Choosing the Correct Worker Classification is not a Choice

America is the land of choice – but not when it comes to whether or not a worker is an employee or an independent contractor. As the workplace environment changes, employers are looking at how worker classification impacts their finances.

However, just like a cat is a cat and a dog is a dog, an employee is an employee and a business owner can’t choose to make them in independent contractor. It is a myth, but many small business owners think they have a choice in the employment status of workers. A client recently called The Payroll Department to tell me he was hiring someone and they wanted to be paid as en employee. After describing the situation, this person was clearly an independent contractor.

Employees, employers and independent contractors can’t be anything other than what they are according to the Internal Revenue Service guidelines.

According to those guidelines it matters how the work and jobs get done:

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

It comes down to the Common Law Rules:

  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?

One of the big differences between how an employer handles the classification of a worker has to do with taxes. If a worker is an independent contractor, the worker is considered self-employed and the employer does not withhold or pay any payroll taxes on payments made to them. Alternatively, if a worker is classified as an employee, the employer is required to withhold income taxes and pay Social Security and Medicare taxes as well as pay unemployment taxes based on the worker’s wages.

Choose the appropriate business relationship with workers. If you aren’t sure, call me at The Payroll Department and we’ll see what we can do to help!

Teresa Ray, owner, The Payroll Department

Posted in: HR Rules, Regulations and Laws, Payroll, Payroll Processing, Rules, Regulations and Laws

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  1. Debbie Mahler August 13, 2013

    Thank you so much for sharing this with everyone Teresa! Especially since you saved me from making a very expensive mistake with my own classification of my staff members from the same points mentioned here.

    You are a lifesaver!


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