Employee Or Independent Contractor?

Rules For Determining Whether Employee Or Independent Contractor

Sometimes the differences between your employees and independent contractors seems negligible. Their work may be the same and their salaries almost indistinguishable, but regardless of whether you see significant differences among the people you pay, there is someone who does: the IRS.

If a company mistakenly classifies an employee as an independent contractor, it faces severe penalties and is generally held liable for employment taxes. So it's important to carefully distinguish between your workers and your independent contractors.

Examples Of An Independent Contractor

Generally speaking, independent ontractors are people such as lawyers, accountants, architects, contractors, or subcontractors who follow an independent trade or profession in which they offer their services to the public.

However, whether such people are actually employees or independent contractors depends on the facts of each particular case. Traditionally, anyone who performs services is an employee if the company or person paying for those services controls the details of how the services are to be performed.

Things indicating an employment relationship include:
  • Instructions as to when, where, and how to perform the work
  • Reimbursement of business expenses
  • Payment of employee-type benefits such as insurance, vacation, and retirement benefits
Things indicating an independent contractor relationship include:
  • They provide their own training
  • They have control over the means of accomplishing their work
  • They cannot terminate their relationships with employers at will
  • They have their own tools
  • They have to pay for all business and traveling costs
  • They run the chance of making a profit or incurring a loss
  • Their services are available to the public, and they usually have multiple clients
Don't get caught with employees masquerading as independent contractors. Make sure you know the rules!

Common Employer Errors In Employee Classification

Employer errors in employee classification can lead to significant legal and financial consequences. Here are some common mistakes employers make:
  • Hoping To Not Get Caught:
    This is one of the most common errors. Employers often try to classify workers as independent contractors to avoid paying certain taxes, providing benefits, or complying with labor laws. However, misclassifying employees can result in penalties for unpaid taxes, back wages, and benefits owed.
  • Misclassifying Exempt And Non-Exempt Employees:
    Under the Fair Labor Standards Act (FLSA), certain employees are classified as exempt from overtime pay requirements, while others are classified as non-exempt and entitled to overtime pay. Misclassifying employees as exempt when they do not meet the criteria can result in violations of wage and hour laws and unpaid overtime claims.
  • Ignoring Job Duties And Responsibilities:
    Employee classification should be based on job duties and responsibilities, not job titles or contractual agreements alone. Employers should accurately assess the nature of the work performed and classify employees accordingly.
  • Not Documenting Classification Decisions:
    It's essential for employers to document the factors considered in employee classification decisions. This documentation can provide evidence of compliance in the event of an audit or legal dispute.
  • Applying A One-Size-Fits-All Approach:
    Each employee's classification should be evaluated individually based on specific criteria. Employers should avoid using a blanket classification for all workers and instead assess each worker's status based on relevant factors.
  • Relying On Industry Standards Or Common Practices:
    Just because certain classifications are common within an industry does not mean they are legally compliant. Employers should conduct their own analysis based on applicable laws and regulations.
You can avoid these common errors and mitigate the risks associated with employee misclassifications by staying informed via training about relevant laws and regulations.

For Training On Determining Employee Or Independent Contractor Status

Featured Course: Compliance Tips For Paying Independent Contractors

Independent contractors may be a necessary and strategic component to your business. If so, you need to know the rules regarding what makes a worker an independent contractor versus an employee - or risk substantial fines and penalties.

During this training session, you will learn how to properly use and pay independent contractors - and assist in avoiding costly worker-classification audits. Specifically:
  • What the IRS and states consider a bona fide independent contractor
  • How to use contracts to solidify your relationship - and how they can both help and hurt
  • How to set up a screening system that can be used by your hiring managers and human resource personnel to insure that they are following the IRS rules
  • What the auditing agencies are focusing on
  • How to determine the scope and potential areas of focus for your audit
  • How to identify any areas of concern prior to an external audit or an audit by another group within your company
  • Common areas where mistakes or issues can normally be found
  • How a review can help you detect internal control issues
  • Where to go to for assistance so you're not re-creating the wheel
  • Devising a game plan on what you want to review and how to divide and conquer
More Details / Order:

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How Do Employers Tell The Difference Between An Employee Or An Independent Contractor?

What Is The Difference Between An Employee And An Independent Contractor?

Organizations may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. The big difference between an employee and an independent contractor is the degree of control over the individual's work.

According to the IRS, the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.

Employees work as scheduled by the employer and receive a paycheck from the employer from which the employer income tax, Social Security, Medicare, etc. from the employee's paycheck.

An independent contractor is a person, business, or corporation that provides services to another individual or business. Unlike employees who work as scheduled by the employer, independent contractors do the required or contracted work on their own time, but within the specific, negotiated timeframe.

Independent contractors receive pay in accord with the terms of their contract and get a 1099 form to report income on their tax return. The paying organization does not withhold taxes from independent contractors. Independent contractors pay their own Social Security and Medicare taxes.

Why Do Some Employers Try To Pass Off Employees As Independent Contractors?

While some employers misclassify their workers as independent contractors in error, often employers misclassify their employees intentionally in order to reduce labor costs and avoid paying state and federal taxes.

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