IRS ruling against FedEx puts independent contractor classification back in the news.

Late last year, the Internal Revenue Service ruled that FedEx had misclassified about 13,000 drivers as independent contractors resulting in a $319 million tax bill. This amount is only for penalties and back taxes for 2002. The IRS is still auditing FedEx for 2004 through 2006. Some groups believe the final cost to FedEx could be as high as $1 billion. The IRS ruled against FedEx’s assertion that drivers were contractors who operate their delivery routes as independent businesses. Some of the reasons behind the ruling stem from the drivers using FedEx equipment, wearing FedEx uniforms and working under explicit FedEx rules.

John Tuzynski, the IRS’ chief of employment-tax operations, made worker classification “a major focus” for fiscal 2008 due in large part because of money. The Government Accountability Office has estimated that misclassification of workers amounts to a tax revenue loss of $4.7 billion a year. For employers who are caught misclassifying, monetary pain is just the beginning. Not only are monetary penalties and fines applied, employers can also be criminally charged. Criminal charges include evasion of payments, filing of false tax returns, conspiracy and tax code section 7202 makes it a felony to willfully fail to collect or pay tax to the government.

The IRS has entered partnerships with the Department of Labor, the National Association of State Workforce Agencies, the Federation of Tax Advisers and the agencies that administer state employment and unemployment taxes to coordinate enforcement.  

To help protect yourself and your business, StaffScapes recommends that all employers with independent contractors complete the IRS 20-factor test (Form SS-8) to determine whether they are really an employee. These tests can be downloaded at the IRS website.