Employer Classification of Individuals

A federal district court has concluded that an employer who classified its workers as independent contractors was entitled to relief under Section 530 of the Revenue Act of 1978 (Nelly Home Care, DC-Pa., May 10, 2016). As a result, the employer did not owe employment taxes for the period at issue. (The court did not determine whether the workers were actually contractors or employees,  but rather  that  the employer was not  liable for the employment taxes.)

Classification of individuals as employees or independent contractors is a crucial issue. Employers seek to avoid liability for FICA, FUTA and income tax withholding by treating workers as independent contractors. If the IRS determines retroactively that the employer should have treated its workers as employees, the employer will be liable for substantial employment taxes.