A frequent and important issue employers commonly deal with is whether to classify a worker as an employee or an independent contractor.
Put simply, the difference between an employee and an independent contractor lies in who controls the work.
An employee works according to the company’s rules and schedule. The employee’s pay is subject to taxes, and they can be eligible for company benefits such as insurance or paid time off. Pay is reported on a W-2.
An independent contractor is hired for specific work on a job-to-job basis, often (but not always) under contractual agreement. The worker must have a TIN (Taxpayer Identification Number). Taxes are the contractor’s responsibility; none are taken from the pay. Contractors furnish their own tools, work on their own schedules, and decide how the job will get done. Pay is reported on 1099.
Employers can ask themselves some basic questions to aid in the determination between employee and independent contractor:
- Do you control how the work is done, including hours, location, or rate of pay?
- Do you offer benefits to anyone in a similar position?
- Do you furnish the worker with a workspace, computer, or other needed tools?
- Is this person in your company’s managerial, executive, or key role?
- Are others with similar duties at the company classified as employees?
If the answer to these questions is yes, then the worker is likely an employee, not an independent contractor.
Companies that misclassify employees as independent contractors cause workers to miss out on several federally-mandated protections including:
- Minimum hourly wage
- Overtime compensation
- Workers’ compensation
- Unemployment benefits
- FICA tax withholding
Employers may be held liable for these missed benefits if they are found to have misclassified employees and other company offerings the worker may have missed, such as paid time off and health benefits.
Further, the misclassification of employees is a hot topic for the Department of Labor (DOL), which partners with the Internal Revenue Service (IRS) in these efforts. The DOL and IRS have a longstanding Memorandum of Understanding, in which they share information between agencies and work together to target and eradicate employee misclassification.
Nextep often assists worksite employers in auditing specific jobs to determine if they should be classified as contractors or employees. We have usually found that the person is an employee and helped our client achieve compliance.
If you need help classifying your workers correctly, Nextep has solutions for you. Contact us to see how we can keep you and your business complaint.