Independent Contractor vs. Employee - Improper Classification Can Lead to Trouble
IRS Audit of City Practices Important Lesson for Community Associations. Improper Classification May Result in Penalties and Tax Liabilities.
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Many community associations classify maintenance personnel and others as "independent contractors" to avoid withholding federal income tax, dealing with workers' compensation insurance and the belief that such classification insulates the association from liability.
But calling someone an “independent contractor” does not mean they are not an employee. Many other factors must be analyzed. A recent preliminary report issued by the IRS in connection with an audit of the City of Deerfield Beach found that 42 workers were classified incorrectly. The IRS considers facts in three broad categories, including 1.) behavioral control 2.) financial control and 3.) the type of relationship. Within these three categories, you must look at the following criteria to determine employee or independent contractor status:
- The existence and specific terms of a contract.
- When and where the work is performed.
- Who owns the tools and equipment that are used.
- What degree of instruction is given to perform tasks.
- Is the service provider subject to a performance evaluation system.
- Is training provided to the service provider.
- Are expenses reimbursed.
- Is the service provider permitted to provide services to others, as well.
- What is the method of calculating payments to the service provider.
We encourage community leaders to discuss this issue with counsel in order to avoid complicated and potentially expensive future disputes.
