Why is job misclassification a problem?

Whether California residents realize it or not, the way their job is classified has an important federal tax implications. It affects how federal income, social security and Medicare taxes are paid. It also affects how one files their tax return. It can also have an effect on eligibility for employer provided benefits and other tax responsibilities. Figuring out whether one is an employee or an independent contractor is the first step for understanding what one’s obligations are.

Employee v. independent contractor: Behavioral control

If an employer has the right to control the way an employee does work, it is most likely the worker and boss have an employee-employer relationship. The employer has the right to direct the employee also. The employer does not have to actually control, just have the right to do it. For example, employers can give instructions on where and how to do the work, the tools to use and where to get supplies from. If someone gets less extensive instructions and does not receive a lot of training for their job, they are more likely to be an independent contractor.

Employee v. independent contractor: Financial control

If someone has a significant amount of investment in their business, they are more likely to be an independent contractor. There is no fixed amount to demonstrate what qualifies as significant, just that it should be a substantial amount. Additionally, if someone is not reimbursed for their business expenses, they are more likely to be an independent contractor.

Employers withhold income tax and other taxes from employees and also pay certain taxes on an employee’s wages. The employer is also responsible for providing the necessary documentation showing the withholdings. Independent contractors on the other hand have to self-report and are responsible for paying their own tax. This means a job misclassification might result in someone not fulfilling their tax obligations and incurring penalties as a result.