Employee vs. Independent Contractor– the $54 billion Tax Gap

January 13, 2014 | Authored by Eric R. Soro CPA


January 13, 2014 – Statistic: The “Tax Gap” is the annual shortfall between taxes owed and taxes paid. Employment tax noncompliance is estimated by the IRS to account for $54 billion of the tax gap.

So you can bet that the IRS would be aggressive in closing that gap by going after worker misclassification. Therefore, to assist with the complexity of the differences between an employee and independent contractor we have provided the following indicators often used by the IRS:

Workers are more likely to be classified as independent contractors if they:

  •       Make a significant investment in business property, such as tools;
  •       Pay their own business expenses;
  •       Receive a flat fee that is not based on an hourly or similar rate;
  •       Are not prohibited from doing work for other companies;
  •       Can pay subcontractors to get the job done;
  •       Are not performing services as an integral part of your regular business;
  •       Have a contract with an enforceable liquidated damages provision;
  •       Can make a profit;
  •       Can suffer a loss.

Workers are more likely to be classified as employees if they:

  •       Are given specific instructions and on-going training in how to get the work done;
  •       Cannot work for others;
  •       Have expenses paid by your company;
  •       Are paid with a salary or hourly wage;
  •       Do not have a significant investment in their trade or business;
  •       Are an integral part of your regular business;
  •       Receive direct reimbursement for all, or almost all, expenses;

Other factors are:

  •       Whether or not the work is performed on the business’s premises;
  •       Whether the worker has flexibility in setting hours;
  •       Whether the relationship is temporary or short-term;
  •       Whether the work is full- or part-time;
  •       Whether the worker performs services for one or more businesses.

Tax Deadline Alert!

Did you know if you paid an independent contractor $600 or more you must send the recipient a 1099-Misc by January 31st and send the IRS a copy by February 28th?

For more information, contact Eric Soro at esoro@dopkins.com.

About the Author

Eric R. Soro CPA

Eric, embraces the challenges of taxes and puts them to work for the client. He focuses on every aspect of a client's needs, from preparing top-level corporate and partnership returns through to the culmination of member and shareholder individual returns. Taking into account the ever changing tax laws, Eric researches the complex topics that affect his client's taxes so that he may efficiently plan his process and yield the optimal results. He joined Dopkins as an intern in 2006 then full-time in 2007 upon graduation.

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