Classification of Workers as Employees or Independent Contractors

Businesses must classify all workers as either employees or independent contractors, but it can be hard to determine which classification you should choose. Employees are entitled to more protections and benefits, such as minimum wage, sick leave, and worker’s compensation insurance. Businesses must also pay payroll tax for employees, whereas contractors are responsible for their own taxes. Although businesses can cut costs by using independent contractors, misclassification of an employee as a contractor can have serious consequences. The business may be ordered to pay wages, benefits, and taxes for the misclassified employee, as well as significant penalties.

The proper classification of a worker as an employee or independent contractor depends on the economic reality of the relationship between worker and business. Generally, a worker is considered an employee if the business has the right to control what the worker does and how the worker does it. The following factors may point towards an employee classification: (1) the business provides training, (2) the worker is guaranteed a regular wage amount for a certain period of time, (3) the position is permanent rather than for a defined period of time, (4) the business provides all of the worker’s supplies, and/or (5) the worker’s services are a key aspect of the regular business of the company. It is important to keep in mind that the correct classification depends on all components of the individual-business relationship and no one factor is decisive. More guidance and additional factors to guide the classification of a worker can be found on the Internal Revenue Service and Department of Labor websites.

A business can take steps to protect itself from misclassification liability by filing Form SS-8 with the IRS. The filing is free of charge but takes at least six months, so it is most useful if a business plans to engage many workers in the same capacity. The IRS will review the facts and circumstances and determine the worker’s status for tax purposes. More information about Form SS-8 can be found at https://www.irs.gov/uac/about-form-ss8.

David Kim