In Part 1 and Part 2 of this series I told you that (i) independent contractors probably should be companies that (ii) are set up to be taxed in a way the guarantees that the IRS won’t disregard the companies for tax purposes.
Who is going to know you have hired independent contractors that should be classified as employees?
Well for one, the individual that was misclassified can now directly sue the employer (VAC § 40.1-28.7:7). And the individual has a lot to gain from such a suit. If the individual wins, the employer may be required to pay back salary or wages, the cost of benefits that are given to employees, and the amount of money that would have been paid out in insurance benefits (think about worker’s compensation insurance claims as an example), as well as the individual’s legal fees to bring the lawsuit.
What if your independent contractors don’t want to form LLCs for themselves because they think that is just too burdensome. Can’t the employer and individual merely have a contract in which everyone agrees that the relationship is an independent contractor relationship?
Nope. The law (VAC § 58.1-1903, to become effective 1/1/2021) prohibits such contracts if those contracts don’t accurately reflect the situation (in other words, the contract and the facts of the actual work contradict what the IRS guidelines say).
But even if you think your independent contractors would never, ever sue you, there is another interested party lurking in the background, and the stakes for angering that party by misclassifying an individual as an independent contractor can get even higher. Stay tuned for the next post in this series.
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