and grows murkier every day. The current economic downturn has resulted in many independent contractors – and the government agencies that regulate them – to re-evaluate just what it means to be “independent.”
At its most basic, the employee-independent contractor controversy boils down to the argument that by labeling a worker as an independent contractor rather than as an employee, an employer can avoid the voluminous paperwork and payroll tax burden. A worker who is an independent contractor can exclude certain types of compensation from income or deduct work-related expenses.
The U.S. Department of Labor (DOL) recently blocked an earlier regulation that would make it easier to classify so-called “gig” workers and others as “independent contractors,” allowing these newly-labeled workers as “employees.” Having a status as an employee means that a worker is covered by federal minimum wage and overtime laws. In the eyes of an administration that has made creating union jobs a priority, labeling workers as employees better positions them to organize into labor unions.
VIVA THE DIFFERENCE
Long called “1099 employees” or gig workers, the IRS generally refers to independent contractors as “nonemployees.” In fact, they only recently reintroduced the tax form employers must use to report amounts paid to independent contractors: Form 1099-NEC, Nonemployee Compensation. This replaces Form 1099-MISC, Miscellaneous Income, used in the past.
Employers have long preferred to treat workers as independent contractors, reaping payroll tax savings, no fringe benefits or other expenses associated with employees. By the same token, workers – including snow and ice removal contractors – could, potentially, lower their own tax bills by shifting from being an employee to independent contractor.
So, who is self-employed or an independent contractor?
PROBLEMS GALORE
The distinction between independent contractors and employees is a complex one that employers must make about each worker. Not only are there the guidelines created by the IRS, but other federal agencies including:
The Department of Labor. Because the minimum wage and overtime protections of the Fair Labor Standards Act (FLSA) do not extend to independent contractors, the DOL has long been required to decide whether someone is an employee or an independent contractor. According to the DOL, even if someone is an independent contractor under another law, they may still be an employee under FLSA.
The National Labor Relations Board. Because independent contractors do not have a protected right under the National Labor Relations Act to form unions, the NLRB must sometimes decide whether workers are independent contractors or employees. The NLRB recently revised its 2014 classification test, emphasizing the importance of evaluating whether a worker has “entrepreneurial opportunity” for gain or loss in determining independent contractor status.
And, then there are the states attempting to jump on the bandwagon created by California’s controversial new law making it more difficult to label workers as independent contractors.
TAX BREAKS
The 2017 Tax Cuts and Jobs Act (TCJA) made independent contractor status more desirable for workers, especially high-income workers, than it ever was for business owners. Switching from employee to independent contractor status can mean a tax cut of between $12,500 and $24,000 annually for high income workers – even considering the worker’s payment of the business’s former half of the Social Security and Medicare (FICA) taxes.
In an effort to help all of those displaced by the pandemic, the CARES Act not only provided federal benefits to employees, it also took the unprecedented step of including independent contractors in the group of “workers” eligible to apply for both federal and state aid.
By some accounts this means lawmakers have tacitly admitted that “gig” workers are not really so “independent.” In fact, they apparently feel there is little difference between them and displaced workers who lost their jobs.
More recently, the IRS issued new guidelines regarding whether a worker is properly classified as an employee of a snow removal or ice management business, rather than as an independent contractor. According to the IRS, this question is usually answered under common law rules for whether the person for whom the services are performed has the right to control and direct the worker in details and means by which the work is performed. An employer failing to treat workers as employees can, of course, be liable for past employment taxes and penalties – but can obtain relief under new guidelines.
These fundamental changes in the government’s attitude toward gig workers and other independent contractors may have opened the door to additional codification of the independent contractor rules. If both employees and independent contractors can receive unemployment when they lose their “jobs,” aren’t they really the same?
MISCLASSIFICATION WOES
Snow removal contractors who want to treat workers as independent contractors – and those who wish to operate as independent contractors – need to be sure they aren’t, in fact, employees. Federal and state government agencies are on the lookout for small, part-time, or seasonal businesses that use independent contractors – “subcontractors” or “service providers” – to evade Social Security, Medicare, unemployment taxes, workers compensation and disability insurance.
Typically, an employer will claim a worker as an independent contractor, while the IRS classifies the worker as an employee. The stakes for employers are high and if a worker is treated as an employee, the employer must pay its share of the FICA and federal unemployment tax (FUTA).
Conversely, if a worker qualifies as an independent contractor, the employer is not responsible for those payroll taxes. Even more important, perhaps, the employer doesn’t have to provide expensive fringe benefits like health insurance or matching 401(k) contributions for those individuals.
Although independent contractors are a long-time, proven way for employers to achieve workforce flexibility and save money, they are also a popular strategy that provides contractors flexibility and, in many cases, lower tax bills for those choosing independent contractor status for themselves. Those lower tax bills and the difficulty in determining who is and who isn’t an “independent contractor,” explains the IRS’s on-going crackdown on worker “misclassification.”
Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee without a reasonable basis, it could be held liable for employment taxes for that worker.
Workers who believe they have been improperly classified as independent contractors can use the IRS’s Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report their share of uncollected Social Security and Medicare taxes due on their compensation.
If there is any doubt remaining after reviewing the three categories of evidence, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, can be filed with the IRS by either the snow removal operation or the customer/client. Unfortunately, review of the facts and circumstances can take at least six months for the IRS to reach a determination.
Employers have long preferred to treat workers as independent contractors, reaping payroll tax savings, no fringe benefits or other expenses associated with employees. By the same token, workers – as well as the owners of many snow removal businesses – could, potentially, lower their own tax bills by shifting from being an employee to independent contractor.
Just as every snow and ice management contractor should be very careful to distinguish between employees and independent contractors, so should every individual when choosing independent contractor status as a pass-through entity. Professional assistance may be required to ensure you and/or your workers are clearly “independent contractors.”
Explore the August 2022 Issue
Check out more from this issue and find you next story to read.
Latest from Snow Magazine
- NOTEBOOK: Go With The Flow
- NOTEBOOK: Winter Equipment Offers the RoadMAXX System
- NOTEBOOK: Yanmar Unveils Compact Loader Lineup
- NOTEBOOK: Schill Expands in Southwest Ohio
- October Cover Story: Achieving Wet Pavement
- August 2022 Cover Story: Beat The Odds
- May 2022 Cover Story: Bullish on Snow & Ice
- 2022 Top 100