Employer misclassification of their employees as independent contractors continues to be a hot topic for business owners and the IRS, as FedEx and Uber are two huge corporations that have recently found themselves in lawsuits over this dispute.
Misclassification occurs when a worker who should be considered a direct employee of a business—and receive a W-2 form to file with tax returns—is treated as a self-employed, independent contractor, and receives a 1099-MISC (miscellaneous income) form instead. Independent contractors are ineligible for benefits such as social security, overtime pay, and unemployment insurance. The legal differences between employees and independent contractors go far beyond a job title, and mistakenly labeling workers can result in fines and penalties from the IRS.
Independent Contractor vs. Employee: In many cases, the differences between an employee and an independent contractor (also referred to as a “consultant”) are minimal, as there may be situations where independent contractors and employees work with the same company doing similar jobs.
The IRS has created a checklist to assist business owners in differentiating independent contractors and employees. Below are five sample questions from the checklist:
- Profit or loss: Can the worker make a profit or suffer a loss as a result of work, aside from the money earned from the project? (This should involve real economic risk—not just the risk of not getting paid.)
- Instructions: Do you have the right to give the worker instructions about when, where, and how to work? (This shows control over the worker.)
- Work hours: Do you set the worker’s hours? (Independent contractors are masters of their own time.)
- Reports: Must the worker give you reports; accounting for his or her actions? (This may show lack of independence
- Services offered to the general public: Does the worker offer services to the general public?
Workers’ Compensation for independent contractors: Employers risk significant financial loss if an independent contractor who should have been classified as an employee, covered with Workmen’s Comp. is injured.
If you are an employer and have questions about wokers’ compensation, unemployment insurance or any other type of benefits for your employees or independent contractor’s, contact a Starke Agency Risk Consultant, or complete one of our free, no obligation quote forms.