Is My Employee an Independent Contractor
For each of your employees, you must file a Form W-2 and withhold and pay certain taxes and benefits. Creative works such as songs, articles, and works of art are subject to copyright. Under the Copyright Act 1976, an independent contractor who has created a work for an employer owns the rights to that work, except in certain circumstances. The employer who commissioned the work is automatically the owner of the rights only if the work is considered a “commissioned work” within the meaning of the law and the parties have signed a written agreement stipulating that the contracting employer is the author of the work. To qualify as a “commissioned work” under the Act, it must fall into one of nine categories: (1) a contribution to a collective work, (2) a part of a cinematographic or audiovisual work, (3) a translation, (4) an additional work, (5) a compilation, (6) a teaching text, (7) a test, (8) test response material, or (9) an atlas. Using independent contractors can help minimize employee-related costs, such as payroll taxes, benefits, overtime and employee wage premiums. While it may be tempting to classify some of your employees as independent contractors, with the increasing risk of penalties, you need to make sure your business is doing things right. Independent contractors are not considered “workers” for the purposes of the Fair Labour Standards Act and are therefore not covered by its wage and hours of work regulations. Generally, an independent contractor`s salary is determined based on their contract with the employer. These contracts often set a deadline for completion of the work, but do not include fixed hours during which the contractor must work on the employer`s construction site. This flexibility is one of the hallmarks of an independent contractor relationship.
A company may pay an independent contractor and an employee for the same or similar work, but there are significant legal differences between the two. For the employee, the company withholds income tax, social security and health insurance from the wages paid. For the independent contractor, the Company does not withhold any tax. Labour and labour law also does not apply to independent contractors. Typically, you must withhold income tax, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You usually don`t have to withhold or pay taxes on payments to independent contractors. “I usually see someone who wants to save as much money as possible, and [the company] works 50, 60, 70 hours a week and doesn`t pay overtime because they misclassified [people],” Miklas says. Then they get caught.
“Now they have to pay arrears, which can be exceptionally high. And most likely, if you misclassified one person, you misclassified an entire group. These are not $2,000 bills. They could be big enough to put a business out of business. In addition, misclassification of employees is a federal offence, so there can also be jail time for the business owner. As you can see, there are many reasons why employers prefer independent contractors over employees. Therefore, it is not surprising that some employees are wrongly classified as independent contractors. Courts and federal agencies use several tests to determine whether an independent contractor is actually an employee, and the standards differ depending on the labor rights sought. Examples of workers who are often misclassified include truck drivers, construction workers, bicycle couriers, and high-tech engineers. There`s more than one test for determining whether an independent contractor is actually an employee, and doing it wrong can cost you more than retroactive payments – it can cost you your freedom.
Hiring independent contractors is popular because it reduces the number of employees and thus reduces overall costs. Here`s what your independent contractor application should include. The fuss around employee classification boils down to taxes. “On the other hand,” Miklas says, “if the worker has to work long hours, maybe 50, 60, 70 hours a week, it makes it almost impossible to work for someone else, let alone competitors who look like an employee. If employees must: Your employer can`t simply label you as an independent contractor to circumvent federal and state legal requirements — if your job characteristics are similar to those of an employee, your employer must treat you as an employee. The activity of an independent entrepreneur is characterized by independence. You could be an independent contractor if: The two main points the IRS says you need to consider when classifying employees are: As you can imagine, the IRS is concerned about its tax base. For employees, you must withhold income taxes, Social Security, Medicare taxes, and unemployment taxes on all salaries paid to employees.
None of this happens with independent contractors. Instead, independent contractors have to pay their own taxes. Are you hiring someone to carry out the small project you`ve had to do for ages? If they work as an independent contractor rather than an employee, be sure to protect your business with an independent contractor contract. If you have a reasonable basis not to treat an employee as an employee, you may be exempt from paying payroll taxes on that worker. To receive this relief, you must submit all required federal information on a basis consistent with your salary as an employee. You (or your predecessor) must not have treated an employee who held a substantially similar position during periods beginning after 1977. See 1976, Section 530 Employment Tax Relief Requirements (PDF) for more information. With the new government`s focus on the difficulty of qualifying as an independent contractor, “there will be more challenges,” warns Miklas.
“Now is the time for companies to audit themselves and make sure these people are truly independent contractors.” Taxes and benefits that are not (or wrongly withheld) do not only place an undue burden on employees and contractors. If you “misclassify” a worker and don`t properly withhold or pay the required amounts, the IRS can label your business and come after the money owed. There are pros and cons to being an employee or an independent contractor. In general, it comes down to a question of job security versus freedom. As an employee, you get benefits and (hopefully) the certainty that you will have a permanent job for the foreseeable future, as long as the business continues to grow and you adhere to employee policies. To convey this message in a simple way, this diagram from ComplyRight shows the striking differences between the classifications of independent contractor and employees. If the IRS determines that a company misclassifies employees as independent contractors under labor laws, it will generally order the company to pay taxes as well as penalties for income taxes, Social Security, Medicare, and unemployment taxes. Depending on the position, the employer may also be required to provide the newly appointed employee with their legal benefits. You can be an independent contractor if your work does not meet the legal definition of employment. Similarly, you are an employee if your work falls under the legal definition of employment. Getting a 1099 tax form is simply the result of how your employer classifies you for federal tax purposes, but the form itself does not mean that you are properly classified as an independent contractor for federal tax purposes.
And getting a 1099 is irrelevant to determining whether you are an employee under the FLSA, FMLA, or MSPA. Never allow an entrepreneur to start working on behalf of your business without a fully signed contract or agreement. This document describes your relationship with the independent contractor, and it is important to respect their parameters throughout your relationship. Unlike employees, independent contractors are generally allowed to perform work for other businesses and can make a profit or loss like any other small business. Therefore, it is important that employers and employees properly organize the employment relationship, as the consequences can be costly. Often, it is employers who make the decision about an employee`s status. But it is a test of “facts and circumstances,” and each person`s situation is different.