EMPLOYEES OR INDEPENDENT CONTRACTORS

By: Gary L. Coulter, J.D., LLM in Taxation

A determination to hire employees or independent contractors may be based on individual needs, the customer’s demands and expectations and even worker availability. Although your initial classification may be appropriate, you must make certain the applicable legal standard is met. One of my clients hired an independent contractor and failed to document the decision in his business records or by a written contract. The “independent contractor” controlled the actions of additional workers over a number of years. An audit by he IRS, determined the independent contractor and each of his employees were “employees of the general contractor” resulting in tax liability for the client on both a federal and state level. The IRS decision was based primarily on a failure to document. If the documentation had been available, the chances are great the liability would have been avoided.

Employees and independent contractors are treated differently under general legal principles, by the IRS and by the Georgia Departments of Revenue and Labor. Most employers are aware independent contractors are exempt from employment and labor legislation but employees are covered. However, if an employer misclassifies workers it can lead to many issues including unemployment and payroll tax liability, wage and hour claims, health and benefit claims, retirement claims and lawsuits from third parties to name a few. With these consequences in mind, employers should be concerned over proper classification of workers and service providers. Misclassification can be costly to the employer and to individual employees in many instances.

The business owner should also take notice of the 2004 Georgia statute, O.C.G.A. § 48-7-127 making it unlawful for any person knowingly to coerce, induce, or threaten an individual falsely to declare themselves an independent contractor in order to avoid or evade the withholding or payment of tax. Individuals violating this law in connection with State or any political subdivision contracts and convicted are subject to a fine equal to the amount of tax owed for the first offense, two times the amount of the tax owed upon conviction of the second offense, and upon conviction of the third and subsequent offenses, the individual is subject to a fine equal to four times the tax owed.

In this article we assume the reader understands the economic advantages and disadvantages of the proper employee/independent contractor classification to both the classified worker and company. If you do not understand the economic impact take the time to study it. The balance of this article will focus on assisting the reader on “how” to classify workers and avoiding the consequences of misclassification.

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