When a company hires a person to work for them, they can either bring them in as a full-time employee or an independent contractor. The pay that each type of worker earns and the tasks they perform may be similar, but there are significant differences, too.
The employment status of your workers can affect the benefits they receive and whether your company takes taxes out of their income.
What determines the classification of workers?
The Internal Revenue Service (IRS), classifies each person based on three categories of control that the employer has. Those categories are:
- Behavioral: If your company has the power to set hours, establish work duties and provide the equipment for use, your worker may be an employee. Contractors can set their hours generally and receive minimal training or instruction on the job. This is because the employer expects them to have that knowledge already.
- Financial: Employees are usually paid on a consistent basis, whether it be an hourly rate or salary. Independent contractors could receive a one-time, flat fee for completing the job. Independent contractors may also need to buy any tools or materials needed for the project.
- Long-term relationship: If you and your worker expect to have an on-going relationship, they might be an employee. Contractors usually have a set period of time to complete their assignment. Qualification for benefits is a good indicator of their employment status. Independent contractors do not receive health insurance or paid time off from their payer.
What are the consequences of misclassifying employees?
Misclassifying a worker as a contractor can get your company into a lot of legal trouble. According to the ADP Research Institute, about one-third of midsized businesses have been fined relating to misclassifying employees. Depending on the severity of the misclassifications your company could be fined a few hundred thousand dollars or a couple million dollars. You may be held liable for any state and federal taxes not withheld from the worker’s pay as well as any unpaid overtime.
Speaking with an experienced employment law attorney can help you identify whether your worker is an employee or independent contractor. Your attorney will understand exactly how the IRS classifies workers and can help you avoid future fines regarding this issue.