5 Essential Do’s & Don’ts of Classifying Workers as Subs vs. Employees
IEC Partner, Attorney David Moulds has provided us with an update on correctly classifying workers. It is important that you classify workers appropriately; how you decide to classify your workers can land you in the hot seat with the IRS and cost you fines.
Classifying your workers as independent contractors can be tempting to any employer. The independent contractor becomes responsible for his or her own taxes, which means no withholdings from the employer. The employer does not have to match FICA, provide healthcare, unemployment insurance, or workers compensation among many other benefits an employee would be entitled to. As enticing as this route may be, if you are classifying workers that should be employees as independent contractors, your business will be in position for a hail storm of legal issues if you don’t do it correctly.
Some issues your business could encounter are;
- Federal and State Tax Audits (back taxes)
- Workers Comp cases filed
- Unemployment claims
- Wage and Hour payment disputes (overtime liability with FLSA)
Misclassification of employees from the government’s perspective is an opportunity to raise its revenue and protect workers at your expense. Understanding the appropriate definition of independent contractors versus employees varies depending on the type of business. It is not always clear; however Attorney Moulds provides a short litmus test when classifying your workers.
The IRS considers three areas when determining if a worker is an employee or an independent contractor; control of behavior, control of finances and overall relationship.
1. Control of behavior- Who controls the assignment? Where is the work performed? Are there evaluations or training programs? Are workers required to attend meetings and are they penalized for not attending? If you are in control of how the work is done, when it is done, and training, then the workers could be regarded as employees.
2. Control of finance- Who provides supplies and materials? Are expenses reimbursed to the worker? Who does the customer pay? Who provides the advertising? If you control the finances, then the worker could be an employee
3. Overall relationship- Do you have a written contract? Do you provide personal days, bonuses or any benefits? How is the relationship represented to the customer? The relationship with the worker carries a heavy weight when classifying employee or independent contractor. Here are the 5 Do’s and Don’ts;
- Develop a written contract with independent contractors.
- Do not have independent contractors complete an employment application.
- Pay independent contractors out of your expense account, not payroll.
- Always ask independent contractors for a copy of their license.
- Complete a 1099 for independent contractors. (Do not complete an I-9)
There is more you can do to prevent misclassification of your workers, such as an annual self-audit, and seek legal advice from a professional to answer any of the gray areas. In 2013 the IRS will do 6,000 audits. Be prepared if you become one of them.
If you would like advice from Attorney Moulds, you may contact him at 678-364-1171. IEC continues to provide its members with the information to educate, inform, and protect their businesses. The best contractors have information to act swiftly and decisively.