{{Short description|Misclassification of independent contractors}} {{UStaxation}} The United States maintains a legal '''distinction between independent contractors and employees''' for tax treatment and for the Fair Labor Standards Act (FLSA). The distinction has been contested since the passage of the FLSA, with employers often attempting the '''misclassification of employees as independent contractors'''. Similar practices exist in other countries, where is often known as false self-employment.
The U.S. Government Accountability Office (GAO) reports that the IRS claims to lose millions of dollars in uncollected payroll, social security, Medicare and unemployment insurance taxes because of misclassification of independent contractors by taxpayers.<ref>{{Cite web|url=https://www.gao.gov/assets/t-ggd-96-130.pdf|title=Issues in Classifying Workers as Employees or Independent Contractors: Testimony Before the Subcommittee on Oversight Committee on Ways and Means|last=Gandhi|first=Natwar M.|date=1996-06-20|website=United States General Accounting Office|access-date=}}</ref>
==Taxation== Employers must report the incomes of employees and independent contractors using the IRS forms W-2 and 1099, respectively. Employers pay various taxes (i.e. Social Security and Medicare taxes, unemployment taxes, etc.) on the wages of a worker that is classified as an employee. These taxes are generally not paid by the employer on the compensation of a worker classified as an independent contractor. Instead, the contractor is responsible for their employer's share of the taxes when paying self-employment taxes at the end of the year.<ref>{{cite web|url=http://www.texasovertimeattorney.com/blog/withholding-for-payroll-taxes-and-misclassifying-workers-as-independent-contractors-why-this-ca.cfm|title=Withholding for Payroll Taxes & Misclassifying Workers as Independent Contractors: Why This Can Hurt You at Tax Time.|publisher=}}</ref>
Classification affects whether a worker can receive unemployment benefits. In many states, independent contractors are not eligible for unemployment benefits because nothing has been paid into the unemployment insurance fund on their behalf. Employers who have no employees are not required to make payments to the unemployment insurance fund (since there is no one to claim benefits).
==Employee vs. independent contractor== IRS regulations state that a worker is an employee if the employer can control what is to be done and how it is to be done. This was codified in revenue ruling 87–41, and is generally called "the twenty factor test".<ref>{{Cite web|url=https://www.irs.gov/pub/irs-pdf/p15a.pdf|title=Publication 15-A: Employer's Supplemental Tax Guide (for use in 2017)|last=|first=|date=2017-01-05|website=|publisher=Department of the Treasury Internal Revenue Service|access-date=}}</ref><ref>{{Cite web|url=https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee|title=Independent Contractor (Self-Employed) or Employee?|website=www.irs.gov|language=en-us|access-date=2017-04-09}}</ref> By contrast, if the worker controls the means and method of achieving the required results, leaving the employer with the right only to define the desired result, they are correctly classified as an independent contractor.
Employees and independent contractors have very different benefits. Employees are entitled to the protection of wage and hour laws and are protected from discrimination and retaliation by employers. Employees may be legally entitled to family medical leave and benefits such as medical insurance and pension plans. Employees are entitled to bargain collectively with their employers.{{clarify|date=April 2019}} Employees are entitled to workers' compensation for job-related injuries and employers must pay into social security, Medicare, and unemployment insurance for their employees.<ref>{{Cite web|url=https://www.irs.gov/businesses/small-businesses-self-employed/employee-benefits|title=Employee Benefits|website=www.irs.gov|language=en-us|access-date=2017-04-09}}</ref> No benefits or employer tax payments are available to contractors, who must pay for their own benefits and unemployment taxes.<ref>{{Cite news|url=https://www.nytimes.com/2014/08/17/technology/in-the-sharing-economy-workers-find-both-freedom-and-uncertainty.html|title=In the Sharing Economy, Workers Find Both Freedom and Uncertainty|last=Singer|first=Natasha|date=2014-08-16|work=The New York Times|access-date=2017-04-09|issn=0362-4331}}</ref>
In the United States, a worker is by default recognized as an employee unless otherwise stated and specific criteria are met. It is not enough to only classify a worker as an "independent contractor" in their contract, they also need to actually be treated as an independent contractor.<ref>https://scholar.google.com/scholar_case?case=12156401043773771981&q=abc+test+independent+contractor&hl=en&as_sdt=2006{{Dead link | date=July 2025 | fix-attempted=yes}}</ref>
Service sector employees are more likely than others to be misclassified as independent contractors. Commonly misclassified positions include delivery and taxi drivers, nurses and home health aides, housekeepers<ref>{{Cite news|url=http://www.rhdtlaw.com/1099d-employer-liability-independent-contractors-service-sector/|title=Independent Contractors or Employees? Who Gets a 1099?|date=2014-10-08|work=Rukin Hyland|access-date=2017-04-09|language=en-US}}</ref> and adult entertainment workers.<ref>{{Cite news|url=https://www.wsj.com/articles/are-exotic-dancers-employees-or-independent-contractors-1417570961|title=Are Exotic Dancers Employees or Independent Contractors?|last=O'Brien|first=Rebecca Davis|date=2014-12-03|work=Wall Street Journal|access-date=2017-04-09|issn=0099-9660}}</ref>
IRS Form SS-8 can be filed with the IRS to request that the agency determine the classification of a worker.<ref>{{Cite web|url=http://www.sandiegouniontribune.com/business/technology/sd-fi-labor-blurred-lines-20170807-story.html|title=Who are you, gig worker or employee?|last=Rafter|first=Michelle|date=October 3, 2017|website=|language=en|accessdate=November 13, 2017}}</ref>
==Reclassification== IRS reclassification as an employee occurs where persons claimed as (or claiming to be) independent contractors are recategorized by the Internal Revenue Service (IRS), or by state tax authorities, as W-2 employees. The reclassification can result in the imposition of substantial fines, penalties and back-taxes for which the employer is generally liable.
