In some parts of the country, there’s been an increase of federal government scrutiny of the question whether certain dealership workers are or should be classified as independent contractors or employees. According to the Internal Revenue Service, “[t]he general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Thus, an individual is not an independent contractor if he/she performs services that can be controlled by the employer. Independent contractors’ earnings are subject to self-employment tax. By contrast, if an employer-employee relationship exists, the individual is not an independent contractor and his/her earnings generally are subject to FICA (Social Security tax and Medicare) and income tax withholding. On its face, the determination whether an individual is an independent contractor or employee may not always be apparent, however, it is critical that dealers make that assessment correctly. For this, they should enlist the assistance of their legal and tax advisors.
As business owners, dealers who hire or contract with individuals to provide services (such as, but not limited to, dealer trade drivers) must determine whether these individuals are employees or independent contractors. This requires an evaluation of the factors that evidence the degree of control and independence. Accordingly to the IRS, there are general common law rule categories into which such facts may fall. The first category is behavioral, that is, whether the company controls or has the right to control what and how the worker does his or her job. The second category is financial: whether the business aspects of the worker’s job are controlled by the payer. This may include items such as how the worker is paid, whether expenses are reimbursed, who provides tools/suppliers. The third common law category is the type of relationship that exists. That is, whether there are written contracts or employee-type benefits (for example, insurance, vacation, pension plan benefits), and whether the relationship will continue and whether the work performed is a key aspect of the business.
All factors must be evaluated and weighed by businesses when determining whether a worker is an independent contractor or employee. Some factors which may be relevant in one scenario may not be relevant in another. Generally, the entire relationship must be evaluated, considering the degree or extent of the right of the business to direct and control. The factors used in making the determination must be documented.
Businesses that undertake and complete the foregoing analysis and are uncertain whether a particular worker is an employee or an independent contractor, should consult with their legal or tax advisors. Additionally, they have the option of filing IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Withholding. Once this form is submitted, the IRS will review the facts and officially determine the worker’s status. This determination can take up to six months to be made by the IRS. Once a determination as to the worker’s status is made (by the business or by the IRS), the appropriate forms must be filed and requisite corresponding taxes paid.
A business that classifies an employee as an independent contractor with no reasonable basis for doing so may be held liable for employment taxes for that worker. If, however, the business has a reasonable basis for not treating a worker as an employee, there may be relief from having to pay employment taxes for the particular worker. To qualify for such relief, the business must file all required federal information returns on a basis consistent with treatment by the business of the worker.
Under the IRS Voluntary Classification Settlement Program, taxpayers have the option to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for those eligible taxpayers, subject to agreement to treat workers (or a specific group or class of workers) on a go forward basis as employees. Participation in this voluntary program requires the taxpayer meet certain eligibility requirements, apply by filing the requisite IRS form (8952), and enter with the IRS into a closing agreement.
Determining a worker’s proper status, employee or independent contractor, is an important requirement that dealership businesses must ensure they are doing correctly to avoid tax and related consequences. A dealership’s review of these worker classifications and applicable laws is significant to ensure compliance.