Recently the owner of a landscape company told me he received a letter from the IRS saying he owed payroll taxes on employees back to 2007. He said, "I didn't have employees until 2009. All the people who worked for me before then were independent contractors." He even said he had made sure the contract workers were paying their own self-employment taxes (Social Security/Medicare).
My next question was, "Are these the same people?" If the workers are the same people and they just changed over from being contractors to employees, he might have a problem unless something essential in their work relationship changed.
How Does the Work of an Employee Differ from the Work of an Independent Contractor?
An independent contractor is just that - independent. This worker may or may not have a contract, but the work relationship is as one business owner to another. The hours of work, the control over how the work is done, is most often determined by the contractor, not the employer. The contractor uses his/her own tools, sets work hours. The contractor is a professional and knows how to do the work, so he/she doesn't need to be given detailed directions ("green side up"). All the employer does is say what he or she wants done and the due date.
In the case of a landscape service, a contractor might have some knowledge of landscaping, plants, turf grass; the contractor might even have mowing equipment and other equipment. The boss would say, "get this done by the end of the week."
An employee's work, on the other hand, is directed entirely by the boss. The employee doesn't have equipment, doesn't know much about landscaping or mowing, just shows up at the start of work hours and does the work as the boss tells him/her to do it.
Although the IRS has factors it looks at to determine whether a worker is a contractor or employee, it considers each case in its own circumstances. They do, however, always assume that a worker is an employee unless you can prove otherwise..
Back to the Question - What's Different?
If the "contract workers" back in 2007 were really just doing employee work and getting paid as contractors, then at some point this person started getting paid as an employee, the company may have a problem convincing the IRS that these workers were not always employees, even if they were paying their own self-employment tax. If you aren't sure if your workers are classified correctly, you can use Form SS-8 to ask the IRS for a determination. In this case, it may be better to ask for permission than forgiveness.
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Disclaimer: The information in this blog post and on this site is intended to be of a general nature and is not intended to be legal or tax advice. Your specific situation may be different, so check with your legal or tax adviser before making any decisions.