Turning to independent contractors can be a smart option in a number of situations, such as when you have a seasonal upswing in workload or need a specialized skill for a short period. But independent contractors come with potential risks, too. They may not help you trim your total workforce costs if you use them excessively. More important, there can be tax and legal ramifications if you mishandle the relationship.
The IRS has long scrutinized employers’ use of independent contractors as a way to avoid payroll tax obligations. If the IRS recharacterizes an independent contractor as an employee, you could be on the hook for:
- Back payroll taxes you should have paid,
- Back payroll and income taxes you should have withheld, and
- Interest and penalties.
Also, earlier this year, the Department of Labor renewed its focus on employee misclassification. Its Wage and Hour Division released Administrator’s Interpretation No. 2015-1, which includes six factors to help employers determine proper classification and warns of serious potential penalties.
Independent contractors can give you flexibility to even out the peaks and valleys of your workforce needs. But these arrangements have risks. We can help you understand the tax implications and work with your legal advisors to keep you in compliance.