Worker classification questions: asking the IRS for a ruling

The issue of worker classification for tax purposes is one we’ve been following closely in this blog. In our June 28 post, we wrote about the incentives the IRS has offered for employers to voluntarily reclassify workers as employees rather than as independent contractors.

The IRS remains very concerned about the issue of improper classification. Indeed, the pressure on the agency has only increased in the last few weeks, following the release of an inspector’s report on the subject. In late July, the Treasury Inspector General for Tax Administration (TIGTA) reported that the “tax gap” to the federal government from uncollected employment taxes on workers who were classified as independent contractors rather than employees. According to the inspector general, that gap is an astounding $385 billion.

For employers in Texas and across the country, then, the issue of employee classification remains an important one.

The gap is by no means entirely due to deliberate employer attempts to game the payroll tax system. After all, the question of who is an employee and who is a contractor for employment tax purposes is not always easily answered.

There are many factors that can affect the determination of a worker’s status. In many cases, employers simply aren’t certain how a worker should be classified.

That is why it is possible for an employer or a worker to ask the IRS for a ruling on the question of whether a certain worker should be classified as an employee or as an independent contractor. Given the complexity of the determination, it is good to know that a request of this type to be IRS could resolve the uncertainty.

Source: Reuters, “Worker or contractor? U.S. businesses get it wrong: IRS watchdog,” July 29, 2013