Succeeding in the horse industry nowadays is tough. Expenses are high. Competition is fierce. Labor costs are high. Making a profit, it seems, is harder than ever. Wouldn’t it be attractive to eliminate the high costs that come with keeping employees? Many equine facilities believe they can cut these costs by simply labeling their workers “independent contractors” instead of “employees.” Does this sound easy and legal? Careful, it may be neither.
There are major differences between employees and independent contractors, and the tax consequences of making an improper designation can be very serious. Equine facilities usually learn this the hard way after the Internal Revenue Service or a government agency has brought a challenge.
The Advantages of Independent Contractors
Independent contractors are not employees. By definition, an independent contractor is one who carries on an independent business and contracts to do some work for another according to his or her own methods, and without being subject to the control of the other as to the means by which the result is accomplished but only as to the result itself. Consequently, one who hires an independent contractor is not responsible for paying the charges normally associated with employees, such as FICA, withholding, overtime, worker’s compensation, insurance, and benefits.
Another advantage of independent contractors is that the employer will generally not be liable for the negligent or wrongful acts committed by the independent contractor or the independent contractor’s employees. A classic example of the independent contractor is the handyman who brings his own tool box, does the work independently, and leaves after the job is done or when it is too late to work.
When is an Independent Contractor an Employee?
The courts and the IRS have weighed a variety of factors to determine whether an independent contractor is really an employee. Some of these factors are discussed below:
This is probably the most important test. The courts and the IRS will examine the degree to which the facility controls the worker’s work processes and work schedule. That is, the more the employer has supervision, direction, and control over the worker, the greater the chance that the worker will be deemed an employee. Also, the worker who receives training, instruction, assistance, and materials from the employer is more likely to be classified as an employee.
Workers who devote a large portion of their time, over an extended period, to one employer will be more likely to be regarded as an employee. Independent contractors, by comparison, typically make their services available to the general public on a regular basis. and are generally free to work when and for whom they choose.
A worker paid by the hour, week or month tends to be regarded as an employee. On the other hand, payment by the job or by commission (or if a lump sum payment is made in installments) can reflect an independent contractor.
If the worker pays for his or her own assistants to perform part of the work, this could evidence an independent contractor relationship.
The IRS has issued IRS Revenue Ruling 87-41, which is designed to guide employers in the factors the IRS uses to determine whether a worker is an employee or independent contractor. If you would like to receive a free copy of these regulations, please contact Ms. Fershtman, the author of this article.
In conclusion, please keep these concepts in mind:
- Just because you have labeled a worker an “independent contractor” does not mean the IRS or the courts will agree. The factors described in this article can give you some idea of how you may fare in an IRS or legal challenge.
- The independent contractor has several important tax obligations, such as self- employment tax, estimated tax payments, and individual health and pension benefits. Terminated independent contractors cannot collect unemployment compensation.
- If you have decided that a worker is an “independent contractor,” make sure it is mutual. For example, find out if the worker has bought insurance and is handling the obligations described above.
- Consider having an independent contractor understanding drawn up in a contract. There is never a guarantee that the courts will accept your designation, but the contract at least evidences your understanding.
- An improper classification, by IRS standards, is a costly one. Even well-intentioned mistakes can receive harsh IRS penalties. A willful failure to comply with the law can expose employers to severe financial penalties.
This article is not intended to constitute legal advice. Where questions arise based on specific situations, consult with a knowledgeable attorney or Certified Public Accountant.
Julie I. Fershtman, Esq.
About the Author
Foster Swift Collins & Smith PC
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28411 Northwestern Hwy., Ste. 500
Southfield, Michigan 48034
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