Worker Classifications

WORKER CLASSIFICATIONS

EMPLOYEE VS. CONTRACTOR

As a business owner you do not get to choose how you pay people.

The rules set forth by the Federal Department of Labor are very specific about the classification of workers and they get more complex every day.

Business owners are responsible for determining whether the individuals that are providing services to their business are employees or independent contractors.

Generally, you must withhold income, Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
You do not generally have to withhold or pay any taxes on payments to independent contractors.

Many businesses choose to pay people as independent contractors to avoid paying taxes, but beware. Classifying an employee as an independent contractor, with no reasonable basis for doing so, makes employers liable for employment taxes, and typically results in penalties and fines.

STAYING COMPLIANT

Review your workers for appropriate classification.

In order to compensate an individual as a Contractor, you must be able to provide evidence of the degree of control and independence for three categories.

If you answer, Yes, to any of these, the worker must be classified as an employee, not a contractor .

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Such as when or where to work, tools or equipment to use, what work must be performed, and what order or sequence to follow when performing work. learn more

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) learn more

Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? learn more

Understand misclassification consequences.

Unfortunately for small businesses, the enforcement of paying workers correctly has become a hot topic over the past decade. In recent years, the Federal government started working with States to audit their small and micro-businesses specifically for employees being paid as contractors.

Classifying an employee as an independent contractor, with no reasonable basis for doing so, makes employers liable for employment taxes, and typically results in penalties and fines. Not to mention a spot on the naughty-list of businesses that the IRS will be back to visit for more audits.