Employee or Independent Contractor? One Mistake Could Draw Six Government Agencies Gunning For Your Business
Most business owners would be thrilled if they could classify all workers as independent contractors. It would make their bottom line look much better. The savings in payroll taxes and benefits can be very tempting. No one is immune to trying to get away with misclassifying workers. Both, small businesses and large corporations, attempt to reap the rewards. If you are looking into the distinctions between classifying workers as employees or independent contractors, proceed with caution. An incorrect classification could result in having as many as six government agencies coming after your business for back taxes, back salary, fines and benefits. Risky Business Remember that it is in the government’s best interest to have workers classified as employees. Taxes are withheld by the employer and it is not as easy for employees to under report or hide income. Each government agency has its own list of rules to determine whether a worker qualifies as an independent contractor. To avoid problems make it your business to learn them before you hire a worker. The Internal Revenue Service (IRS): According to the IRS, workers are considered employees if the employer has the right to direct and control the way they work, including the details of when, where, and how the job is accomplished. In contrast, the IRS will consider workers independent contractors if the company they work for does not manage how they work, except to accept or reject their final results. The U.S. Department of Labor: A worker who is an independent contractor is not covered by the Fair Labor Standards Act (FLSA). This means, among other things, that the worker would not be entitled to minimum wage or overtime. Your State Unemployment Compensation Board: Companies often get in trouble when a worker classified as an independent contractor decides to apply for unemployment compensation. If this happens, it could be your company’s word against the workers and you must be prepared to prove your assertion that they had independent contractor status. You must pay unemployment insurance for all workers classified as employees. Your State Workers’ Compensation Agency: If a worker meets your state workers’ compensation agency definition of independent contractor, your company does not have to pay for workers’ compensation coverage for that worker. However, if an independent contractor is injured on the job and applies for workers’ compensation, your company might face an audit. Your State Tax Department: If the worker qualifies as an independent contractor under your state tax department, your company does not need to withhold state income taxes. Contact your state tax board for details. This is especially important because many independent contractor audits begin with a state tax agency. And, be aware that state tax agencies are often more aggressive about independent contractor audits than the IRS. Your State Department of Labor: This agency looks into minimum wage and overtime abuse. If your worker is misclassified as an independent contractor, this agency could come after your business pay back wages. True Designation Business is stressful enough without having the added risk of six government agencies breathing down your neck for misclassifying employees as independent contractors. If you can legally make the designation of workers as independent contractors, go for it. If the line is fuzzy, stay on the side that is going to cause you less stress.