Posted 08.18.2010
Employee or independent contractor?
How and why you absolutely must know the difference
By Todd FredricksonBusinesses are always looking for ways to save money while maintaining productivity, especially in trying economic times. One way of achieving this has been for companies to hire independent contractors in lieu of employees.
Businesses can reap several benefits, both financial and legal, from hiring properly classified independent contractors. On the one hand, they can avoid the financial burden of hiring employees, including employment taxes, worker's compensation insurance, Social Security and Medicare, and other withholding. Businesses who hire independent contractors also may not be subject to minimum wage, overtime and antidiscrimination laws. On the other hand, businesses that get this analysis wrong may be exposed to hefty fine, penalties, back taxes, and damages in employment lawsuits.
As a general rule, workers are considered employees when someone else controls how and when they do their work. Independent contractors, on the other hand, work for themselves, decide how they perform their jobs and secure their own clients.
The Bureau of Labor Statistics estimated that 10.3 million workers, over seven percent of the workforce, were classified - correctly or not - as independent contractors in the United States in 2005.
Government Crackdown
In recent years, federal and state agencies increasingly have scrutinized companies that try to pass of regular employees as independent contractors: A 1984 IRS study estimated that 15 percent of employers misclassified approximately 3.4 million employees as independent contractors, resulting in a tax revenue loss of $1.6 billion (in 1984 dollars). And a Department of Labor (DOL) study in 2000 that found that 10 to 30 percent of firms audited in 9 states misclassified at least some employees.
Consequently, since February 2010, the IRS has been implementing a program that aims to audit 6,000 businesses regarding employee misclassification over the next three years. Additionally, the DOL's proposed 2011 budget includes $25 million for a joint initiative with the Treasury Department to combat the misclassification of independent contractors through the hiring of 90 additional investigators and 10 additional lawyers.
Specific Tests
Employers should be aware that specific tests are required to determine independent contractor status. The requisite tests are complex and varied and depend on the state or agency involved. U.S. government agencies that are interested in worker misclassification include the Department of Labor, Social Security Administration, and the IRS. State departments of labor and revenue also are expanding their focus on this issue. Generally, the classification is dependent on the amount of control the business has over the worker.
The IRS has taken the lead in helping employers correctly classify workers by developing so-called "common law rules." The IRS lists three main criteria that should be taken into account when considering if a worker is an employee or independent contractor:
• Behavioral Control: The more influence the business has in directing and controlling the worker, the more likely it is that the person is an employee. An evaluation system that measures a job's details is indicative of an employee; an evaluation system that looks at the end result could indicate an employee or independent contractor. Similarly, a training program indicates that the company wants the job done in a particular way and is indicative of an employee.
Readers Respond
Of the main factors which indicate the status, I have always thought about who provides the tools. If the worker is being provided a computer, software, desk, lamp and chair in a space defined by another person - than that person is probably an employee. If the worker is providing their own tools, as mentioned above, in a work space which they pay for and define -- than most likely they are an independent contractor.
By Craig McDowall on 2010 08 26Leave a comment