Employee or Contractor? Which One Are You?
There has been a great deal of controversy lately in regard to the “Employee or Contractor” question. We see it everywhere in the post Great Recession economy where people may be working as contractors to earn extra money or have been pushed into this world based on the job market. There are benefits and risks to both sides of this equation. Most importantly, the IRS has an opinion on the conclusion!
The contractor workforce is great for employers. They don’t need to pay for Workers Compensation, FICA, Medicare, Unemployment Taxes and benefits in general. With clerical Workers Compensation rates typically at 4% and payroll taxes at 7.65%, employers can save more than 10% before benefits are factored into the equation. It is also much easier for employers to remove contractors.
The government may come back and deem contractors employees and charge or fine for the items that were avoided.
Contractors can make more money as the employer will general pay more than the market rates given the savings noted above. Contractors also generally will have more flexibility in schedules and in other areas.
Contractors can carry a great deal of risk. The first risk which is rarely contemplated, is insurance exposure. If they are injured doing commercial activities, Health Insurance will NOT pay. If they are in a car accident and are conducting commercial activities, Personal Auto Insurance will NOT pay. In short, contractors will need to secure business policies if they are regularly doing this work.
Contractors are also liable for the taxes that the employer was able to save. At a minimum contractors owe “both sides” of FICA and Medicare which is 7.65% (15.3% total). In addition, contractors receive 1099s, not W-2s and have NO withholding, so they owe income taxes on these amounts. If they work enough they may be subject to quarterly withholding. Contractors need to be disciplined and set aside taxes or be in dire straits on April 15!
This can be more of an art than a science. There are several areas that need review:
Does the contractor do this for other people? A plumber who has dozens of clients is a contractor. A plumber that works in your facility full time is likely not a contractor.
Does the company control or have the right to control what the contractor does and how the job is done? The company should be focused on the result not the process. If the company legislates the process and timing, it will jeopardize contractor status.
Are the business aspects of the contractor’s job controlled by the company? This includes how the contractor is paid and when they are paid. Who provides the tools and the means of work? How are business expenses handled? As a basic level, does the contractor invoice the company? If these processes look the same for normal employees, there will be a problem with contractor status.
Type of Relationship
Are there written contracts? Will the engagement last more than a year? Will the relationship continue, and is the work performed a key aspect of the business? Does the contractor have risk in regard to not being paid if the work is not done? If there isn’t a normal business relationship with the contractor, the status will be in question.
There continues to be more government enforcement action on this issue. If you are not sure about your workforce, contact us for assistance.