Using an independent contractor (IC) is a good way for employers to save money when dealing with a specialized or one-time project. Taxes such as Social Security and Medicare, which total 7.65% of compensation, state unemployment and worker’s compensation can be avoided when using an independent contractor. Employers are also not responsible to provide their ICs with benefits, nor do they typically have to provide them with office space and working materials to complete the job.
As tempting as this arrangement sounds, employers often misclassify workers, either intentionally or unintentionally, as ICs to avoid the extra expenses of having a regular employee. Even if you have an agreement with your IC that they will be classified as such, it doesn’t matter in the eyes of the Department of Labor (DOL) if they don’t fit the requirements to be classified as an IC. Addressing misclassification of employees is a top priority for the DOL these days, as it affects the economy in many different ways. The IRS, in particular, wants to see as many workers as possible classified as employees instead of ICs for obvious financial reasons. All it takes is one unemployment claim filed against your company by a former independent contractor to have the DOL knocking on your door. Not only will an employer be liable for unpaid taxes, but they could be levied severe penalties, depending upon the intent.
In order to determine whether or not an individual you are considering employing should be an employee or if they can truly be classified as an IC, it comes down to the employer’s right to “control” and “direct” the worker. Employers should ask themselves these questions if they want to classify someone as an IC:
Who sets the hours of work? (Worker)
Who sets the pay rate? (Worker)
Who pays for the equipment necessary to do the job? (Worker)
Is the worker in business for themselves? (Yes)
Does the worker have other customers? (Yes)
Does the worker have an office or business site separate from the employers? (Yes)
Does the worker perform high-level, skilled tasks which require little or no training from the employer? (Yes)
Is the relationship between the company and the worker permanent or temporary? (Yes)
It is very important that employers carefully assess a worker to determine if they can be classified as an independent contractor instead of an employee. In the long run, an employer may not save any money if they have misclassified their workers, as they could find themselves the target of an investigation by numerous different federal and state agencies.