Good problem to have – Worker Classifications

So many clients are growing their businesses and need help. A common mistake some overwhelmed business owners make is thinking they can choose to make a worker a contractor to avoid paying benefits. What they fail to realize is that the job duties and oversight of the worker control the employee/contractor classification. There is a huge body of law that governs what an employee is, and this area is jointly enforced by the IRS and the Labor Department.

Employees are given workspace and tools. They are told when, where, and how to perform their duties. They are closely supervised and given feedback to improve their work. They must be paid minimum wage, be paid overtime for hours worked over 40, and be compensated for on-the-job injuries. Their salary is recognized on form W-2 to the IRS. The employer withholds taxes and pays certain employment taxes on behalf of the employee.

Contractors are given a scope of work to perform at a certain price at a certain time. They are not told what order to perform the work. They use their own materials. When they are finished, the work is either accepted or rejected. They are not coached or trained. They do not get minimum wage, overtime, paid vacation, workers' compensation, workplace protection from discrimination, or other benefits. Their payments are recognized on Form 1099 to the IRS. No taxes are withheld.

The IRS uses a three-part analysis to determine whether a worker is an employee or an independent contractor (regardless of how the business itself classifies the worker):

1. Behavioral: Does the company control, or have the right to control, what the worker does and how the worker does their job?