As an employer, it is important to know the difference between when a worker is considered an employee and when they are considered an independent contractor. There are tax implications for both types of workers, and it is important that they be classified correctly. An experienced employment law attorney can help you determine how to correctly classify your workers.
Differences Between an Independent Contractor and an Employee
In most situations, a worker will be classified as an employee if you have the right to supervise the job that they will be doing, as well as the methods they will be using and how the job will be done. An independent contractor, on the other hand, will retain control over the means and manner in which they perform their work.
The Internal Revenue Service (IRS) uses three key areas to determine which type of worker is an employee and which type is an independent contractor:
- Behavioral Control – Does the worker have the right to control or direct all the aspects of the work they are doing, such as when, how, and where the job will be done?
- Financial Control – Does the employer have control over the financial business aspects of an employee’s work? For example, does the employee determine whether business expenses will be reimbursed or not, when the worker will be compensated for their work, what investment the worker will make in the amenities they use on the job, the cost and type of benefits offered, or any other financial aspects of the job?
- Type of Relationship – The IRS will examine the working relationship between the worker and employer through the written contracts that detail whether the worker is eligible for benefits such as insurance, vacation pay, pension plans, or sick pay, as well as whether the relationship between the employer and worker extends beyond the duration of one job.
Many employers incorrectly classify their workers as independent contractors to avoid the expenses of retaining employees, such as overtime and minimum wage requirements, payroll taxes, and more.
Cost of Misclassification
While there are expenses associated with having employees that can be high, the cost of misclassifying workers is even more costly. Misclassification of workers is on the radar of all government agencies, including the IRS, state unemployment agencies, and the Department of Labor. All of these entities are eager to find extra sources of revenue.
If you get caught misclassifying any of your workers, whether unintentionally or intentionally, you may face both financial and legal consequences. You will be required to reimburse payments such as unpaid wages, workers’ compensation benefits, overtime wages, employee benefits, retirement contributions, health insurance, unemployment insurance, Social Security and Medicare contributions, and back taxes, just to name a few. You may also be required to pay interest and penalties imposed by state and federal agencies for violating their laws.
Contact an Experienced Chicago Business Law Attorney Today
If you are uncertain how your workers should be classified for your business, an experienced employment law attorney can help you make this determination and avoid the possible penalties involved in misclassification. Call the dedicated DuPage County business attorneys at Momkus LLC at 630-434-0400 and let us ensure that you are handling all aspects of your business within the limits of the law.