Employees vs Contractors

So far, 2017 has been a year of growth for many businesses.  It may be time for your business to start thinking about hiring someone to help manage that growth.

 

A question many business owners struggle with when hiring is whether to classify your new people as employees or independent contractors.  The difference may be a bigger deal than you think.

 

Misclassification of workers costs Federal and State governments millions of dollars per year in uncollected Social Security, Medicare and Unemployment taxes as well as income tax revenues.  The IRS and the State of Maryland have task forces specifically designed to identify misclassified employees and collect the unpaid taxes.  The State estimates that approximately 20% of Maryland employers misclassify their workers.

 

With Federal and State budgets stretched thin, this is a targeted area the agencies are focusing on to re-coup needed tax dollars.  To them, this is a very big deal.  They are enforcing the tax as well as penalties on non-compliant businesses.  As a public accountant, I have seen several of my clients under employment tax examination over the last few years as the IRS and Maryland crack down hard on employee misclassification.

 

So, are your new hires classified correctly?  Are they employees or contractors?  It is important for you, the employer, to understand the differences between employees and independent contractors. Employers must consider the degree of control and independence of the person performing the services.  According to the IRS, the determining factors fall into three categories:

 

1. Behavioral

 

Who controls what the worker does and how they do it?

 

2. Financial

 

Who determines the business aspects of the worker’s job? Who decides how much and when the worker is paid?  Are they reimbursed for expenses?  Who supplies the necessary tools and materials?

 

3. Type of Relationship

 

Is the work being performed a key aspect of the overall business? Will the relationship continue for an indefinite period of time?  Is there a contract between the parties?

 

As you can imagine, there are factors to weigh in all of these categories, and unfortunately, there is no single determining factor that qualifies a worker as an employee or independent contractor.  Often, factors relevant in one situation may not be relevant in another.  As the employer, make sure you are aware of all the factors, closely weigh them, and if you are still not sure, give us a call for further guidance.

 

Enjoy the benefits of your growing business and don’t be afraid to get some help with the extra workload.  Just make sure you classify that help correctly.  Taurus CPAs is here to assist.  Please contact us if you’d like more information on this topic.