September is Compliance Month at Bell Solutions! |
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Did you know that as a business owner, you do NOT get to choose how you pay people?
The rules set forth by the Federal Department of Labor are very specific about the classification of workers and they get more complex every day.
Business owners are responsible for determining whether the individuals that are providing services to their business are employees or independent contractors.
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Generally, you must withhold income, Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
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You do not generally have to withhold or pay any taxes on payments to independent contractors.
Many businesses choose to pay people as independent contractors to avoid paying taxes, but beware. Classifying an employee as an independent contractor, with no reasonable basis for doing so, makes employers liable for employment taxes, and typically results in penalties and fines.
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Review your workers for appropriate classification.
In order to compensate an individual as a Contractor, you must be able to provide evidence of the degree of control and independence for three categories.
If you answer, Yes, to any of these, the worker must be classified as an employee, not a contractor .
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Such as when or where to work, tools or equipment to use, what work must be performed, and what order or sequence to follow when performing work. learn more
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) learn more
Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? learn more
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2023 NEW RULE
Federal Department of Labor New Classification Rule
As of 2023, new rules replace the previous rule that emphasizes two core factors, among five, as being the most important in determining whether a worker should be classified as an employee or an independent contractor.
What was considered an employer-friendly rule, now uses a totality-of-the-circumstances analysis, giving no individual factor predetermined weight. The factors include:
- Opportunity for profit or loss depending on managerial skill*
- Nature and degree of control*
- Degree of permanence of the work relationship
- Is work performed an “integral” part of the employer’s business?
- Skill and initiative
*These were the core factors that were given more weight under the previous rule.
The new rule also proposes a sixth factor to determine whether an individual is economically dependent on the employer (e.g., Is the worker’s investment either capital or entrepreneurial and is the worker’s investment relative to employer’s investment).
- If a worker has no opportunity for profit or loss resulting from the demonstration of managerial skill that impacts their performance (e.g., do they negotiate pay for the work complete, do they have the power to accept/reject jobs, do they hire talent, purchase materials, etc.), then they could be an employee.
- Based on nature and degree of control, for example, if the employer handles setting the schedules, supervises the work being done, oversees any discipline required, and more, then the indications are that the individuals being scheduled and supervised are employees.
- Under the degree of permanence factor, a continuous or indefinite relationship would indicate employee status, while a more project-based or non-exclusive relationship indicates independent contractor status.
- If the work performed is critical or central to the principal business, then it is an integral part and the definition leans toward the worker being an employee. Conversely, if work performed is not critical or necessary, the factor would weigh toward the worker being an independent contractor.
- With skill and initiative, if a worker needs training or is applying no specialized skills to perform tasks, then the indication would be that their status is an employee.
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Understand misclassification consequences.
Unfortunately for small businesses, the enforcement of paying workers correctly has become a hot topic over the past decade. In recent years, the Federal government started working with States to audit their small and micro-businesses specifically for employees being paid as contractors.
Classifying an employee as an independent contractor, with no reasonable basis for doing so, makes employers liable for employment taxes, and typically results in penalties and fines. Not to mention a spot on the naughty-list of businesses that the IRS will be back to visit for more audits.
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Utilize your CFO on the Go services!
Need help determining your worker classifications? Give us a call!
Bell Solutions can also help:
- Track Contractor accounting,
- Maintain W9 documentation,
- File annual 1099's, and
- Write or review subcontracts.
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Bell Solutions | bellsolutions.biz
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