Independent Contractor vs. Employee: The Danger’s in the Designation for Construction Companies

The question of whether a worker is an independent contractor or an employee is a difficult one which may have costly consequences for construction companies.  As a recent Construction Business Owner article entitled "Worker Classification Woes” reported, the 2013 Tax Court memorandum decision in Kurek v. Commissioner “explains that businesses relying on the independent contractor designation – namely, construction companies – are going to receive additional scrutiny from the IRS.”

This focus on construction companies has actually been a long time in the making.  Back in 2009, the Government Accountability Office (GAO) published a report on the independent contractor designation and the negative impact it was having on the government’s tax revenues coming in from sources like social security, unemployment and payroll tax. And guess which industry was one of the ones singled out by the GAO for potentially mislabeling workers?

Due to the nature of the work, and sometimes in an attempt to reduce payroll cost, some construction employers unknowingly make the mistake of misclassifying workers as independent contractors instead of employees.  Making the wrong determination will cause your company to incur hefty tax liabilities in addition to penalties.  And no one wants their bottom line to take that kind of hit!

On the lookout for classification abuses, the IRS is taking a closer look at any company that might be misclassifying an employee as an independent contractor.  In order to assist business owners and employees, the IRS has published Employee vs. Independent Contractor—Seven Tips for Business Owners. The article provides information on the three broad categories of factors you need to consider when determining whether a worker is an independent contractor or an employee.
If you are still not quite sure whether your worker is an independent contractor or an employee, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.  The agency will review the filing and then determine whether the specified individual is an independent contractor or an employee.  Keep in mind, however, that once the IRS makes a ruling on your specific situation, you will have to operate in accordance with that ruling moving forward.

As with so many other tax questions, it’s better to be safe than sorry when it comes to worker designations. If you need further information on this topic or have any questions concerning the above information, feel free to contact an accounting or tax professional.

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