The trucking industry continues to evolve. From new regulations and emerging technologies to political and economic uncertainties, the industry must adapt to continuous change.
The independent contractor model has been under scrutiny for years and is a recent focus of challenge by regulators. It is critical that business owners correctly determine that individuals providing services are properly classified as employees or independent contractors.
An employer must withhold and deposit income taxes, Social Security taxes, and Medicare taxes from the wages paid to an employee in addition to paying the employer portion of Social Security and Medicare taxes, as well as pay unemployment tax on wages paid to an employee. In most cases, businesses are not responsible for withholding or remitting taxes on payments to independent contractors.
Recently, there have been several court cases that provide companies some insight into how regulators and the courts approach these determinations. In evaluating whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Per the IRS, common law rules apply.
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does their job? The type of instructions given, evaluation systems, and training given all influence the determination of behavioral control.
- Financial: Are the business aspects of the worker’s job controlled by the payer? The worker’s level of required investment, opportunity for profit or loss, payment arrangements, and whether services are available to the general market can all impact financial control.
- Type of Relationship: Are there written contracts or employee-type benefits, e.g., pension plan, insurance, vacation pay, etc.? Will the relationship continue indefinitely and is the work performed a key aspect of the business?
Companies must consider each of these items before determining whether a worker is an employee or independent contractor. There is no set number of factors that indicates a worker is an employee or an independent contractor and no one factor stands alone in making this determination. Employers must consider the entire relationship and consider the extent of the right to direct and control the worker.
Employers risk being held liable for 100% of the employment taxes for workers classified as independent contractors when no reasonable basis exists for doing so. In addition to the tax, penalties for nonpayment of payroll taxes are highly punitive. Also, the internal time and professional fees incurred to resolve worker classification issues can be substantial.
If it is unclear whether a worker is an employee or independent contractor after reviewing the three categories of evidence, then Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.
As regulatory audits and insurance audits related to workers’ compensation increase, the independent contractor model is increasingly under scrutiny. While this article is focused on classification for employment tax purposes, classification of workers also is highly relevant to a company’s legal claims liability. We recommend consulting with a team of competent professional advisors including attorneys, CPAs, and insurance specialists who are well versed in the latest regulatory developments impacting the trucking industry.
If you have any questions or need assistance, please reach out to a professional at FORVIS.