Misclassifying employees: An expensive proposition
Many small businesses believe they are getting a bargain on expenses and payroll taxes by classifying their employees as independent contractors. Some employers classify independent contractors as such in order to avoid paying overtime. They arbitrarily bring them on-board and figure they can simply provide them a 1099 at the end of the year and be done with it, completely oblivious to the perils to their business down the line.
Classifying employees and determining who is and is not an independent contractor isn’t a choice you are free to make in order to suit your business goals independent of the rules involved. If a hire is misclassified, a company can face hefty financial penalties and even lawsuits.
A number of factors must be taken into consideration in determining whether an individual should be hired as an independent contractor or an employee. It is also important to remember that no single factor is conclusive on its own- it’s sometimes very difficult for the hiring organization to make the correct determination on their own.
To determine whether an individual is an employee or an independent contractor under common law, the relationship of the worker and the business must be examined carefully. Generally speaking, an employee is subject to an employer’s control over what work gets done, how it is performed, with what tools and resources, and when the work gets performed. If on the other hand an individual is an independent contractor, the employer has the right to control or direct only the result of the work- and not the means and methods of accomplishing the result.
At Miami Payroll Center, we want to help you ensure you have properly classified your employees and/ or independent contractors. To this end, we’ve created a simple two-page job aid which can help you make the determination. To get this free tool, simply click here and fill out the short form. You will receive an email with a link to download the free job aid.
For more information on the proper classification of your employees, contact us or visit the IRS’s web site here.