The Good News: more and more businesses, including those in the sharing and on-demand economy, are making use of independent contractors in their workforce.
The Bad News: the controversy over the classification of workers as employees or as independent contractors continues to be a hotbed of regulation and litigation in a wide variety of industries. In this segment, we discuss the measures you can institute to protect your company from attack by taxing authorities and from lawsuits by former workers.
Why you need to consider the IRS when hiring contractors
One of the benefits of hiring independent contractors is that you aren't required to pay them a salary, benefits or withhold employment taxes in the way you would for employees. The IRS has upped its efforts to collect employment taxes and is clamping down on employers who misclassify employees as independent contractors (deliberately or otherwise).
Statistics suggest that up to 30 percent of firms are misclassifying contractors so understanding the difference between an employee and an independent contractor is hiring 101. The consequences of getting it wrong can be painful – no one wants to deal with IRS penalties, back payments and interest on uncollected payroll taxes.
The difference between an employee and an independent contractor
The IRS imposes a broad definition of what constitutes an independent contractor versus an employee: "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."
For example, if you exert any type of control over when, where and how the actual work is performed by an independent contractor, you may be getting into murky waters.
The independent contractor test
Don't assume that just because you hire the worker as a contractor that the relationship has remained that way. If you work with independent contractors and are concerned that you may be misclassifying them, consider the following:
An independent contractor:
- Operates under a business name
- Has his/her own employees
- Maintains a separate business checking account
- Advertises his/her business' services
- Has a contract with you describing the relationship
- Invoices for work completed
- Has more than one client
- Has own tools and sets own hours
- Keeps business records
Whereas, an employee:
- Performs duties dictated or controlled by others
- Is given training for work to be done
The IRS offers more guidance on the dynamics and differences here.
There is a safe harbor!
If you believe you may have misclassified workers, you do have the opportunity to reclassify your workers as employees for future tax periods through the Voluntary Classification Settlement Program.
We, at Complete Financial Services, are here to help you minimize your tax liability and maximize your bottom line, all while avoiding an IRS Crackdown! If reclassification of workers as employees is necessary, we will guide you through the Voluntary Classification Settlement Program before the IRS slams you with penalties in the coming years!
Contact us today to learn more about the pros and cons of hiring independent contractors.