Independent Contractor or Employee? Tax Court Case Ruling Causes More Problems

This post is in: Business


We’ve been talking for a few years about the problem with Independent Contractor (IC) vs. Employee issues.

The IRS wants to try to prove that your ICs are really employees. It means more payroll tax from you. You want your ICs to be ICs because it means less payroll tax and benefits. And, if your ICs are savvy taxpayers, they know that they pay less tax too because they get business deductions. No wonder the IRS wants to turn ICs into employees.

A recent court case (Rosenfeld) brought up another problem when the IRS turned an IC into an employee. In this case, the IC was reclassified as an employee. The IC had put a SEP pension plan in place. Now, as an employee, he wasn’t entitled to have a SEP. So, not only did it get disallowed and he had to pay more taxes, he also had to pay a 10% penalty because he made an excess contribution to the pension plan. Or rather, he should have paid a 10% penalty, but the IRS agent made a mistake and only charged him 6%.

Bottomline: If you are an Independent Contractor, make sure you’re in compliance with the IRS requirements and that you will be Winning the Independent Contractor Argument. If you hire Independent Contractors, same thing. Don’t lose this battle!


  1. Megan Hughes says:

    Hi Christina,

    That depends on your situation. If you have an HR department, or a Union rep, you can certainly talk to them, if you disagree with the reclassification. Did your employer talk to you ahead of time? What reason did they give for making the change? Did you receive a new contract to sign, or some type of compensation for making the change? Did you have an option to remain an employee? Have you been given the opportunity to seek legal advice, or have you talked to an attorney in your area about your options?

  2. ..What if you think youre an employee but your employer doesnt withhold taxes from your pay because they say youre an independent contractor?..What happens if you had a job and are suddenly converted to independent contractor status?..What if you subcontract work to others in your business? Are they employees?..These are all good questions that deserve good answers.

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