==Fair Labor Standards Act== In July 2015, the U.S. Department of Labor issued new guidelines on worker classification. "A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of "employ" under the Act, most workers are employees under the Fair Labor Standards Act."<ref name=Weil>{{cite web |url = http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf |publisher = United States Department of Labor |title = The Application of the Fair Labor Standards Act's "Suffer or Permit" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors |author = Weil, David |date = July 15, 2015 |accessdate = July 15, 2015 |url-status = dead |archiveurl = https://web.archive.org/web/20150716032022/http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf |archivedate = July 16, 2015 }}</ref><ref>{{cite news | url=https://www.wsj.com/articles/labor-department-releases-guidance-on-classification-of-workers-1436954401 | publisher=Wall Street Journal | date=July 15, 2015 | accessdate=July 15, 2015| title=Employees vs. Independent Contractors: U.S. Weighs In on Debate Over How to Classify Workers | author=Trottman, Melanie}}</ref>
{{blockquote|... the economic realities of the relationship, and not the label an employer gives it, are determinative. Thus, an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker's status.<ref name = Weil />}}
==Examples of disputes== Several Uber drivers have claimed to be employees, despite their classification as independent contractors. Some of the drivers sued after California passed a law aimed at requiring gig economy companies to classify workers as employees that took effect January 1, 2020.<ref>{{cite magazine | url=https://www.wired.com/story/courts-decide-uber-drivers-employees/ | title=Now the Courts Will Decide Whether Uber Drivers Are Employees | magazine=Wired | last1=Marshall | first1=Aarian }}</ref> Likewise, many more workers in the gig economy are making similar claims. This goes for, for example, Amazon's "last mile" delivery drivers and FedEx's ground delivery drivers.<ref>{{Cite web | title=Archived copy | url=https://uidl.naswa.org/ds2/stream/?#/documents/64/page/2 | archive-url=https://web.archive.org/web/20210421201355/https://uidl.naswa.org/ds2/stream/? | archive-date=2021-04-21}}</ref>
==See also== * California Assembly Bill 5 (2019) * False self-employment * IR35 (UK) * Statutory employee, an independent contractor under American common law who is treated as an employee for purposes of tax withholdings
==References== {{Reflist|30em}}
== Further reading == {{refbegin}} * {{cite magazine | author=<!--Not stated--> | date=March 27, 2006 | title=IRS offers tips on how to correct reporting of misclassified employees | work=Headliner | volume=152 | publisher=Internal Revenue Service | url=https://www.irs.gov/businesses/small/article/0,,id=155756,00.html | url-status=dead | archive-url=https://web.archive.org/web/20060517213114/http://www.irs.gov/businesses/small/article/0%2C%2Cid%3D155756%2C00.html | archive-date=May 17, 2006}} * {{cite magazine | last=Freeman | first=Tracy A. | date=February 1996 | title=Avoiding IRS reclassification of workers as employees | work=The Tax Adviser | url=http://www.allbusiness.com/legal/laws-government-regulations-employment/540547-1.html | url-status=dead | archive-url=https://web.archive.org/web/20070312142640/http://www.allbusiness.com/legal/laws-government-regulations-employment/540547-1.html | archive-date=March 12, 2007}} * {{cite news | last=Tady | first=Megan | date=July 18, 2006 | title=FedEx drivers fight for 'employee' status, rights | work=The NewStandard | publication-place=Syracuse, New York | publisher=PeoplesNetWorks | url=http://newstandardnews.net/content/index.cfm/items/3428 | url-status=usurped | archive-url=https://web.archive.org/web/20060720230542/http://newstandardnews.net/content/index.cfm/items/3428 | archive-date=July 20, 2006}} * {{cite web | author=<!--Not stated--> | date=July 11, 2006 | title=Sebelius announces campaign to ensure fairness for Kansas workers and businesses | website=Kansas City infoZine | location=Topeka, Kansas | publication-place=Kansas City, Kansas | issn=1082-7315 | url=http://www.infozine.com/news/stories/op/storiesView/sid/16328/ | url-status=dead | archive-url=https://web.archive.org/web/20070304030313/http://www.infozine.com/news/stories/op/storiesView/sid/16328/ | archive-date=March 4, 2007}} * {{cite news | last=Redman | first=Justine | date=October 23, 2007 | title=Waxman: Blackwater may have evaded millions in taxes | work=CNN | url=http://www.cnn.com/2007/POLITICS/10/23/congress.blackwater/index.html}} * {{cite magazine | last=Singer | first=Natasha | date=August 16, 2014 | title=In the sharing economy, workers find both freedom and uncertainty | work=New York Magazine | url=https://www.nytimes.com/2014/08/17/technology/in-the-sharing-economy-workers-find-both-freedom-and-uncertainty.html?}} * {{cite web | last=Pilling | first=Melinda | date=October 8, 2014 | title=I was 1099'd: Employer liability for independent contractors in the service sector | website=Rukin, Hyland, Doria & Tindall | url=http://www.rhdtlaw.com/1099d-employer-liability-independent-contractors-service-sector/ | url-status=dead | archive-url=https://web.archive.org/web/20150223222838/http://www.rhdtlaw.com/1099d-employer-liability-independent-contractors-service-sector/ | archive-date=February 23, 2015}} {{refend}}
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{{DEFAULTSORT:Misclassification of employees as independent contractors}} Category:United States labor law Category:Tax avoidance Category:Taxation in the United States