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Legal: IRS and Independent Contractors |
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Four senior Democratic senators, including presidential candidate Barack Obama, recently introduced the Independent Contractor Proper Classification Act of 2007 (S. 2044). Although the act may not pass this year, it likely will be considered in subsequent congressional sessions because it would ostensibly increase revenue. The significance of the legislation is the elimination of an employer’s ability to rely on the industry practice of claiming a safe harbor in the classification of workers as independent contractors rather than employees. In light of this bill and with tax season around the corner, it may be helpful to provide guidelines for determining whether a person is an employee or an independent contractor, and information on current court decisions regarding employee/independent contractor status.
The Internal Revenue Service has published a 20-part test that employers should consider in determining whether they have hired an employee or retained an independent contractor. Of course the significance in making the determination is taxed based—an employer must withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on an employee’s salary. Independent contractors are responsible for all of their own taxes, and independent contractor agreements generally provide that the independent contractor will indemnify the employer for the independent contractor’s failure to pay such taxes.
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