Independent Contractors v. Employees – An Update

June 24, 2025

Worker classification is one of the key issues during an IRS audit. Whether a worker is classified as an employee, or an independent contractor can significantly affect the amount of employment taxes a business must pay. Additionally, under the new health care reform law, companies with more than 50 full-time employees are required to provide health insurance. As a result, hiring independent contractors can offer tax advantages for businesses. While there is nothing inherently wrong with hiring independent contractors properly, deliberately or mistakenly classifying workers to avoid employment tax or health insurance obligations can lead to risks such as penalties and interest charges. Such consequences can significantly impact a company’s operations.

IRS Guidelines on Worker Classification

To determine whether a worker is an employee or an independent contractor, the IRS considers various factors. These include:

• Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?

• Financial control − Does the business direct or control the financial and business aspects of the worker's job. Are the business aspects of the worker's job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.

• Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?

For more detailed information, you can refer to the IRS guidelines on worker classification:

IRS Worker Classification Guidelines.

Correcting Worker Classification: VCSP

If your company is not currently under an employment tax audit but wishes to correct its worker classification, it may be beneficial to consider the Voluntary Classification Settlement Program (VCSP). The IRS launched this program in 2011. By participating in the VCSP, a business can resolve past worker classification issues by paying 10% of the employment tax liability for the most recent tax year. In return, there will be no penalties, interest charges, or employment tax audits related to worker classification.

Resolving Disputes During Audits: CSP

Additionally, the IRS offers the Classification Settlement Program (CSP) to help resolve worker classification issues. This program allows businesses and IRS auditors to address worker classification disputes at an early stage, thereby reducing the taxpayer’s burden. Under CSP, IRS auditors can offer a standardized settlement agreement to businesses under audit to resolve worker classification issues. Even if a taxpayer declines the settlement offer, they still have the right to administrative appeals and judicial review under existing IRS procedures.

Next Steps

The programs introduced here are designed to benefit taxpayers.

We highly recommend taking this opportunity to reassess your worker classification or consider participating in the VCSP.

If you have any questions or need assistance regarding this article, please feel free to contact our office.