Employee vs. Independent Contractor Checklist
With the new healthcare laws into effect combined with the cost of workers compensation, providing benefits to employees has become more expensive than ever before. Many employers are looking to downsize staff and bring in independent contractors to fill the gap. It is important, however, to be sure you are not misclassifying employees as contractors. Doing so could present a high degree of liability for you that could bring severe damage to your business. It’s vital to understand what constitutes a 1099 worker and construct an employee vs. independent contractor checklist.
A Growing Epidemic
Recent figures estimate that over a third of businesses have misclassified employees as 1099, or independent contract workers. In the construction industry, low wages and a lack of regulation have become epidemic, and misclassification has resulted in estimated figures nearing $100 million in unpaid workers comp insurance premiums. This doesn’t account for the loss of FMLA, unemployment, overtime and safe workplace protections.
Employee misclassification also results in workers having to pay more taxes than they should, because they are paying the employer’s portion of social security tax, which for contractors is called the “self-employment tax.” While this may seem advantageous to the company looking to save money on their books, it is becoming a real problem in federal tax loss. It is also, so far as the IRS is concerned, fraud.
Determining the Difference
An independent contractor is someone who is self-employed. If the worker controls or directs the nature and means of the work being done (what to do and how to do it), they are an independent contractor. If the employer controls and dictates the services performed and how they are done, the worker is an employee. Finally, if an employer-employee relationship is in place, the worker cannot be an independent contractor. There are three basic factors that should form the basis of your employee vs. independent contractor checklist. These factors are:
- Do you control how the worker performs his duties and exactly what those duties are? This forms the Behavioral aspect of the issue.
- Are your employees’ business aspects controlled by you? That is, do you determine how the worker is paid, whether they get reimbursed for expenses and who pays for and supplies tools, equipment and the like? This is the Financial consideration.
- Do you have written contracts for employee benefits? Is the relationship ongoing or for a set period of time? Does your worker perform a key role in your business? This is the Relationship aspect of employment.
Misclassification of an employee is considered fraud by the IRS. At very least you will be responsible for paying back employment taxes for the worker in question and may be held liable for deserved benefits that you have yet to provide. In addition, you run the risk of being reported. Any worker who thinks they have been misclassified may complete Form 8919 to report your share of these taxes.
For more information on liability insurance and the employee vs. independent contractor checklist, see our informational page, and get in touch with us for a review and quote today!