Many small businesses hire extra help starting with their Black Friday deals, Small Business Saturday, and throughout the holiday shopping season. Many entrepreneurs unintentionally misclassify their seasonal workers, which can result in steep penalties. Did you know a written agreement that a worker is an independent contractor is not legal if they really are acting like an employee? It’s just like when your vegan in-law brings a Tofurky to dinner—we can all politely agree it’s tasty and she may truly believe it’s a good equivalent, but it’s really not fooling anyone into thinking it’s actually Thanksgiving turkey.
Try as you might, you’ll never be able to make Tofurkey into real Thanksgiving turkey.
While (as you can probably tell) Tofurkey isn’t my thing, it IS a good alternative for some people. Maybe they’ve gone vegetarian for health or ethical reasons and this is as close to the real thing as they can get. (I personally prefer a carved pumpkin centerpiece filled with a rich stew or soup if you’re going vegetarian for the holidays.)
Similarly, if you try to pass off employees as independent contractors, you could get a serious jeer and some hefty fines from the government. Many entrepreneurs don’t even know it’s wrong to misclassify their seasonal workers, which is the equivalent of trying to pass Tofurkey off on the IRS – only they aren’t going to smile politely. And you can bet the “nibble” they take out of your bank account will be anything but dainty.
Read on to find out who really is an independent contractor, the penalties for misclassification, and what you can do to minimize the risks.
A written agreement that a worker is an independent contractor is not legal if they really are acting like an employee?
If your independent contractor is treated/acting like an employee, a written agreement saying they’re an independent contractor is about as useful as a certificate from the Tofurkey people saying their faux turkey tastes real. In other words, it’s not very useful. Instead of relying on a document that won’t help you, let’s look at what separates these two classes of workers.
Who is an Independent Contractor, Really?
An independent contractor is a worker who is not an employee, but contracts with various companies and other groups to provide services when required. An independent contractor typically:
- Charges fees for service.
- Is contracted only for the term required to perform an identified service or task.
- Pays employment taxes personally to the government. Your business doesn’t pay employment taxes to the IRS and issues a Form 1099.
- Is not protected by most federal, state and local laws designed to protect employees.
As the business owner, when you deal with a true independent contractor, you’re mainly focusing on the result of the work. If you want to tell your worker HOW, WHEN, AND ALL THE OTHER DETAILS ON THE METHOD or MANNER of getting the job done, then you’re probably treating him/her like an employee, even if you both agree the worker is an independent contractor.
Correct classification depends on the facts of each individual case and how those facts apply to the tests recognized for evaluating classification status. There are more than 8 tests defining Independent Contractors for workers in Texas alone.
An agreement that your worker is an independent contractor is NOT legal if they really are working like your employee. The IRS, DOL, and other federal and state agencies regularly audit businesses for misclassification. Employee overtime law suits are also on the rise.
Penalties for Misclassification
As one example, the IRS typically requires a company to reclassify the worker as an employee, making your business liable for any financial and litigation liability concerning that employee, including:
- Back wages and overtime pay.
- Tax and insurance obligations, such as FICA, FUTA and Worker’s Comp.
- Employment law compliance such as I-9 $110 to $1,100 civil penalties.
- Employee benefits.
How to Minimize Your Risks
- Visit with a Lawyer or a Human Resources Professional. Get some outside help on classifying your workers. Remember it greatly depends on your particular situation. One entrepreneur client of mine didn’t realize one of the factors of classification depended on the size of his company vehicles! This stuff is complicated so it’s a good investment to work with a professional.
- Train your personnel on classification issues. Some businesses delegate hiring to an office manager. Make sure your hiring personnel understand before they make a hire.
- Obtain a ruling from the IRS. Yes, your business could file a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS if you plan ahead. The ruling can take six months or more to get a determination, but it is conclusive for federal tax purposes.
- Draft contracts with a careful awareness. A written agreement for an independent contractor can be binding if it is legally accurate.
It’s just like Thanksgiving: given the situation, it’s just not worth skimping and trying to save a little (calories or monies) with a Tofurky independent contractor. Go for the real thing. It’s worth it (and so satisfying). If your business needs an employee, then hire one to get some real help during this busy season. Some extra help (workers that can truly benefit your business) are an investment. Don’t skimp on the growth of your business.
Interested in learning more? Post a comment or click here if you’re interested in a webinar series to learn the details of Independent Contractors v. Employees.