What do many of us have in common nowadays? Yeah, empty pockets and a crying need for money, money, money – and that includes your government. In the search for dollars, employers’ misclassification of employees as independent contractors beckons as a legitimate source of lost funds. So, the Texas Workforce Commission (TWC) Unemployment Tax Division and the IRS both have an interest in worker-classification issues. It may be tempting to assume your workers are independent contractors and blithely pass on the responsibility for Social Security, Medicaid, Unemployment, and other payroll taxes. Best be sure of your classification though, because when one of the agencies comes knocking, they can collect not only back taxes but impose fines for your errors. Witness the $319 million fine the IRS slapped on FedEx!
What’s the beef with hiring a person as an “independent contractor” whenever you want? Being paid fairly lies at the heart of the worker classification issue according to the Fair Labor and Standards Act. An independent contractor is self-employed, manages work without an employer’s direction and control and pays his or her own expenses and taxes. If you control and direct work planning and performance, this person is an employee and you are responsible for wages, expenses, and taxes. “We both agreed to the contract labor deal!” you cry. No matter – the primary factor in determining classification is the underlying nature of the work. The Texas Unemployment Compensation Act creates a “presumption of employment” or employee relationship and says the employer must prove the independent contractor relationship by showing an absence of direction and control over the work.
Well, now what? You’ve got some contract labor and you’re not sure if they meet that approved definition. Read Lisa Bogany’s blogs with the complete, TWC approved definition of contract labor. Especially for Texas Employers, the employer guide sponsored by the TWC Commissioner Representing Employers, has an explanation and the entire TWC common law test used for the definition. If you meet Texas requirements, you’re good on federal contract labor requirements. If you need help, speak with your local TWC Tax Representative at (281) 933-3858. TWC is more interested in assisting employers to understand and meet their unemployment tax obligation than in punitive actions.
Think you can slide by? Tax investigations are frequently sparked by people filing unemployment claims despite their contract labor status. Random audits are a routine fact of business. The IRS has implemented a new tax examination program concentrating on worker classification issues. In 2012, they will be here in Texas to help TWC learn all about this new program. Take action now to clear up your worker classifications!
Cally Graves is an Industry Liaison between business, workforce, and education working with Workforce Solutions. She has 35 years of experience in workforce development, primarily working with employers in Houston, Texas and the Gulf Coast region.