Myth About Payroll Taxes: Transforming Employees Into Independent Contractors To Save On Payroll Taxes Is Easy 

Myth About Payroll Taxes: Transforming Employees Into Independent Contractors To Save On Payroll Taxes Is Easy

Sep 21, 2022

Myth: Transforming Employees Into Independent Contractors To Save On Payroll Taxes Is Easy

Reality: You probably know that it costs less to use an independent contractor than to have an employee on staff. The reason: the cost of payroll taxes, along with insurance and benefits, apply only to employees. But don’t think you can simply reclassify a worker who’s been your employee as an independent contractor. The IRS, as well as other government agencies, are on the lookout for just such action.

According to the Harvard Business Review, the use of Independent Contractors has increased by 40% in the last decade. According to the Labor Department, so many employees are misclassified because companies are not knowledgeable about how to classify their employees according to labor and workplace laws. The issue of misclassification of Independent Contractors has been around for a while. According to the IRS, they primarily view workers as Independent Contractors when they should be classified as W-2 Employees.

The classification of a worker depends on many factors, most of which boil down to a matter of control. Essentially, if you have the right to say when, where, and how work gets done, you’re likely dealing with an employee. The IRS uses three categories of factors to assess the degree of control: behavioral, financial, and type of relationship. Many states, including California, use an ABC test:

  1. The worker is free from the control and direction of the hirer in connection with performing the work.
  2. The worker performs work outside of the usual course of the hiring entity’s business.
  3. The worker is usually engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

According to the IRS and court precedent, the following items indicate that a worker is an employee:

  • Level Of Instruction: If the company directs when, where, and how work is done, this control indicates a possible employment relationship.
  • Degree of Business Integration: Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees. 
  • Services Rendered Personally: Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. 
  • Set Hours Of Work: People whose hours or days of work are dictated by a company are apt to qualify as its employees. 
  • Full-time Required: Full-time work gives a company control over most of a person's time, which supports a finding of an employment relationship. 
  • Furnishing Tools and Materials: Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. 

According to the IRS and court precedent, the following items indicate that a worker is a contractor:

  • Investment In Facilities: Independent contractors typically invest in and maintain their own work facilities.
  • Realization Of Profit Or Loss: A worker who can realize a profit or suffer a loss providing the services is generally an independent contractor.
  • Working For More Than One Firm At A Time: People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors. 
  • Making Service Available To The General Public: If a worker makes his or her services available to the public on a regular and consistent basis, that indicates independent contractor status.

Hiring, Supervision, & Paying Assistants: If the worker hires and supervises others under a contract pursuant to which the worker agrees to provide material and labor and is only responsible for the result, this indicates independent contractor status.

