Employee or Independent Contractor?

In recent years, the Internal Revenue Service has been auditing more companies regarding payroll and the classification of workers. Why? Because when a company improperly classifies someone as an independent contractor instead of an employee, it causes several problems for the federal government such as loss of tax dollars and improper credit for Social Security benefits.

PEP can help you avoid all the pitfalls of misclassifying workers. Call us at 1-800-650-3002 and we’ll gladly explain how our employee leasing service can save you hassles and money.

As an employer, you must establish whether a worker should be classified as an employee or an independent contractor. An employee cannot legally make this determination. For each worker given employee status, it is the employer’s responsibility to:

  • Withhold and remit income taxes from paychecks
  • Match the FICA taxes (Social Security and Medicare)
  • Provide workers’ compensation insurance
  • Pay federal and state unemployment taxes


An employer does not provide any of these benefits for independent contractors. The Common Law test can help you understand whether a worker is an employee or an independent contractor. For example, the following conditions could mean your worker is an employee:

  • You control what work is done and how it will be done.
  • You reimburse the worker for business expenses.
  • You provide training for the worker and have procedures or methods to follow for the job.
  • You offer employee-type benefits such as health insurance or paid vacation.


On the other hand, your worker might be classified as an independent contractor if

  • The worker must make a financial investment to do the job.
  • The worker uses his or her own tools, equipment, and/or office space.
  • You have a written contractual agreement with the worker.


Sometimes classifying your workers can be tricky. You must be careful not to misclassify your employees as independent contractors, because it can result in paying costly penalties to the IRS for misclassification. Workers who believe they are misclassified as independent contractors have the right to file a complaint with the U.S. Department of Labor.

 

 
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