This is an important question that many employers need to ask themselves. Often, employers take the path of least resistance and deem an employee an independent contractor but this assumption could bring on some legal trouble. There are many tests that can be found online that help determine if a person's working arrangement tips the scale from independent contractor to employee. This classification error can lead to significant tax (income, Social Security and Medicare) withholding errors as employers typically do not withhold taxes on independent contractors. The State of Michigan published a 20-point fact sheet recently to help employers determine how to classify a worker appropriately. In general, there are three broad factors that describe a person’s scope of work and depending on the person’s working relationship with the company, the worker should be deemed either an employee or an independent contractor. The general factors to consider are whether or not the company has (1) behavioral or (2) financial control over the worker and what the working (3) relationship entails.
For example, consider the following:
- The worker is required to follow the rules of the company regarding the work performed
- The worker is provided training by the company
- The work is performed on a frequent basis
- The worker needs to be on premises at the company to complete the tasks
- The worker is paid for time worked (hourly or salary) rather than project based
- The company provides the tools to complete the job such as cell phones and computers, etc.
- The company directly reimburses the worker for expenses incurred completing the work such as mileage
- The work performed is vital to the company and not just an ancillary service
All of these statements are examples of when the scope of work tips the scales from independent contractor to employee.
Still not sure?
The IRS form SS-8 can be filled out by the worker or the company to determine whether or not the scope of work classifies the person as an employee or an independent contractor. This is a very detailed form that explores all three of the factors described above.
The fines for misclassifying employees can be in the millions. According to the Department of Labor, these errors cost everyone, in fact, misclassifications could double the Social Security Tax owed by the worker and the company could not only face fines but they are held legally liable as well. HR audits can be helpful in discovering these misclassifications and potentially correcting the errors before it becomes a costly mistake.