There has been a great deal of controversy lately regarding the “Contractor or Employee” 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. Consequently, there are benefits and risks to both sides of this equation. Most importantly, the IRS has an opinion on the conclusion.
Employee vs. Contractor
Employer Perspective
Benefit
The contractor workforce is significant for employers. First, they don’t need to pay for Worker’s Compensation, FICA, Medicare, Unemployment Taxes, and benefits in general. Additionally, 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.
Risk
The government may come back and deem contract employees and charge or fine them further for the items that were avoided.
Contractor Perspective
Benefit
Contractors can make more money as the employer generally pays more than the market rates given the abovementioned savings. Contractors also typically will have more flexibility in schedules and other areas.
Risk
Contractors can carry a great deal of risk. The first risk, which is rarely contemplated, is insurance exposure. Generally, if they are injured doing commercial activities, Health Insurance will NOT pay. Additionally, if they are in a car accident and are conducting commercial activities, Personal Auto Insurance will NOT pay. In short, contractors must secure business policies if they regularly do 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. Basically, contractors must be disciplined and set aside taxes or be in dire straits on April 15!
What are the Rules for a Contractor or Employee?
This can be more of an art than a science. Several areas need review:
Clients
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.
Behavioral
Does the company 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 the contractor’s status.
Financial
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? At a basic level, does the contractor invoice the company? Contractor status will be problematic if these processes look the same for regular employees.
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 vital aspect of the business? Does the contractor have the risk of not being paid if the work is not done? The status will be in question if there isn’t a normal business relationship with the contractor.
Conclusion
There continues to be more government enforcement action on this issue. If you are not sure about your workforce, contact us for assistance.
