Many employers’ eyes glaze over when it comes time to hiring. What confuses many is whether to hire someone as an employee or independent contractor.
“What’s the big deal?” you might ask. Well for starters, failure to properly classify a worker as an employee could lead to penalties and interest on unpaid Social Security and Medicare taxes.
An employer is responsible for paying half of the Social Security and Medicare taxes due on an employee’s wages, with the employee typically paying the other half through a payroll deduction. If an employer has not paid the Social Security and Medicare tax normally associated with an employee’s wages the IRS may collect the tax from either the employer OR the employee.
Uber and Lyft long treated its drivers as independent contractors arguing that the drivers were not essential to its business and thus could not be treated as employees. However, California felt differently and passed a bill that reclassified their drivers as employees. This allowed the workers to be eligible for employee-related benefits such as overtime, unemployment, health insurance, workers’ compensation, paid sick leave and other protections under the law.
They are not the only companies to make this mistake. FedEx also was stung after a legal decision declared that they too misclassified workers as independent contractors instead of employees. FedEx Ground and FedEx Home drivers made deliveries on their routes and were compensated as independent contractors. However, lawsuits in a number of states proved that the drivers actually did not have the necessary control to determine how to do their work and should thus be treated as employees.
You can see that the employee classification is important but how exactly do you determine who is an employee and who is an independent contractor? There are a variety of tests governments will use including, but not limited to, the following:
- Do you have the right to decide how and when the work is performed?
- Does the worker have the ability to hire a sub-contractor?
- Does the worker have profit or loss potential?
- Does the worker provide his or her own tools?
- Is the work performed by the person different from your primary business?
- Is there a contract in place between your business and the individual hired?
- Are you bringing in the person to work on a project or short-term basis?
If the answer to all, or some, of these questions is no then the person hired is likely an employee. Keep in mind that since the IRS and States may have different guidelines it is best to look at all factors before making the decision on whether to treat your new hire as an employee or independent contractor.