Especially in the current economic client, some companies and workers are concerned about misclassifying employees. There are a lot of gray areas between independent contractors and employees, and companies must understand the difference before they run into trouble with the IRS for misclassification. We want to provide an overview that can help you understand who classifies as an independent contractor and who doesn’t. Let’s take a closer look.
What is an Independent Contractor?
As opposed to an employee, an independent contractor is most simply defined as someone who works on a contract basis and is issued a 1099 form at tax time. An employee, on the other hand, will have their payroll taxes taken out each paycheck and will receive a W2 in January. Beyond the tax implications, an independent contractor is exactly that: independent. They don’t work for the company; they work for themselves and provide their service to the company that contracts them.
There are several categories for determining if someone is an employee or a contractor. The first is behavioral. Do they function as an employee? That means they are coming into the office at a set time every day. Do they utilize employee issued equipment? It also matters how much control you have over the individual. If you dictate how certain work is done, they may be an employee even if you’re paying them as an independent contractor.
The tax implications are a big part of the financial definition for independent contractors and employees. Misclassifying someone as a contractor and paying them as such could mean big penalties if it’s discovered during or after their work with you. An independent contractor will also have unreimbursed business expenses and make their own investment in work equipment or workspaces.
An independent contractor will also have a very different relationship to the job itself. They should have a contract in place. They won’t receive paid vacation or health insurance benefits from the employer. And they don’t necessarily have an on-going relationship with the company, meaning their work is largely transactional.
Issues with Misclassification
What happens when someone is misclassified. The most common situation is misclassifying someone as an independent contractor while treating them as an employee. When that happens, an employer isn’t responsible for social security tax payments, overtime, benefits, unemployment, or worker’s comp insurance. If you are caught, there may be tax penalties and fines, which can be affected by the outcome of the investigation and whether the classification was found to be intentional or accidental.
If you want to avoid these problems, it may be in your best interest to hire short-term or project-based employees through a staffing partner like Anserteam. We ensure every one of our employees is classified correctly and you are not directly responsible for the proper payment of taxes and other benefits. There are plenty of other benefits to working with a staffing agency to source and place talent in your company.
About Anserteam Workforce Alliance
Anserteam Workforce Alliance represents North America’s very best staffing agencies aligned together to deliver world-class workforce management solutions. We offer end-to-end talent services that can be customized for any size business, utilizing our Managed Services Provider (MSP) model and Vendor Management Solutions (VMS) technology. Is your organization seeking a WBENC-certified diversity partner to provide measurable results and substantial cost savings? Contact us today.