Two Reasons The IRS May Reclassify You As An Employee
As an independent contractor, you work for yourself. However, there are times when the IRS may attempt to reclassify you as an employee when the agency does an audit on a company you work for. This can have significant consequences for your own business taxes if this happens, and you may actually lose the client because the company doesn't want the headache of treating you like an employee in the future. Here are two reasons why the IRS may attempt reclassification and how you can avoid it.
You Look Like an Employee on Paper
The IRS constantly has to deal with misclassification fraud. This is when a company purposefully misclassifies an employee as an independent contractor to avoid paying taxes, carrying workers compensation insurance, and performing other employer responsibilities. Thus, if you have some of the hallmarks of being an employee, the IRS will assume the company is trying to commit misclassification fraud and reclassify you as an employee.
Some things the IRS would consider red flags include
- Using your real name instead of a business name.
- Working on the premises when it's not necessary.
- Receiving training from the company.
- Receiving part of your payment in benefits (e.g. health insurance).
- Working for the client exclusively.
There may be very good business reasons for doing some of the above. For instance, it may be more convenient to work onsite or the nature of your business requires you to only work for one client at a time. However, it's a good idea to review your business setup and how you manage yourself with a business attorney to determine where the IRS would have problems and make the necessary changes to reduce the risk you'll be reclassified as an employee of the company.
There is No Contract
Another thing that may cause the IRS to reclassify your status with a company is not having a contract that stipulates your mutual rights and responsibilities. First, not having any type of written agreement with the company is a recipe for disaster, because it can be very difficult to hold the company liable for damages if it doesn't follow through on the things you talked about.
Second, the lack of a contract may make the IRS doubt your claim that you're an independent contractor –especially if you have some of the red flags above— and they may require you to prove you really are in business for yourself to avoid being reclassified as an employee.
It's best to always draw up a contract for every job you do for a client to protect yourself. Consult with a business attorney for assistance with developing a standardized contract you can use whenever you accept an assignment.
For more information about this issue or help managing the legal aspect of your business, contact an attorney or visit websites like http://www.clgnc.com/.