Whether you are looking to hire talent for your business from a creative agency such as Wunderland or searching for a new job, it is important to understand the differences between employee and independent contractor classifications. From tax ramifications to business or worker responsibilities, this one label can make a huge difference. These tips and criteria will help you to ensure you are using the right classification to achieve maximum benefit for your business or employment efforts and avoid the pitfalls of improper classification.
Independent Contractor or Employee?
When it comes to choosing the proper classification, there are many things to consider. The US Department of Labor and Supreme Court agree that classification is not possible using a specific list of criteria. However, by analyzing worker involvement and the employer-employee relationship, a few generalizations can help to determine the proper choice.
- Worker Control and Supervision: In general, independent contractors provide a service while controlling many of the terms of when and how services are rendered. Employees are generally provided a schedule and supervised within the company while independent contractors are not.
- Worker Investment: In most cases, employees are provided with facilities, equipment and training by their employers. While some of these items may be offered to independent contractors, this is most often not the case.
- Permanency of the Business Relationship: Employees are typically hired for long-term work and provided terms and guidelines to maintain employment. Independent contractors often work on a per-project basis and might work with multiple companies simultaneously.
Common Differences between Independent Contractors and Employees
- Taxes: While businesses are responsible for reporting any annual wages to independent contractors over $600, the contractor is responsible for paying all required taxes on the income. Employees share tax liability with the employer.
- Benefits: Insurance, 401k, paid vacation and other benefits are not available to independent contractors.
- Compensation: Employees are often paid hourly wages or salary. Independent contractors are typically paid per-project, by milestone or other contract agreement between the business and worker.
Risks of Improper Classification of Workers
For the business, the biggest risk involved in misclassification is the possibility of a worker reporting an anonymous claim to change classification. Should the worker’s claim be approved, your business could be responsible for owed employment and social security taxes. Improper classification and worker reports also increase the risk of an IRS audit on your business.
For workers, improper classification most often results in reduced earnings and job benefits. From overtime compensation to health insurance, the losses for working as an improperly classified independent contractor can accumulate quickly. Even worse, if other workers within your place of employment are considered employees instead of independent contractors, you might find that you are treated differently within the business.
If your business is responsible for finding and classifying workers, it is important to understand the IRS guidelines concerning classification. For scenarios in which you are unsure, or if you think that you might be classified improperly, the IRS can provide clarification by filing Form SS-8. However, for a large number of workers, consulting with an attorney is often the best way to ensure that workers are properly classified based on regulations for your state and scenario.
Another option gaining popularity with many businesses is using a staffing firm. These firms can help to find skilled workers to help complete your business tasks. However, workers remain employees of the staffing firm while working for your business. This allows you to avoid unforeseen complications and focus on maximizing your business.
Proper classification of independent contractors and employees is an important consideration for both businesses and workers. Improper classification leads to reduced employee benefits and increases the risk of IRS audit and financial penalties for businesses. While determining the proper classification for workers might seem tricky, there are numerous ways to ensure that your classification is accurate and reduce the worries for you or your business. For further information, check out this infographic from Wunderland.