Heightened emphasis on worker classification.

• Author: Koppel, Michael D.

Worker classification has been a major concern for businesses for many years. Classifying workers as independent contractors when they should be employees can be costly for a business. If there is no reasonable basis for the classification, the business can be liable for the employment taxes that should have been paid, as well as penalties and interest.

Reasons a business would prefer independent contractor status include that it does not have to pay payroll taxes or provide employee benefits such as health insurance. For the worker, independent contractor status allows him or her to deduct various business expenses such as travel and to take advantage of various retirement plans.

Businesses have no bright-line test for making the determination. For years, the IRS has used a 20-question test to determine worker classification (Rev. Rut. 87-41). The importance of each question depends on the type of work that is being performed and the facts and circumstances of the situation. In other words, there is no way to definitively determine whether the IRS will rule that a worker is an employee or an independent contractor. In 2001, the IRS, in a memorandum (Field Service Advice 200127004 (7/6/01)), essentially consolidated the factors into three categories:

* Behavioral control: This category involves the degree of control the business has over the worker. If the worker controls the methods he or she uses on a project, the relationship looks more like that of an independent contractor.

* Financial control: This category examines whether the worker can make additional profit if he or she can control expenses and other efficiencies.

* Relationship of the parties: This category includes factors such as the duration of the relationship and whether the worker provides services for multiple recipients.

In 2009, the U.S. Government Accountability Office (GAO) reported that worker misclassification contributes to the "tax gap" (the difference between the revenue the federal government collects and what is legally owed) and identified 19 options for correcting it (see...