Independent Contractor or Employee?

This is a subject that has long been a topic of discussion and debate among business owners, employees, and independent contractors; however, the feds and states are very clear on one thing –  you’d better be darn sure that you are classifying your workers correctly because the penalties are stiff and the consequences just became more severe.

Because it is very tempting for employers to convert or hire workers as “independent contractors” and the workers even agree to it, the DOL has initiated the “misclassification initiative.”   In doing so, millions of dollars are being collected from employers for back overtime for misclassified employees.

In the past, if the IRS held an audit and discovered a worker misclassification, they passed out their penalty, etc. and that is where it ended.  Today, as part of the initiative, the feds and states are now sharing information so everyone gets their piece of the pie.

In the event you have hired an independent contractor here are some tips to prevent an unfavorable decision if you are audited.

Review all current independent contractor relationships and make adjustments if necessary.

  1. Have a written contract.
  2. It is much safer if contractor is a legal entity (LLC or Corp).
  3. Contractor should have a business card to pass out trying to grow their business.
  4. Contractor should be receiving a 1099 from more than just you.
  5. Contractor uses his own equipment and tools.
  6. Contractor can lose money on the job if they don’t produce the desired results.
  7. Contractor is paid by the job and not by the hour.
  8. Contractor sets their own hours including start and end times.

In the end, if in doubt – get the W-4 and I-9 and report your newly hired employee to the new hire registry.