If you classify any workers as independent contractors, it’s vital that your classifications are correct. The IRS and Department of Labor are cracking down on employee misclassifications.

The IRS estimates that 80% of workers classified as “independent contractors” are actually “employees”. Because of this, the Department of Labor has budgeted $12 million for misclassification enforcement efforts during 2011. They have also hired 100 new auditors for this investigation.

In Wisconsin, a person is required to meet a nine-part test before he or she is considered an independent contractor rather than an employee.

To be considered an independent contractor and not an employee, an individual must meet and maintain all nine of the following conditions:

1. Maintain a separate business
2. Obtain a Federal Employer Identification number from the Federal Internal Revenue Service (IRS) or have filed business or self-employment income tax returns with the IRS based on the work or service in the previous year.
3. Operate under specific contracts.
4. Be responsible for operating expenses under the contracts.
5. Be responsible for satisfactory performance of the work under the contracts.
6. Be paid per contract, per job, by commission or by competitive bid.
7. Be subject to profit or loss in performing the work under the contracts.
8. Have recurring business liabilities and obligations.
9. Be in a position to succeed or fail if business expense exceeds income.

Note: When requesting a Federal Employer Identification Number (FEIN) from the IRS, you must inform the IRS that you are required by Wisconsin Worker’s Compensation law to obtain a FEIN. A social security number cannot be substituted for a FEIN.

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Information from Business Management Daily.