Page 41 - BusinessWest December 22, 2021

Contractor or Employee?
Mistakes in Classifying Your Workers Can Be Costly
By Sarah Rose Stack
Even prior to the pandemic, the ‘gig economy’ was growing at unprecedented rates. That growth has only been acceler-
ated with more traditional companies relying
on remote workers and hiring more contrac-
tor workers. Freelancing is big business, with nearly $1 trillion of income generated. However, although that total number is impressive, inde- pendent contractors earn 58% less than full-time employees (FTEs), and more than half don’t have any employer-provided benefits.
control.
Some tax advantages to hiring independent
contractors include the ability to avoid several tax obligations that apply to employees. For example, a company generally isn’t required to withhold fed- eral or state income taxes, pay the employer’s share of Social Security and Medicare (FICA) taxes, with- hold the workers’ share of FICA taxes, or pay fed- eral or state unemployment taxes.
In addition, companies that use contractors may avoid other obligations, such as the require-
Behavioral Control
If the company has a great deal of control over the behavior of the worker — for example, where they work, when they work, or how they perform their jobs — the worker should be classified as an employee. If the company is giving the worker eval- uations, conducting extensive or ongoing training about procedures and methods, or demanding that the worker attend daily meetings or set hours, then the worker is more likely an employee. Inde- pendent contractors will customarily set their own hours, decide on how to implement a project, and dictate where they work.
Financial Control
If a company provides equipment for the work- er (tools, software, computers, phone, etc.), often reimburses expenses, and/or pays on regular and ongoing basis, then the worker is more likely to be an employee. The IRS clarifies by considering the following:
• Significant investment in the equipment the worker uses in working for someone else;
• Unreimbursed expenses, which indepen- dent contractors are more likely to incur than
Classify
Continued on page 55
“From a business perspec- tive, there are advantages and disadvantages to how a com- pany classifies its workers.”
ment to pay minimum wages and overtime under the federal Fair Labor Standards Act and similar state laws, furnish workers’-compensation insur- ance (in many states), make state disability-insurance contributions, or provide employee benefits.
Keep in mind that simply having a written agreement or labeling a worker as an independent contractor doesn’t make them so. The IRS and other gov- ernment agencies look at all the facts
From a business perspective, there are advan- tages and disadvantages to how a company classi- fies its workers. With employees, you’ll have more control, but that comes with more compliance obligations. With contractors, you’ll have fewer compliance obligations, but you will also have less
and circumstances to determine whether workers are misclassified.
When someone is hired, they must be classified as either an employee or an independent contrac- tor. Here’s how the IRS determines worker status.
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