From Bloomberg BNA —
“Rehired Employee v. Independent Contractor
Thus far, this article has assumed that an employer will rehire a retiree as a “rehired employee.” This term describes an individual who worked for an employer, terminated employment with that employer and is subsequently rehired by the employer the W-2 employee.
However, employers sometimes seek to reengage retirees as independent contractors, often with the hope that this change in status will provide the retiree with more flexibility to commence and continue receiving his employer-sponsored retirement benefits. The term “independent contractor” is more opaque. The term typically describes an individual who is providing services for employer without being under the direction and control of that employer. Because this individual is not an employee, the employer reports the individual’s compensation on IRS Form 1099-MISC, and is therefore spared the additional tax obligations associated with employee wages, such as wage withholding and reporting and employment tax obligations. For these tax reasons alone, reengagement of a retiree as an independent contractor often seems like an appealing option to both retirees and employers. However, reengagement as an independent contractor only makes sense to the extent that the independent contractor characterization is valid under the IRS guidelines used to determine worker status. The employer will incur significant legal risk for employment taxes and other employee benefits if the duties performed as an independent contractor make the arrangement look more like an employment relationship.
Whether an individual is performing services for an employer as an employee or an independent contractor is a facts and circumstances determination. The tests for distinguishing employees from independent contractors are murky, but independent contractor status will be difficult to substantiate if an individual’s duties are much the same as those of other employees are those previously performed by the independent contractor as an employee. According to current IRS guidelines, an individual is an independent contractor if the employer has the right to control or direct only the result of the work and not what will be done and how it will be done. In determining whether an individual has the requisite amount of control and independence over his work, the IRS will look at a variety of factors in three categories: (i) behavioral, (ii) financial and (iii) type of relationship. According to the IRS website, there is no “magic” are set number of factors that “makes” the worker an employee or independent contractor, and no one factor stands alone in making this determination.
Independent contractor status is often difficult to substantiate and employers should work with legal counsel to develop a customized written independent contractor policy. This policy should include tailored independent contractor guidelines, based on the employer’s needs, practices and risk tolerance. In addition, please note that an employer may increase its risks of an IRS audit if it issues both a form W-2 any form 1099-MISC the same individual for the same calendar year. In order to mitigate against this heightened level of risk, some employers implement the a strict re-engagement policy, under which they will not reengage former employees as independent contracts under any circumstances unless a specified period of time has passed (e.g., six months).”
- Court: Employee vs. independent contractor (nathansgibson.org)
- Don’t Misclassify Workers as Independent Contractors (nathansgibson.org)
- The Tax Risks of Misclassifying Employees – The National Law Review (natlawreview.com)