QUESTION:

I own a business and file my tax returns every year. I treat the people that work for me as independent contractors and not as employees so they are responsible for their own taxes. Now the IRS says that they have classified them as employees and I am responsible for all of these back tax withholdings.

ANSWER:

Unfortunately, it doesn’t matter how business owners classify their employees, even if your contract states you are an independent contractor. The IRS has a test they apply to each “employee” to determine whether they qualify as an independent contractor. If the IRS determines that your independent contractors are actually employees, you will be required to pay the taxes that should have been withheld from their paychecks. The test the IRS applies to determine the employees’ status considers the control over the work exercised by the company, the provision of equipment and supplies, ability to discharge or fire, permanency of the relationship between the parties, and which party assumes the risk of loss. Not one of these factors is determinative, but all of the factors considered in total determine the status of the employee.

I will discuss the factors mentioned above in more detail in a later set of articles on this site so you will have a better understanding of their meaning.