If you are hiring someone for either a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees and know which category the person you hired falls into.
Why Does It Matter? Both the Internal Revenue Service (IRS) and individual state regulators scrutinize the distinction between employees and independent contractors. That’s because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do so because independent contractors are not covered by unemployment and workers’ compensation, or by federal and state wage, hour, anti-discrimination and labor laws. In addition, businesses do not have to pay federal payroll taxes on monies paid to independent contractors.
But beware! If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus any penalties imposed by the IRS or state regulators.
Often times the issue comes up when a terminated worker files for unemployment benefits and it is not clear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost employers or companies thousands of dollars to defend, even if the challenge is successfully defended by the employer.
The good news is there are ways to reduce the risk of an investigation or challenge over the status of a worker. As an employer, at a minimum, you should:
— Familiarize yourself with the rules. Ignorance is not bliss and knowledge of the rules will allow you to structure and carefully manage your relationships with your workers to minimize risk.
— Document relationships with your workers and vendors. It is helpful to have a written contract stating the terms of employment.