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Misclassification of Independent Contractors is Risky Business

By Kristen Harris

More opportunities for independent and remote work also means more opportunities to run afoul of employment law. There are a growing number of people who are interested and open to flexible work options and, understandably, companies want to take advantage of their skills and talents.

Upfront disclaimer: I am not an attorney or legal professional. This is general information only; be sure to consult with your own legal, tax and employment experts. Okay, back to the topic…

Businesses are utilizing a wide range of arrangments, to get work done, including full time and part-time employees, freelancers, temporary staffing employees, contracting firms, remote workers, and more. With all of these different arrangements, it can be challenging to know how to engage each person in a legally compliant way.

Today there are still only two ways to classify any worker from a tax and employment law perspective: as an Independent Contractor (1099) or and Employee (W2). Misclassification can be a serious issue, whether purposeful or accidental, so it’s important to make the right choice.

The IRS, federal and state government agencies are well aware of the temptation to ‘misclassify’ a worker by treating them as an Independent Contractor instead of an Employee. It may seem simpler, easier and advantageous from a tax perspective, but federal and state entities are continuing to crack down on businesses that misclassify workers and the consequences can be serious.

So, how do you get it right? There are two key things to keep in mind.

First of all, regardless of what the worker may prefer, the onus and the risk to properly classify workers are on the business. With the potential new tax advantages, some individuals may request to be handled as an Independent Contractor, but it’s up to you to decide if they truly qualify.

Second, the default is for every worker to be an Employee. So, if you want to handle someone as an Independent Contractor, there must be significant evidence that the relationship qualifies.

However, there is no clear set of rules to determine whether someone is an Independent Contractor or Employee. There are common law rules provided by the IRS but ultimately you have to make a judgment call.

You’re looking for what degree of control and independence the worker has in their relationship with you in three categories: Behavioral, Financial, and Type of Relationship. How much do you control what, how and where they do their job? How are they paid and reimbursed for expenses? Are there contracts, benefits, and is the relationship ongoing?

If you really want the IRS’s help in making this determination, you can fill out Form SS-8. Or perhaps you could just work through the questions on the form and the answer will become clear.

Wondering what the risks are to misclassifying a worker? You may be held liable for employment tasks for the worker, plus fines and penalties related to failure to withhold and remit taxes, pay insurance or pay overtime. Workers who feel they have been misclassified may also file a Form SS-8 requesting a review of their work situation.

If you realize that some of your Independent Contractors need to be reclassified as Employees, the IRS does offer an optional Voluntary Classification Settlement Program to help you get on the right track. Or, many companies avoid the risk by working with a qualified firm to assess and take care of non-employees. It’s what we do every day–we’re happy to help!

 

  

Will New Tax Laws Mean More Independent Contractors? It Depends.

By Kristen Harris

Recent changes to US tax law have started a whole new round of conversation about independent contractors. The line of thought is that some of the provisions will cause many more people to leave their jobs and work independently. Is that true? Maybe. Like most things, it depends. 

First of all, let’s be totally clear...I am not an attorney, accountant, or tax law expert of any sort. This is purely my opinion and reaction to recent conversations and articles.

Now, back to the topic. Will these changes to the tax law create a whole new wave of independent contractors? While some provisions may seem to encourage it this trend is already happening, and I believe it will continue with or without government involvement.

When the Affordable Care Act was first proposed there was a similar level of conversation about how it would push many more people into being independent contractors. The theory was, if people had access to healthcare on their own, they would be much more likely to work for themselves instead of an employer.

The conversation around these tax changes is similar. One provision allows sole proprietors (in most industries) to deduct 20 percent of annual revenue from their taxable income. Some people believe these tax savings will entice employees to go out on their own. 

And, for some people, it might. For a certain person saving on taxes could be the tipping point, the last little thing that encourages them to start something on their own instead of being an employee. But, just like the ACA healthcare issue, I believe that someone who makes that choice was already considering it anyway. 

Rather than forcing people to become independent contractors, these tax law changes are just removing one more barrier that may have prevented someone from making that choice. I don’t believe it’s suddenly creating a flood of people starting their own independent businesses who never considered that option before. Starting and building a business is hard, it has to be something you actually want to do. And there are still other tax considerations, like tracking expenses and being responsible for both the employer and employee portion of the federal payroll tax. 

There has been a consistent shift to people working independently for years and that trend is likely to continue. Three key factors are driving this shift–employer choice, employee preference, and access to information–and they’re not going away.

Companies are evolving the way they build their workforce, and most use some percentage of non-employees (independent contractors, contract workers, SOW firms, etc) allowing them the flexibility to manage work in the way that is best for their business. On the other side, some people prefer to work independently for a variety of reasons–the ability to work on a variety of projects, flexibility in schedule and location, work/life balance, family considerations, or the ability to build a lasting business–just to name a few. The catalyst that has helped bring the employer and employee sides together is access to information. Many people can work anywhere, anytime.

Even jobs that involve some level of physical work or presence may have the ability to be independent due to information access (ride-share drivers, for example).

So, while the changes in tax law may make it easier or slightly more attractive to be an independent contractor, might encourage someone to go ahead and take that leap, I believe the trend towards more independent work will continue with or without government involvement. The more access we have to information, the more possible it is to have and be an independent worker. My two cents (earned independently).