A worker’s employment status affects many issues such as employment benefits, tax implications, and liability. Many small businesses prefer to hire independent contractors due to flexibility, costs and less regulations. Employers have more financial obligations if they hire employees such as paying federal income taxes and benefits (including vacation, holiday, and sick pay). On the other hand, if your small business hires an independent contractor, you are not required to make these payments.
Unfortunately, there is no single test for determining whether a person actually is an employee or independent contractor. The IRS emphasizes the importance of understanding and correctly applying the rules for classifying a worker as an employee or an independent contractor. For this reason, the IRS uses a 20-factor test for determining worker status. These rules focus primarily on the level of control an employer has over a service or product, meaning, whether or not the employer actually defines what is being done and how it will be accomplished.
Far too often, business owners misclassify their workers. The Labor Department has estimated that up to 30% of companies misclassify their workers. Sometimes the misclassification is the result of a mistake. Other times, employers are misclassifying workers because they are trying to evade regulations and taxes. Either way, employers are liable for back taxes, penalties and interest. Jail time and personal liability can even be imposed in some circumstances. UBER and FedEx have had to pay out large penalties because of their misclassification of employees as independent contractors.
Enforcement of correct worker classification has been on the rise lately. An agreement detailing the relationship between the parties would help a court make the determination whether the classification is correct. The IRS also considers the parties’ written agreements in determining the worker’s status. Merely having a worker sign an agreement saying they are an independent contractor does not make them one. It is a good idea to consult with an attorney to ensure your workers have the proper documents in place to correctly reflect their status.
It is important to contact a Florida licensed business attorney if you’d like to discuss the classification of your workers or draft agreements. You can contact Wheeler Legal PLLC by calling (321) 209-5995 to schedule a consultation and find out how this firm can help you.
Disclaimer: The information contained above is provided for general informational purposes only, and does not constitute legal advice, nor is it intended to create an attorney-client relationship. This firm aims to provide quality information, but we make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this post. Nothing provided herein should be used as a substitute for the advice of competent counsel.