Business Corner

There have been some recent situations with contractors, where the IRS determined their “subcontractors” were really employees under their definition. Not only did the tax issue come up but the penalties as well.

Per irs.gov the definition of a subcontractor is:

“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.

However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.”

In the most recent case the IRS took it upon themselves to notify the Florida Department of Financial Services so they could audit the workers compensation and charge back fines for unpaid premiums. If you use “individual” subcontractors you should seek assistance from your CPA or Tax attorney to be sure you are within the legal definition, otherwise these are two government agencies that might come knocking on your door.