Get Your Contractor or Employee Classification Right!

As the pandemic restrictions ease, you may soon begin thinking about bringing back more workers as your business activity picks up. Due to the uncertainty of the economic recovery, however, many businesses are considering adding contractors instead of full-time or part-time employees.

Classifying your workers as independent contractors provides more control over your expenses if the recovery is slower than you anticipated. It also can save in benefit expenses and payroll taxes.

However, you need to tread with caution. If the IRS determines that you misclassified your employees as contractors, you could end up paying all of the employment taxes and benefits that would have been owed to these workers had they been your employee. Depending on the size of your workforce, the cost to your business could be substantial.

In determining whether the person providing a service is an employee or an independent contractor, the IRS will review these three categories that deal with a worker’s degree of control and independence:

  • Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? If yes, the worker is an employee.
  • Financial. Are the business aspects of the worker’s job controlled by the payer? This includes things like how the worker is paid, whether expenses are reimbursed and whether the employer provides tools and supplies. If yes, the worker is an employee.
  • Type of relationship. Are there written contracts or employee-type benefits? If contracts are involved, the worker may be a contractor. If benefits such as a pension plan, insurance and vacation pay are made available, the worker most likely is an employee.

It’s definitely worth exploring if the workers you welcome to your company can be classified as independent contractors. But deciding whether a worker is a contractor or an employee can get complicated. And there are significant financial consequences for incorrectly classifying a worker.

Please contact us if you have questions about how to rebuild your business’s workforce and stay away from tax challenges.

As always, we hope you find our tips and news for businesses valuable, and look forward to receiving your feedback. Companies focused on growth have sought the help of Insero & Co. for more than 40 years. During that time they have consistently experienced the peace of mind that comes from knowing their CPA firm takes the concept of integrity seriously. Should you have any questions about contractor or employee classification, please contact us directly.