Posted by Liz Greene
One of the most pervasive and dangerous myths in the practice of worker classification -- that arcane process of determining whether to pay a worker as an employee or an independent contractor -- may be the belief that a piece of paper in the form of articles of incorporation makes a substantive difference.
In a new legal alert published Friday by Michael Best & Friedrich, one of the leading employment law firms with expertise in independent contractor compliance, attorney Eric Rumbaugh explains how the IRS and other regulatory agencies determine worker classification, concluding that, "Incorporation Not a Substantive Factor in Determining Worker Status."
If your legal or accounting departments have instructed you to direct workers to go incorporate themselves in order to make them "compliant" independent contractors, you might want to send them this page. Workers can incorporate themselves for just $139 on Legalzoom, but don't kid yourself that this piece of paper -- whether an LLC, S-Corp, or C-Corp -- will by itself fundamentally alter the relationships of the parties.
You can also refer them to my recent blog post on the 1099 Risk Blog covering the incredible Baby Trend independent contractor reclassification case, where a single worker was determined by the court to have been misclassified as an independent contractor, and Baby Trend was ordered to pay over $8 million. The worker in question had his own corporation and established business, and yet this made no substantive impact on the court's findings of misclassification. What's even scarier is that the $8 million did not include state and federal taxes that may eventually also come due. Any independent contractor reclassification case bears the potential for cascading consequences, regardless of where it starts.
A new tax year is the perfect time to evaluate your business' independent contractor classification rubric.
If you're losing sleep over your independent contractor compliance processes, at least this paper makes good bedside reading.
In a new legal alert published Friday by Michael Best & Friedrich, one of the leading employment law firms with expertise in independent contractor compliance, attorney Eric Rumbaugh explains how the IRS and other regulatory agencies determine worker classification, concluding that, "Incorporation Not a Substantive Factor in Determining Worker Status."
If your legal or accounting departments have instructed you to direct workers to go incorporate themselves in order to make them "compliant" independent contractors, you might want to send them this page. Workers can incorporate themselves for just $139 on Legalzoom, but don't kid yourself that this piece of paper -- whether an LLC, S-Corp, or C-Corp -- will by itself fundamentally alter the relationships of the parties.
You can also refer them to my recent blog post on the 1099 Risk Blog covering the incredible Baby Trend independent contractor reclassification case, where a single worker was determined by the court to have been misclassified as an independent contractor, and Baby Trend was ordered to pay over $8 million. The worker in question had his own corporation and established business, and yet this made no substantive impact on the court's findings of misclassification. What's even scarier is that the $8 million did not include state and federal taxes that may eventually also come due. Any independent contractor reclassification case bears the potential for cascading consequences, regardless of where it starts.
A new tax year is the perfect time to evaluate your business' independent contractor classification rubric.
If you're losing sleep over your independent contractor compliance processes, at least this paper makes good bedside reading.
Tags: misclassification, incorporation, classification, independent contractors
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