Whether your workers are considered employees or independent contractors will carry significant legal ramifications. With respect to the IRS, ACA (Affordable Care Act), and Department of Labor, it is necessary that you classify your workers accurately.
Why it matters
Business owners with 50 or more full-time employees have responsibilities under the ACA to offer insurance, or pay a penalty if any full-time employee enrolls in a plan through the Health Insurance Marketplace and receives a premium tax credit.
Employers are also responsible for withholding federal income tax, social security, Medicare taxes, and possibly retirement contributions.
This means that if you misclassify an employee as an independent contractor, you may be required to:
- Reimburse the employee for wages under the FLSA, including overtime and minimum wage
- Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare, and unemployment
- Provide employee benefits, including health insurance and retirement
- If applicable, pay any injured employees workers’ compensation benefits
Notable differences
The IRS uses the following criteria to determine workers’ status: behavioral control, financial control, and the relationship between the parties.
Behavioral Control:
This has to do with the instructions the employer gives to the worker, including when, where, with what equipment or materials, and how to perform the task. Training is usually provided to the employee by the employer. By contrast, independent contractors will have a degree of autonomy not afforded to employees. Contractors will usually have their own tools or equipment that they have invested in to perform the contracted duties. In addition, they might have a skill set that is specialized to a degree that the business owner may not know how to train or instruct them.
Financial Control:
This has to do with business expenses and compensation. Independent contractors will often have more unreimbursed expenses than employees, whose business expenses are more likely to be reimbursed. Employees are usually paid a guaranteed regular wage for an hourly or weekly period of time, in addition to overtime pay if they qualify. Independent contractors are more often paid a flat fee, or they are paid for time and materials. The independent contractor can also realize a profit or a loss.
Type of Relationship:
Contracts that specify a finite length of time or project indicate that the worker is not an employee. The permanence of the relationship between the worker and business owner is taken into consideration as well. If there is a general assumption that the relationship and work will continue indefinitely, this worker is more likely to be considered an employee.
The full article can be found here. For further clarification about your workers’ status, or any other questions you have about your business, please contact one of our CPAs.