Independent Contractors or Employees? Frequent Misconceptions Debunked

Due to the Patient Protection and Affordable Care Act, businesses have an even greater incentive to classify workers as independent contractors rather than as employees. Businesses with 50 or more employees that do not provide the required health insurance to employees could face penalties up to $3,000 per employee. As a result, we will see an increased emphasis on proper classification of workers as independent contractors or employees. In most cases, people are not intentionally misclassifying workers; however, many business owners rely on these common misconceptions which lead to misclassification.

employee w-2s

Independent Contractors or Employees?

1. Probationary periods

By issuing a 1099 and a W-2 without a substantial change in the work performed or the business-worker relationship, you may be scrutinized by the IRS. Oftentimes, business owners think that they are properly reporting in these situations. This is usually one of the most honest mistakes made. However, it is important to keep in mind that if the worker receives a 1099 and a W-2 for the same type of work, without a substantial change in relationship, the worker has likely been misclassified.

2. Part-time workers

If you hire part-time workers that perform work that is substantially similar to work done by other employees, then they should probably be classified as employees. According to the PPACA, part-time employees will be counted towards the total number of employees that determines whether employers will be penalized for not providing health insurance. For example, if you have 30 full-time employees and 20 part-time employees, you will have hit the 50-employee mark. Thus, the classification of part-time workers will become increasingly important to businesses, and will likely be more closely scrutinized by the IRS in the next few years.

3. The signed contract

Obviously, this provides a measure of security for businesses. However, if the working relationship mirrors that of an employer/employee rather than a business/independent contractor, the IRS may find that the worker should be an employee, regardless of any clauses in the contract. Even if the contract states that the worker will be classified as an independent contractor, the work must reflect a business/independent contractor relationship and not an employer/employee relationship.

4. Off-premises workers

Working off-site is not a sufficient condition to classify a worker as an independent contractor. To determine whether an off-site worker could be an employee, look at the worker’s personal investment, any opportunity for profit or loss, and any unreimbursed expenses.

5. The independent business

Many businesses automatically classify a worker with a business name and an EIN as an independent contractor. Although many of these workers will likely qualify as independent contractors, this shouldn’t be automatic. Once again, it is crucial to base your classification on the nature of the actual working relationship.

As a bonus tip, if others are classifying certain types of workers as independent contractors, you may use this information to justify classifying workers as independent contractors. However, remember that you must have documented evidence that you used to classify the worker before engaging the independent contractor, and rely on well-established industry practices. If you follow procedures properly, this can be a reliable way to classify workers.

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