Independent Contractor Test: Massachusetts vs. IRS

Massachusetts Independent Contractor Classification: Understanding IRS vs. State Law

Your accountant may have advised you to classify certain workers as independent contractors, mainly for tax purposes. While the IRS might endorse this classification, it's essential to understand that Massachusetts law has its own criteria, which might not align. This disparity can create significant confusion for Massachusetts business owners.

It's vital to grasp that even if the IRS recognizes a worker as an independent contractor, you may still encounter legal issues under Massachusetts law.

Definition of Contractor: The IRS Version

Historically, the IRS employed a comprehensive "20 factor test" to determine a worker's status. Today, this test has been condensed into three primary categories: behavioral control, financial control, and the nature of the worker-employer relationship.

Behavioral Control: This factor examines the degree to which the employer supervises and directs the contractor's work. The more independence the contractor has, the more likely their classification as an independent contractor will stand.
Financial Control: It analyzes who bears the expenses and how the worker is compensated. Similar to Massachusetts law, the contractor's freedom to provide services to other entities is a crucial factor.
Nature of the Relationship: The IRS takes a broad view of the relationship, including the definition in the independent contractor agreement. It also questions whether the contractor's service aligns with the employer's core business.

Definition of Contractor: How the IRS Differs from Massachusetts

While both IRS and Massachusetts law consider similar factors, there are key distinctions:

Specificity: Massachusetts law demands a more specific approach. If the work performed by a contractor falls within the usual course of the employer's business, it fails the business prong of the test. Additionally, if the contractor isn't customarily engaged in an independently established trade, occupation, or profession, they won't meet the third prong.
All-or-Nothing: In Massachusetts, all three parts of the three-part test must be satisfied for independent contractor classification.

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Misclassification Under Massachusetts Law

Meeting the IRS criteria ensures you won't face tax liability issues related to employees. You'll continue issuing 1099 forms and won't need to withhold federal taxes.

However, if you don't meet Massachusetts' three-part test, you could face employment law concerns. Contractors could seek damages in civil suits, including self-employment taxes and missed employee benefits. Moreover, you might undergo investigation by the Massachusetts Attorney General, which could result in fines, penalties, and damages.

Industry Norms vs. Legal Reality

In some industries, the use of independent contractors is widespread, despite potential misclassification. Publishing, design, consulting, and IT consulting firms often rely on freelancers. However, just because it's an industry norm doesn't mean it's legally valid.

Even with assurances from your accountant, your independent contractor classification may not withstand legal scrutiny. Consulting an employment lawyer is crucial to ensure compliance with Massachusetts law.

Don't leave your worker classification to chance. Understand the nuances of IRS vs. Massachusetts law to avoid legal entanglements and financial repercussions.

How Our Employment Lawyers Can Help

At slnlaw, we specialize in employment law and worker classification issues. Our experienced team can provide legal guidance to ensure proper worker classification, minimizing the risk of misclassification disputes and penalties under Massachusetts law. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.

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