VIEWpoint Issue 1 | 2023
2023 Compliance Trends: Staying Ahead in an Evolving Regulatory E...
2023 Tax Calendar
Last year, FedEx settled in a class action lawsuit, requiring it to reclassify approximately 2,300 drivers as employees in California. Despite FedEx entering into operating agreements that classified the employees as independent contractors, the California Court of Appeals for the Ninth Circuit noted that FedEx controls the appearance of its drivers and their vehicles, the times drivers work, and aspects of how and when drivers deliver packages.
So its drivers were deemed to be employees under the California Labor Code. This decision contradicts a previous IRS audit of FedEx driver classification that decided not to treat the drivers as employees. Keeping track of two separate worker classifications could prove an ongoing administrative nightmare for FedEx.
This high profile case should act as a reminder to all manufacturers and distributors to make a clear distinction between employees and independent contractors. Here’s what you need to know to get it right.
Workers generally are employees for federal tax purposes if the company controls and directs the jobs they perform and how they perform them. The IRS has grouped the degree of control into three general categories of evidence:
In analyzing the status of your workers, pay close attention to such factors as:
Additionally, if the employer and the worker believed the same thing at the time they entered into their arrangement, this factor can indicate either employee or independent contractor status, depending on the facts.
If you currently use contractors — or are considering doing so — it’s a good idea to establish procedures that help ensure you don’t inadvertently misclassify any workers. First, require contractors to sign a written operating agreement outlining your relationship with them and ask for tangible evidence of their autonomy. This may include copies of letterhead, invoices, logos, business cards and advertisements. Also record their federal employer identification numbers and equivalent state numbers, if they operate through their own corporations.
Over time, managerial practices may inadvertently violate the original intent of a contractor’s operating agreement, crossing the fine line between contractor and employee. So, it’s also a good idea to develop a checklist or questionnaire to gather facts about those you classify as contractors. Periodically compare how you’re currently treating contractors to the factors described above. Then you should know whether you’re properly classifying workers.
The issue of whether to classify workers as employees or independent contractors has been a hot button with the IRS and state taxing agencies for several years. Improper classification can be a costly mistake, requiring you to pay back taxes, penalties and unpaid benefits. Contact your Doeren Mayhew tax advisor to make sure you’re playing by the rules.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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