Employees are, among other things, expensive! The labor crunch of the past few years has escalated compensation (which, truth be told, had not been keeping up with the cost of living so a correction was necessary) but the costs go well beyond their hourly rate or salary. An employer matches an employee’s FICA and Medicare contributions, pays for state and federal unemployment insurance, and very likely buys Workers’ Comp insurance in case they get injured on the job. Those expenses can add 15% or more above and beyond the hourly pay. There are also documentation and compliance issues when you have W-2 employees. Thus, some employers seek to classify their workers as independent contractors.
But are they really? It gets down to an issue of control. If you, as the employer, do ANY of these things: schedule them, train them, direct or supervise them, if they use your tools or facility to do the work, and/or if they are an integral part of your business operations, they really aren’t independent contractors; they should be classified as W-2 employees. The IRS has a good discussion of the 20 or so “tests” that they use to decide if a worker is truly independent – read more here: INDEPENDENT CONTRATORS (regent.edu) and from the IRS itself at: Independent contractor (self-employed) or employee? | Internal Revenue Service (irs.gov)
This employee classification issue often comes into painful focus when there is an injury on the job. For example, if a moving company pays its crew members as independent contractors and one of them drops a dresser, breaks their foot, and goes to the ER, they’ll soon get a letter from their insurance provider asking about how the injury occurred. Frankly, the insurance company is looking for a way out, and once they find out that the injury occurred on the job and should have been covered by Workers Comp insurance, the whole thing unravels. But it need not be an injury: if one of your workers does not pay their self-employment insurance, when the IRS contacts them to collect, the jig is up, and you as the employer will be liable for back taxes and penalties.
Some people who provide services for your business are independent contractors: your graphic designer, web developer, attorney, the plumber who fixes that leaking pipe would all fit under that category. But notice that they all have their own businesses, file their own self-employment taxes, have their own insurance, set their own prices and most importantly, they are not under your direct supervision or control.
Work with your advisor, accountant or even the IRS, which has a form for classification (SS-8) to determine your employees’ true status.
