Many businesses hire workers as independent contractors, rather than full-time employees, to reduce costs. However, the rules that govern whether someone is a contractor or employee examine factors of the person’s work environment – not what the company calls them. As we have seen with companies like Uber, the answer is not always cut and dried, and getting it wrong can have serious consequences.
Today we cover the essential aspects of correctly classifying workers and what can happen if employees are misclassified.
What makes someone an independent contractor?
When a court examines the relationship between a business and a worker, they look at several factors. The essential difference between a contractor and an employee is control over when, where, and how they do their work.
Questions business owners should ask themselves include:
- Does the worker provide their own tools or materials?
- Can they choose their work hours?
- Is the worker free to take on other work, including from a competitor?
- Does the worker receive any benefits?
- How is the worker paid?
- Does the company require ongoing training for the worker?
The more control a worker has over their job, the more likely they are an independent contractor. Using a 1099 tax form does not guarantee someone will qualify as a contractor. Similarly, even a signed independent contractor agreement can be invalid if the above factors indicate that someone is an employee.
What impact does misclassification have?
State and federal government agencies take misclassification very seriously because it costs them tax revenue. If a business misclassifies an employee as an independent contractor, they could be on the hook for several different back taxes, including:
- Social Security
- Medicare
- Unemployment
Inadvertent misclassification comes with several fees and penalties, including a $50 fee for every W-2 not filed for an employee. If the government finds a business purposely mislabeled its employees, the company and any persons responsible might face criminal penalties.
Don’t risk losing your business by choosing the wrong classification for workers. An attorney experienced in business employment tax can help you examine the situation and determine the right course of action.