Employee or Independent Contractor? New Jersey Business Taxpayers Can Correct the Misclassification of Workers with Minimal Tax Liability
Businesses with any New Jersey employees are responsible for withholding and paying income taxes, Medicare taxes, and Social Security, and paying payroll taxes on wages paid to their employees. However, in general, the same businesses do not have to do so when hiring independent contractors.
Therefore, it may be tempting for a business to classify all workers as independent contractors to avoid payments. However, the Internal Revenue Service and New Jersey Division of Taxation have stringent regulations to ensure that businesses correctly classify their workers. The IRS imposes significant penalties on businesses which have misclassified their workers as independent contractors.
A worker is an independent contractor if the “employer” has the right to direct only the result, but not the way in which the worker performs her job. For example, if a business hires a New Jersey attorney to sue another company for breach of a contract, the business does not direct the attorney on how to argue the case, what motions to file, etc. The client educates the attorney about the dispute and asks the attorney to work towards a certain result (recovering lost profits). Therefore, this attorney is a New Jersey independent contractor, not an employee.