Category List

Tag List

1099 G (1)
Affordable Care Act (3)
Federal Payroll Reports (2)
Ultimate Payroll (1)
Mac (1)
Payroll Software (7)
1095 (6)
Social Security Tax Deferral (1)
Social Security Wage Base (2)
Growth (1)
Dependent Care (1)
IRS Form W-3C (1)
TIN Matching (4)
Secure eFiling (2)
workplace dynamics (2)
nonexempt employee (2)
Rebranding (1)
Human Resource (1)
Payroll Tax (5)
ACA Reporting (5)
IRS Notice (2)
1099-G (5)
remote office (2)
The Families First Coronavirus Response Act (1)
ACA 1095 C&B requirements (3)
Tax Return (2)
HSA (1)
Top 50 (1)
IRS 1099 NEC Form (2)
Cryptocurrency (2)
Economic Security Act (1)
1095-C (4)
Solution (3)
Aatrix Software, Inc. (5)
Small Business (2)
Travel Expenses (1)
Accounting Solutions Provider (2)
HR (1)
e-File (1)
1099-K (4)
Tax Payments (1)
State (1)
CIO Review (3)
IRS Form 1099 NEC (3)
Payroll Reporting (14)
Medicare Tax (1)
1094-C (2)
CP2100 (3)
New Logo (1)
exempt employee (2)
employee classification (2)
Biometrics (1)
Payroll Solution (6)
eFile (6)
Quarterly Reports (1)
IRS Forms (1)
B-Notice (2)
Review (2)
Initiatives (1)
Payroll Tax Forms (5)
Sage Summit 2014 (1)
Aatrix (7)
e-Filing (1)
minimum wage (3)
Top 10 (3)
Accounting Solutions (2)
Venmo (1)
IRS Form 7200 (1)
Student Loan Relief (1)
Taxes (2)
irstaxtip (1)
I-9 (2)
OEM Payroll (2)
Paycard (1)
SSA (2)
Payroll Compliance (5)
Payments (1)
IRS Tax Forms (2)
EEO-1 (3)
Sponsorship (1)
Electronic W-2 (1)
Paycheck (2)
Cloud (1)
SUTA (1)
Employee Benefits (1)
HFSA (1)
1099 (12)
IRS Form 1099 (3)
Inflation (1)
Certified Payroll Reports (1)
Paycheck Protection Program (1)
Federal Taxes (1)
Reporting (1)
ACA eFiling (4)
independent contractors (1)
cyber attacks (1)
Year-End Deadlines (2)
Tax Identification Number Verification (2)
Forms (1)
Aatrix Software (10)
Solutions (2)
Aatrix eFile (10)
Sage Summit 2015 (1)
1094-B (2)
Helpful Hints (1)
Payroll Tax Rates (1)
Compliance (5)
Employee Tax Credits (1)
Technology (3)
Standard Mileage Rate (1)
ACA e-filing (3)
State FMLA (2)
COVID-19 (8)
Employee Retention Credit (2)
Payroll Tax Reporting (11)
employee retention (4)
1095-B (4)
covid (2)
unemployment (6)
Company Of The Year (1)
Accountant Shortage (1)
1099 NEC (7)
2020 IRS Form W-2 (2)
Infrastructure (1)
Sick Leave (2)
Awards (1)
IRS 7200 Form (1)
New Hire Reporting (3)
Sage 300 CRE (1)
w-4 (2)
Travel During Covid (1)
Coronavirus Aid (2)
Payroll Taxes (5)
eFiling (3)
Tax Free (1)
State Payroll Reports (3)
SUI (1)
IRS Form 941 & 940 changes (3)
CA Pay Data Report (1)
Employee Travel (1)
Millennials (2)
Payroll Tax Relief (1)
Technology Companies (2)
Child Tax Credit (2)
SOC2 (4)
Future (1)
vaccine (2)
SOC3 (2)
ACA (8)
Staff (1)
940 (1)
Social Security Number Verification (3)
CIO (3)
Web Forms (1)
FMLA (3)
Corrections (2)
Paid Leave (1)
IRS Form 941 (3)
Sage (1)
Sage Solutions (1)
W-2 (15)
Social Security Withholding (3)
Top 100 (2)
CV Technology Innovator Awards (1)
Recruiting & Retention (4)
Reports (1)
Safe eFiling (1)
payroll reporting changes (2)
eFiling Thresholds (3)
IRS 7200 Tax Form (1)
Deposit Schedule (1)
Retirement Contribution Limits (1)
ACA Compliance (3)
PTO Payout (1)
Payroll (22)
Sage Solutions Provider (1)
1099-PATR (2)
Enterprise (2)
Windows (3)
SSA Notice (2)
Top Software (1)
Payroll Reports (18)
IRS Form W-2 (6)
employees (3)
Tax Identification Number (2)
Penalties & Fines (1)
Form 941 (3)
IRS Regulations (1)
Medical Leave (1)
Federal (1)
SMBs (1)
Paypal (1)
Innovation (2)
Assessment (4)
Labor Shortage (1)
TIN Matching Services (4)
Security (6)
Filing (1)
Employee Documentation (1)
TUG (1)
941 (8)
CV Magazine (1)
IRS Notice 931 (1)
work from home (1)
1099-INT (2)
Tax (2)
Family Medical Leave Act (2)
FUTA (1)
1099 TIN Matching (6)
Business Travel (1)
overtime (1)
interest rates (1)
Virtual Currency (1)
Coronavirus (2)
941-X (1)
American Rescue Plan (1)
Improvements (1)
Families First Coronavirus Response Act (1)
1099-MISC (3)
IRS Form 941 Changes (2)
Per Diem (1)
IRS (5)
IRS 941 Form (2)
Gig Economy (1)
Payroll Tax Notice (2)
Fraud (2)
Withholding (5)
Workplace Efficiencies (1)
Sage Summit (2)

