Burkland Brief
- Misclassifying workers can lead to back taxes, penalties, and legal exposure.
- The IRS uses a three-part test focused on control and independence.
- Part-time or remote workers may still qualify as employees under IRS rules.
- Form SS-8 can be filed with the IRS if classification is unclear, but takes time.
- Burkland helps businesses correctly classify workers and resolve past missteps.
Does it really matter if I classify workers as employees or contractors?
Absolutely. The way you classify workers has serious legal and financial consequences. It affects payroll taxes, benefits, insurance, and labor law compliance. Both the IRS and state agencies have strict rules, and misclassification can lead to audits, penalties, and lawsuits.
Key Differences:
- Employees (W-2): Entitled to protections like minimum wage, overtime pay, and unemployment insurance.
- Contractors (1099): Not entitled to these protections.
That’s why worker classification is often one of the first things regulators examine during a review.
If a worker is an employee, you must:
- Withhold federal income tax, Social Security, and Medicare
- Pay the employer portion of Social Security and Medicare
- Pay federal and state unemployment taxes
- File payroll tax returns and issue a W-2
If a worker is a contractor, you generally:
- Don’t withhold or pay taxes on their behalf
- Must issue a Form 1099-NEC if you pay them $600 or more in a calendar year
Getting classification right isn’t just about following the rules—it’s a great way to keep your business safe and thriving!
What’s the legal test for determining worker classification?
The IRS evaluates classification using what’s known as the common law test, which groups facts into three main categories:
- Behavioral control: Do you direct how, when, and where the work is performed?
- Financial control: Do you control the worker’s business expenses, provide or control their tools, payment terms, or ability to earn a profit?
- Relationship of the parties: Do you provide benefits such as insurance or vacation pay? Is the work ongoing and essential to your business?
There’s no single “magic” factor that determines status. The IRS looks at the total relationship to assess the degree of control and independence. You can find more details on the IRS website.
Does remote or part-time work mean someone is a contractor?
A person working part-time or remotely can still be considered your employee if you control the work being done. Just because someone works remotely doesn’t automatically classify them as a contractor. If you dictate how the work is performed—not just what the final deliverables should be—you probably have an employee, even if they have a flexible schedule or work part-time.
Can I just decide how to classify a worker based on what’s easier for my business?
No, the classification should accurately reflect the actual working relationship, not just your preferences. Labeling someone as a contractor on paper does not change their role in practice. If you control the job details, provide equipment, and treat the worker like a part of your team, both the IRS and state agencies are likely to consider them an employee.
Misclassification can have serious consequences. If you mistakenly treat an employee as a contractor, you may be liable for years of back taxes, interest, and penalties. Additionally, the IRS may deny business deductions related to those payments.
What if I’m not sure which classification applies?
If you’re unsure how to classify a worker, you can file Form SS-8 with the IRS to request a formal determination of their status. Either the business or the worker can file, but the process may take six months or more—so it’s best reserved for ongoing or long-term working relationships.
While waiting for a decision, treat the worker according to the most conservative and reasonable interpretation of the facts. If you’re still uncertain, it’s wise to consult a payroll or tax professional, as well as an experienced human resources professional who can help assess the role, responsibilities, and working relationship within the broader context of labor law compliance.
Is there any relief if I’ve misclassified a worker in the past?
Yes. The IRS offers limited relief if you’ve consistently treated a worker (and others in similar roles) as a contractor and had a reasonable basis for doing so. This is known as Section 530 Relief.
If you want to reclassify workers going forward without triggering full back taxes, you may be eligible for the Voluntary Classification Settlement Program (VCSP). This program reduces your exposure and allows you to correct course with fewer financial consequences.
The Bottom Line
Worker classification is a legal obligation that can have significant consequences. Missteps in this area can be expensive. As a business owner or manager, it’s essential to evaluate each role from the IRS’s perspective rather than your own. Consider factors like the level of control you have, how integrated the worker is into your business, and whether the arrangement genuinely reflects an independent relationship.
If you’re uncertain, document your decision-making process and seek professional advice. At Burkland, we assist businesses nationwide in accurately classifying workers, and we can also help you resolve any past issues.
Need help reviewing your team’s classification status?
Let’s talk. Burkland’s HR and Payroll compliance experts can help you reduce risk and stay focused on growing your business. Contact us to learn more.