Page 33 - Oil & Energy - March 2013

March 2013 • 33
Taxation
IRS Cracking Down on Employee
vs. Contractor Classification
Understand the difference and designate with care to avoid penalty
By Michael D. Koppel, CPA, MST, PFS, Gray, Gray & Gray, LLP
IF YOUR COMPANY HIRES INDEPENDENT
contractors in any capacity, be prepared to
prove their independence, or your may face
fines, penalties and back taxes. Ouch!
The Internal Revenue Service (IRS) and
U.S. Department of Labor have announced
plans to aggressively crack down on com-
panies who – intentionally or accidentally
– misclassify workers as independent con-
tractors, thus avoiding paying payroll taxes
and benefits (including health insurance
and retirement plans).
Workers may want to be classified as
independent contractors in order to take
deductions against their income. Even if
both the business and worker agree, the
government still may reclassify the worker.
There are several common tasks that
oilheat and propane retailers often farm out
to independent contractors. The seasonal
nature of the industry lends itself to using
contractors during the winter delivery
season, and running lean the rest of the
year. Typical assignments for independent
contractors include:
• Delivery drivers
• Sales representatives (especially those
paid on commission)
• Outsourced administrative support
(such as a part-time bookkeeper)
• Independent service technicians
EXPANDED SCRUTINY
The IRS is expanding its scrutiny of
these classifications to include payments for
these and other independent contractors.
They are using a very tight interpretation
of the regulations determining what consti-
The primary “test” of
classification is control over
the individual performing the
work. IRS regulations state
that an employer-employee
relationship exists if the
person for whom the services
are being performed has the
right to direct and control the
individual performing the work.
tutes true independence and what indicates
employment status.
The primary “test” of classification is
control over the individual performing
the work. IRS regulations state that an
employer-employee relationship exists if the
person for whom the services are being
performed has the right to direct and con-
trol the individual performing the work.
It is important to note that the employer does
not have to actively exercise such control –
all that is necessary is that the employer has
the right to control and direct the work.
For example, if you contract with an
individual to drive a delivery truck for six
months, and he or she drives your company-
owned truck and is dispatched by a company
dispatcher, the driver cannot be classified as
an independent contractor. He or she must
be treated as an employee because of the
control and direction exercised over daily
activities. You are responsible for payroll
taxes, and fringe benefits, along with state
income taxes, and (in most states) workers’
compensation insurance.
DEFINING ‘INDEPENDENT’
On the other hand, if you contract with
a bookkeeper to come in once a month to
go over your ledger (or to do so electroni-
cally) and the bookkeeper also serves other
clients, he or she may be classified as an
independent contractor.
A third scenario is an individual who
does more than one job for your oilheat or
propane company. If you employ a delivery
driver who performs service calls (with his
or her own tools) on the side, the IRS will
look at each of these functions separately. It
may be that the person will be tagged as an
employee for driving, but retain indepen-
dent contractor status for service work.
This attempt to identify misclassifica-
tion of employees is not new. The IRS has
been reviewing questionable employee vs.
contractor relationships for many years. But,
as the pressure to generate additional tax
revenues has increased, so has the scrutiny
and diligence of the IRS. The importance
of an employee classification is even more
important with the impending health care
requirements.
It is very important that you take the
time to examine all relationships you
have with independent contractors to
make sure they will pass the control test.
Consult with your accountant or attorney
to determine if you need to reclassify any
contractors to avoid the stiff penalties that
could result if they are actually deemed to
be an employee.