Independent Contractor Compliance Blog

Educating Independent Contractors About Compliance

Do you occasionally experience pushback from consultants who insist on being treated as an independent contractor (IC) when they don’t qualify? Maybe you should inform them of the risks they are taking as a misclassified worker.

Although most consultants are truly ICs enjoying a mutually beneficial relationship with their clients, at times you may encounter a consultant who should be classified as an employee based on an objective review of the project and qualifications, but insists on being treated as an IC anyway. Often these consultants say they will refuse to take the job as an employee. Sometimes reason wins them over, and other times the client company takes the risk and engages them as an IC. Usually, doing the latter is not the best business decision for either the client or the consultant.

Normally, we think of all the risk as being on the company’s side. It’s true a misclassified worker can generate large unforeseen liabilities for the business that engages them. However, the possible consequences to the consultant are often overlooked. If a consultant is retroactively reclassified by the IRS from an IC to an employee, in addition to the consequences to the employer, several things can happen:

  • The consultant’s personal income tax return may be examined, creating an additional income tax liability with penalties and interest because deductions on the consultant’s schedule C (business expenses) and tax deductable contributions for a self-employed Keogh plan could be retroactively disallowed.
  • Personal income tax returns from prior years may be examined, and former clients may come to the IRS’ (or state agencies) attention, targeting these companies for employment tax audits.
  • Since agencies share misclassification information, other enforcement agencies may also target former clients.
  • This unwanted attention is likely to make the consultant an unpopular commodity for future engagements.

When you have a consultant who doesn’t qualify as an IC, but insists on being treated as one anyway, there are a few advantages to being employee you could point out:

  • An employee pays only half the social security and Medicare tax
  • An employee is covered for workman’s compensation
  • An employee is eligible for unemployment insurance
  • Most employers (such as Collabrus) provide health insurance and 401(k) programs
  • The probability of being audited by the IRS for income taxes is much lower than as an IC, who receives a 1099 form

When the advantages and disadvantages are netted out for the consultant, completing the project as a temporary employee may be better than as a misclassified IC. It is certainly better for the employer.

Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.


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