When it comes to compensation classification and taxes, it’s important to get it right.
Most passenger transportation companies compensate workers as employees. During COVID, it came to light that some companies treated drivers and other workers as independent contractors. In some cases, PPP funds were either unavailable or reduced, or not forgiven because of this labor classification.
Here is some guidance to determine what relationship your company may have with a worker. “Yes” answers to the following questions tend to indicate an employer-employee relationship.
- Does your company determine how, when or where the person providing services does the work?
- Does your company determine what tools or equipment are to be used?
- Does your company train the person?
- Does your company provide employee benefits such as insurance, retirement, paid leave, etc.?
Employee relationships require:
- Employers to issue paychecks with the appropriate taxes withheld.
- Employers to pay employment taxes to the federal and state governments as well as workers compensation.
- Employers to issue forms W-2 in January for wages earned the preceding calendar year
“Yes” answers to the following questions tend to indicate an independent contractor relationship.
- Does your company have a written contract with the person?
- Does the person performing services have a significant investment in the work performed?
- Is the person responsible for their own expenses?
- Does the person performing services have the opportunity for profit?
- Does the person performing the services maintain their own workers compensation insurance?
Independent Contractor relationships require:
- Companies to follow the information reporting rules and to issue forms 1099-NEC.
Therefore, it is important to get this right. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker.
For example, if $100,000 of previously classified independent contractor payments were reclassified as employee compensation, the company may be assessed $14,300 in
FICA and Medicare Taxes plus penalties and interest.
And as always, check with your CPA for their opinion on this subject and what your company should do to be compliant.
This information is general in nature and is not intended as legal, accounting, or tax advice provided by BUSBooks LLC to the reader. This material may not apply to the reader’s specific circumstances and may require consideration of additional factors. BUSBooks LLC recommends that the reader contact a tax professional before taking any action based on this information. BUSBooks assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect this information.
UMA Member Tracy Fickett, CPA, operates BUSBooks, a specialty accounting firm dedicated to the motorcoach industry. If you have a question, you can reach her at firstname.lastname@example.org.