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Ah, the games people play - or used to!!
Every business person learns early on that if you classify a
worker as an "independent contractor" rather than an employee, money was saved
- no employer contribution [7.65%] to social security, no unemployment taxes,
maybe no worker's compensation premiums and reduced hassle of withholding. And the laws whether a classification was
proper used to be really vague, really squishy.
The IRS and the courts developed a 20, yes twenty, factors test -
factors without any priority or weighting.
Essentially useless for planning and easy to argue against if challenged.
But in Massachusetts
that's been changed . . .and radically!
Under Massachusetts
law, M.G.L. c. 149, §148B, any person performing service for another will be
considered an employee and cannot [repeat, cannot]
be classified as an independent contractor unless each of three factors is met,
not one or two but all three --
- the person is free from control and direction
in performing the service both under his contract for service and in fact.
- the service is outside the usual course of business
of the employer AND
- the person is customarily engaged in an independent
trade of the same nature.
Thus, this new rigid three-factor scheme now creates a very
strong presumption that every person performing service for another is an
employee!
The law carries both criminal and civil penalties. Moreover, there is joint liability for both
the employing entity and its president, treasurer and other officers/managers.
It also follows that if a service provider is misclassified
as an independent contractor, likely several other wage and hour laws have been
violated, including proper employee records, payment of appropriate wages,
etc. Each of those can yield additional
civil and criminal penalties as well.
Finally, the Massachusetts Attorney General has repeatedly
expressed the intention to be aggressive in enforcing these laws.
In a nutshell, the "independent contractor" game is
over. If you previously have played that
game at all, STOP.
This is not just a Massachusetts
issue. The IRS and some 20 states,
including Rhode Island,
are now actively examining and assessing the scope of the problems and the
underreporting and/or under-withholding [read "lost tax revenues"] that is
occurring.
Plus the BIG TAX Trap!!! -
Here's where the Independent Contractor game can really bite
hard.
If it is determined that the person really was an employee
with the attendant requirement that the various employee taxes be withheld and
paid over to the government and they were not, each "responsible" person in the
company is personally liable
for 100%
of the unpaid amount. Got that - not
only is the company liable but you might be as well.
The same exposure exists if taxes are in fact withheld but
are not properly paid over to the government
A responsible party
is any person responsible for collecting, accounting for or paying over taxes
who willfully fails to perform the duty.
The moral - DO NOT play the independent contractor game,
period. And be sure that all employee
taxes and charges are promptly and properly paid over to the government.
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