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Have you ever wondered if your company has correctly identified all individuals performing services for you as either employees or independent contractors? Lately, we’ve had a few inquiries from clients, asking for guidance on whether or not they are classifying people correctly. Actually, that’s not exactly true; we’ve been assisting clients for other needs, and someone on our staff says, “Wait a minute – let’s look further at this situation before we decide to ‘contract’ someone to work the front desk at the optometrist’s office!”

It’s important we take the time to figure out how to classify each individual. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

This article by the IRS is extremely helpful; It explains,

“In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

    1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
    2. 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.)
    3. 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?

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”

In the event that the IRS finds a business to be misclassifying employees as independent contractors, the business would need to pay back-taxes as well as penalties for income taxes, Social Security, Medicare, and unemployment taxes. Depending on the position, the employer may also need to provide the newly designated employee with their rightful benefits.

It’s never an issue to classify someone as an employee; examples that we see are where businesses consider individuals as Independent Contractors when all indicators point to an employee. See this 20-point checklist from the IRS to help in conjunction with the Common Law rules above.

If you have any individuals currently in mind or you are thinking about adding to your team and you may be questioning how to classify the position, reach out to Purple Ink. We can take the time and make a recommendation that will keep you in compliance.

Laura North
Laura North
Laura is a Consultant at Purple Ink. She thrives for all employees to understand their role and value within the company’s mission.

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