Employees VS Independent Contractors

Perhaps you have not thought about the differences between an independent contractor and an employee. Oftentimes, independent contractors and employees work in tandem with each other at the same company, doing alike tasks. The similarities stop there due to the very important legal guidelines for each type of work status.

Determining Independent Contractor vs. Employee

The primary rules of thumb to follow in determining if someone is an independent contractor are the level of control an employer has over the services or products, how the individual is paid, and who supplies the equipment, material, and tools. The nature of the work can also help to define the relationship. If the work is considered integral to the function of the business, more than likely the individual is considered an employee of the company, and is regularly paid as such. If the work is temporary or intermittent and not considered integral to the function of the business, it may signify the individual is considered an independent contractor.

Employer Tax Liability

The individuals’ employment status will determine the employer’s tax liability. If the individual is considered an employee, the employers are required to pay workers compensation/disability premiums, Social Security and Medicare tax, and federal and state unemployment taxes. If the individual qualifies as an independent contractor, the “employer” is not liable for any of these payments.

Misclassification

If a company incorrectly classifies an individual as an independent contractor, instead of an employee, there is a range of costly legal consequences. As the owner of the company, you may be required to reimburse the individual for any wages you should have initially paid them under the Fair Labor Standards Act, provide the employee with benefits such as health insurance and retirement plans, and pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment. The Internal Revenue Service can be alerted to the suspected tax fraud and the U.S. Department of Labor Wage and Hour Division can be alerted to the pay violations.

 

The rules relating to the proper classification are fairly complex. Please call Travis Thomas at 314-576-1350 or email at tthomas@bwtpcpa.com.

Travis Thomas, CPA is a manager with BWTP P.C. Read more about Travis here.

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