One of the biggest employment problem areas for small business owners is the misclassification of workers. So often, employers will label someone as an independent contractor when in fact they should be labeled as an employee.
Why does it matter? What’s the difference? Generally, employers withhold money for taxes from an employee’s payroll check. Employers also pay unemployment tax for employees. However, for independent contractors, the employer does not pay payroll taxes or contribute to the unemployment insurance fund.
Classification of a worker as an employee or independent contractor can have dramatically different tax consequences. Thus, the IRS has created a publication to explain the differences between the two and help business owners properly classify their workers. Here are some of the factors that should be considered when classifying a worker:
- Level of Control (Does the employer control how the worker completes the work? Does the employer require the worker to show up and leave at a certain time? The general rule is, the more control, the more likely the worker is an employee.)
- Tools or Equipment Used (Does the employer provide the necessary tools? If the employer provides the tools, this factor weighs in favor of the worker being an employee. If the worker uses his/her own tools this weighs in favor of the worker being an independent contractor. This applies to other items such as supplies as well.)
- What Kind of Work (Generally, if the worker is doing the same kind of work that your business does, they likely qualify as an employee. Example – I own a bakery and I have a worker who makes cupcakes. This worker would likely be an employee. However, consider this example. I own a bakery and I pay someone to come clean the facilities after hours. This worker would likely be an independent contractor. My business is to bake and this worker’s main job is to clean. Of course there are exceptions to this rule, but it is a good rule of thumb for most classifications cases.)
There is no black and white answer for independent contractor and employee classifications. Generally, courts look at the facts of each case and balance a series of factors to determine the proper classification. If you are ever in doubt as to whether someone should be classified as an independent contractor or employee, I would highly suggest contacting an attorney. A little money up front can save you a ton in the end if you are faced with a misclassification lawsuit.