Tag Cloud

TaxesInflationComplianceSocial Security Tax DeferralPaid Leave940State Payroll ReportsPayroll TaxBiometricsVenmoCIO ReviewIRS Form W-2Ultimate PayrollTravel Expenses1095-BPayroll Tax ReportingPayroll Tax FormsTop SoftwareCorrectionsSagecyber attacksIRS 1099 NEC Form1099-INTAmerican Rescue PlanMacHelpful HintsAatrix eFileReports1099-MISCOEM PayrollTax FreeInnovation1095-CDependent CareSocial Security Number VerificationTUGSolutions1099-PATRPer DiemCoronavirusPaypal2020 IRS Form W-2IRS Form 941W-2New Logononexempt employeeCertified Payroll ReportsCryptocurrencyCV Technology Innovator Awardse-FilingEconomic Security ActPaycheck Protection ProgramACA 1095 C&B requirementsPaycheckSage Solutions Providerworkplace dynamicsVirtual CurrencySUIremote officePayroll Tax ReliefFormsFMLAIRS RegulationsSafe eFilingInitiativesIRS 7200 Tax FormMedicare TaxFamilies First Coronavirus Response ActAccounting SolutionsGig Economywork from homeStateAccounting Solutions ProviderSSA NoticeTop 10941-XChild Tax CreditcovidEmployee Retention CreditIRS Form 1099 NECSmall BusinessRetirement Contribution LimitsSage SummitStudent Loan ReliefMillennialsCoronavirus AidPaymentsTax ReturneFiling ThresholdsTax Identification Number Verificationemployee classificationPayroll CompliancePenalties & FinesEmployee DocumentationIRS Tax FormsAwardsNew Hire ReportingEEO-1Recruiting & RetentionTax Paymentsemployee retentionSSAPayroll Tax NoticeWeb FormsFamily Medical Leave ActLabor ShortageWindowsovertimeAatrix SoftwareSolutionTop 1001099 NECHRSecure eFiling1094-BWithholdingHIPAASocial Security Wage BaseACA eFiling941IRS Form 7200Top 50Employee Tax CreditsPayroll SolutionIRS Form 941 ChangesPayrollIRS Form 1099ACATechnologyEmployee TravelSick LeavePayroll Tax Rates1099 TIN MatchingEmployee BenefitsYear-End DeadlinesFraud1099-GSage Summit 2014Travel During Covidexempt employeeCIOFilingw-4SOC2Affordable Care ActSOC3RebrandingAatrix1099IRS NoticeForm 941IRS 941 FormFederal Payroll ReportsElectronic W-2e-FileeFilingPayroll Software1094-CHuman ResourceSocial Security Withholdingminimum wageSMBsIRS Form 941 & 940 changesIRS 7200 FormEnterpriseIRS Form W-3CCOVID-19FUTAHSAFederal TaxesThe Families First Coronavirus Response ActvaccinePaycardSponsorshipMedical LeaveeFileTaxFederalCompany Of The YearQuarterly ReportsAssessmentACA ReportingDeposit ScheduleunemploymentIRS Forms1099 GState FMLAindependent contractorsGrowthpayroll reporting changesemployeesirstaxtipTIN MatchingPayroll ReportingReviewIRS Notice 931CA Pay Data ReportSUTASage 300 CRETax Identification NumberFutureAccountant Shortage1095Business TravelAatrix Software, Inc.ACA e-filingSage Summit 2015IRSI-9StaffStandard Mileage RateReportingSecurityHFSAPayroll TaxesB-NoticeEFTPSinterest ratesCP2100InfrastructureWorkplace EfficienciesTIN Matching ServicesPTO PayoutPayroll ReportsImprovements1099-KCV MagazineSage SolutionsACA ComplianceCloudTechnology Companies