Why hire employees when you can use an "independent contractor" under IRS Form 1099? Isn't it easier to avoid withholding, sick leave and other risks by just hiring contract workers instead?
Businesses who follow this line of reasoning often find themselves on the wrong end of government agency complaints or lawsuits.
It takes more than a contract to make a contract employee
Even if you and the worker agree that he or she is an independent contractor, a government agency or a judge can take that agreement and throw it in the trash if they think the worker was really an employee.
To make it worse, the rules are different under federal and state law, and under different agency regulations. The IRS looks at 20 factors, the Employment Development Department looks at about ten factors, but in certain industries (real estate, home health care, computer services, barbering, newspaper distribution, and others) there are special regulations. The Labor Commissioner has a definition in its Wage Orders, and courts make decisions based on court precedent.
The key factor is the right to control how the job is done. Regardless of whether the hiring party actually exercises that control, the mere right to do so makes the worker an employee.
If you misclassify someone as an independent contractor, you could be liable for withholding, social security and tax payments, and fines of up to $15,000 or more. A misclassified worker could claim an injury that your workers compensation policy won't cover. He or she could also claim overtime you never tracked. The fact that the worker agreed or even demanded to be independent will not prevent him from suing you!
Stack the Deck in Your Favor
Of all of the factors courts use to classify employees and contractors, several stand out:
• If you have the right to terminate at will, most likely you are an employer
• If the worker does not operate a separate business, he is most likely your employee
• If the work is something that's part of your business and not a separate occupation, then it's likely the person doing it is your employee
Take an honest look at the work. Are you contracting for a computer expert to set up the network in your accounting office? Or are you contracting for a "Word expert" to do your regular typing, filing and general office work? The first example is probably an independent contractor, the second one is probably an employee.
In a close case, get professional advice! Call your attorney or your CPA, but remember the rules may be different for tax purposes than for wage and hour cases. You can even ask the IRS or EDD for a determination, but they're not guaranteed and may not protect you from a wrong classification. If there's any doubt, you're safer presuming you have an employee. Of course, you may decide to take the risk, but that's your job as a business owner, isn't it?
Storrow can be reached at [email protected]
Businesses who follow this line of reasoning often find themselves on the wrong end of government agency complaints or lawsuits.
It takes more than a contract to make a contract employee
Even if you and the worker agree that he or she is an independent contractor, a government agency or a judge can take that agreement and throw it in the trash if they think the worker was really an employee.
To make it worse, the rules are different under federal and state law, and under different agency regulations. The IRS looks at 20 factors, the Employment Development Department looks at about ten factors, but in certain industries (real estate, home health care, computer services, barbering, newspaper distribution, and others) there are special regulations. The Labor Commissioner has a definition in its Wage Orders, and courts make decisions based on court precedent.
The key factor is the right to control how the job is done. Regardless of whether the hiring party actually exercises that control, the mere right to do so makes the worker an employee.
If you misclassify someone as an independent contractor, you could be liable for withholding, social security and tax payments, and fines of up to $15,000 or more. A misclassified worker could claim an injury that your workers compensation policy won't cover. He or she could also claim overtime you never tracked. The fact that the worker agreed or even demanded to be independent will not prevent him from suing you!
Stack the Deck in Your Favor
Of all of the factors courts use to classify employees and contractors, several stand out:
• If you have the right to terminate at will, most likely you are an employer
• If the worker does not operate a separate business, he is most likely your employee
• If the work is something that's part of your business and not a separate occupation, then it's likely the person doing it is your employee
Take an honest look at the work. Are you contracting for a computer expert to set up the network in your accounting office? Or are you contracting for a "Word expert" to do your regular typing, filing and general office work? The first example is probably an independent contractor, the second one is probably an employee.
In a close case, get professional advice! Call your attorney or your CPA, but remember the rules may be different for tax purposes than for wage and hour cases. You can even ask the IRS or EDD for a determination, but they're not guaranteed and may not protect you from a wrong classification. If there's any doubt, you're safer presuming you have an employee. Of course, you may decide to take the risk, but that's your job as a business owner, isn't it?
Storrow can be reached at [email protected]