If a worker is misclassified, your company could be liable for an enormous bill for back employment taxes plus penalties, interest and legal costs. In assessing whether a worker is an employee or an independent contractor, the IRS has concluded that such a determination revolves around control.
First, if your company is exercising behavioral control over a worker by dictating when and where to do work, the sequence in which to perform the work, and providing training regarding required procedures and methods, that worker should most likely be classified as an employee. Second, if you are in financial control of a worker by directing the financial and business aspects of a worker’s job, they are also more likely to be an employee.
Below are ten tips to ensure that independent contractors are not treated like employees:
- Don’t closely supervise the independent contractor or their assistants.
- Don’t let the independent contractor work at your office unless the nature of the service they’re providing requires it.
- Don’t give the independent contractor employee handbooks or company policy manuals.
- Don’t establish the working hours.
- Don’t provide ongoing instructions or training.
- Don’t provide equipment or materials unless absolutely necessary.
- Don’t pay for travel or other business expenses directly.
- Require independent contractors to sign documentation stating that they are not entitled to, and will not seek, unemployment benefits, and don’t provide any other form of benefits to them.
- Don’t provide business cards or stationary with your company’s logo for the contractor to use or distribute.
- Require that they submit invoices for their time and expenses and pay them like a vendor, as opposed to weekly or biweekly.
There is not a single rule or test for determining whether an individual is an independent contractor or an employee, but these tips highlight factors which have been considered by the courts in worker classification cases. In addition to these ten tips, it’s also important to note that how the relationship can be ended may determine status. The ability of a worker to terminate the relationship with your company at any time he or she wishes without incurring liability indicates employee status. To avoid this, you should consider documenting an exit protocol to the contrary (for example, requiring 30 days’ written notice of termination between your company and any independent contractor).
If you find yourself in a situation where you are unsure of how to classify a worker, you can request an IRS determination by filing Form SS-8, “Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, be cautious to the fact that the IRS usually classifies workers as employees whenever it’s not clear-cut what their status is. Further, employers that request such a determination lose protections against liability for misclassification. Filing Form SS-8 without talking to an attorney is not recommended.
It’s important to not only be aware of the distinctions that exist between employees and independent contractors, but also to be conscious of them at all times. If you’re not careful in how your treat independent contractors, you’ll likely find yourself handing over a wad of cash to Uncle Sam instead of to your next big project!
This article is meant to be utilized as a general guideline for classifying employees and contractors correctly. Nothing in this blog is intended to create an attorney-client relationship or to provide legal advice on which you should rely without talking to your own retained attorney first. If you have questions about your particular legal situation, you should contact a legal professional.
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