Independent Contractor or Employee

Do you have Payroll tax liability?

If you are employer in the IRS determines that a person you had treated as an independent contractor is actually an employee, you will face liability for unpaid payroll taxes. In addition to the substantial tax liability, you also will likely be unable to collect the employee's share of apparel taxes from your "independent contractor".

A recent FedEx case shows how difficult the issue can be. FedEx Ground entered into agreements with drivers as independent contractors. The drivers owned their own delivery trucks, paid their own expenses and provided their own uniforms. the IRS tentatively determined that the drivers were actually employees and indicated that it would assess FedEx $319 million for 2002. The IRS action would have also meant that the drivers would likely not be able to write off their truck and related business expenses.

The tentative ruling was withdrawn, but only after FedEx vigorously contested the issue.

The IRS is scrutinizing this area more closely than ever. The difference between independent contractor and employee is a fine line that is easily crossed.

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