The rules for classifying employees and contractors can seem tricky at times. Unfortunately, the Internal Revenue Service and the U.S. Department of Labor expect everyone to interpret them correctly and they are cracking down on misclassifications in 2015. If you list someone as an independent contractor and one of these federal agencies determines they should be an employee, you could be subject to thousands of dollars in penalties, so it’s vital that your business gets these classifications correct.
I’ve been reading about the employee classification rules that help employers determine whether a worker is an employee or contractor. Here are some articles and blog posts that highlight the importance of interpreting those rules correctly and explain how.
Employee or Independent Contractor? The Basics for Business Owners. Savannah Morning News: “In general, employees are under closer control than independent contractors. Independent contractors tend to work only when their services are required and using their own materials, while employees typically function on a regular schedule and at the employer’s facility. The IRS and the Department of Labor have separate, but similar, tests for determining whether a worker is an employee or an independent contractor.”
Employee or Contractor? Health Care Law Raises Stakes. The New York Times: “The I.R.S. is emphasizing the distinction between employees and self-employed independent contractors this year, tax specialists warn. That makes it important for workers and critical for businesses that use their services to make sure to get the classification right. If you flub the answers, it could be costly.”
Employee vs. Contractor – Implications for PPACA Compliance. Johnson & Dugan:“The definition of an employee, according to Code §4980H of PPACA, is an individual who is an employee that meets the common-law test. The common-law test involves determination of behavioral control, financial control and the type of relationship between the employer receiving the worker’s services and the worker. Factors include how much direction the company provides the worker, control over work hours and location and whether or not the work is exclusively for the employer.”
The Uber Model: Worker Classification in the Sharing Economy. Business Management Daily: “The car service company Uber exemplifies America’s new sharing economy, testing the often blurry boundary between employee and independent contractor….If you are considering adopting a system like Uber’s to staff your business, consult an attorney first. Companies that rely on independent contractors instead of employees can expect lots of regulatory scrutiny. Federal and state agencies are increasingly suspicious of the sharing economy and its impact on workers, who may end up earning less than minimum wage and miss out on benefits like health insurance.”
Are Your Workers Contractors or Employees? Fred Pothoff, CPA: “There is no risk from an IRS standpoint to classify a worker as an employee instead of a contractor. There is significant financial risk if you incorrectly classify a worker as a contractor when they should be classified as an employee. You may be liable for back employment taxes if the IRS re-classifies a worker from contractor to employee, and this can go back many years.”
Unsure if your employees or contractors are classified correctly? Contact us. We’re happy to help.
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