NFIB

A Dangerous Disguise: The penalties of masking employees as contractors are stiff
01/ 24/ 2006
by Erik Sherman

Employee injuries should always make businesses reevaluate their operations. But Field of Flowers president Donn Flipse knows they can also be deeply jolting. At major holidays, the Davie, Fla.-based business—a thriving fresh flower superstore—used extra floral designers whom it treated as independent contractors. About a dozen years ago, one of them got hurt, and suddenly Flipse didn't know what to do about medical treatment. Insurance only covered actual employees. “I had to tell that person he wasn't covered under workers’ comp,” Flipse says.

Although the injury wasn't bad and treatment was minor, Flipse keyed into the other issue that could have surfaced. “If an employee doesn't pay his taxes as an independent contractor, and it’s determined that the person is really an employee, then the company can be held liable,” he says. And not just for this year’s taxes, but all taxes, penalties and interest from the past.

Keeping straight on employees and contractors is tough but necessary—but the penalties of doing wrong are brutal.

In its Publication 15-A, the IRS asks businesses to consider whether they control the details of how people do their work. Follow these guidelines strictly, because any ambiguity could work against you.

State agencies can also get involved. Phoenix CPA Sandra Abalos saw the IRS go after one of her clients because a contractor didn't have his own business card. “The government would like more workers to be classified as employees instead of contractors because then we as employers have to pay into unemployment insurance,” she says.

State employee reclassifications can trigger an IRS review. Abalos’ suggestion? If there’s doubt about someone’s status, treat the person as an employee and require independent contractors to either incorporate or form a limited liability company. It’s hard for anyone to argue with independent legal status.

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