Could this happen to you?

I was helping a successful business owner with wage and hour compliance issues, and his biggest challenge was the classification of his workers. The workers wanted to be independent contractors so payroll taxes weren’t deducted from their checks. According to federal guidance, though, they did not qualify to be independent contractors.  While we were in the process of correcting the situation, the Department of Labor audited and cited the business with 6-digit fines related to unpaid payroll taxes and non-compliance for misclassified workers. 

Make sure you’re right when you call someone an independent contractor. It’s all about control. Independent contractors should:

·         Control when, where, and how the work is done;

·         Provide their own tools and computer equipment;

·         Work with multiple clients and choose their own sub-contractors;

·         Invoice the company and be paid through accounts payable;

·         Be able to provide a tax identification number and a certificate of insurance for general liability and worker’s compensation coverage;

·         Sign an Independent Contractor Agreement covering the scope of the work, payment terms, etc.

If you control when, where, and how the work is done, what the workers wear (uniform or required dress code), provide the tools and computer equipment to do the job, pay the workers a salary or hourly rate through payroll without an invoice, and they only work for your company, they should probably be employees who get a W2 at the end of the year. Otherwise, you’re creating unnecessary liability for your company.

The IRS website provides detailed explanations to help you determine if workers are employees or independent contractors.  Take the time to review your pay practices and ensure correct classifications. In the next blog I’ll discuss how to stay out of trouble by classifying, tracking, and paying non-exempt employees correctly.