Is Your New Worker an Employee or a Contractor?

When your organization needs more help, worker classification — employee or contractor — takes a back seat to more immediate concerns, like the worker’s start date and assignments. In reality, how your workers are classified should be your first consideration because it impacts the worker relationship, the on-boarding process and your organization’s overall cost.

What does “Worker Classification” mean? 

Workers can be employees or independent contractors. The IRS spells out around 20 tests to determine worker classification. But they all boil down to the amount of control over the worker and the work itself in three ways:

  • Behavioral: Do you control what the worker does and how the job is done? For example, do you determine work hours and processes to perform work tasks? If you set work hours and procedures, your worker is an employee.
  • Financial: Do you provide the tools for the worker to perform the job, such as a work space and computer? Your worker is an employee.
  • Relationship: Is the work permanent or temporary? Are employee-type benefits provided? Permanent workers who receive employer-provided benefits are employees. Temporary worker? Depends on #1 and #2.

What is the Cost Impact of Worker Classification?

Costs can be higher when workers are classified as employees vs. contractors. Employee wages are subject to the employer portion of social security taxes and any federal and state unemployment taxes. Employees may also get employer-provided benefits, such as insurance. An independent contractor is responsible for paying all of her or his social security taxes and insurance. Do some cost projections based on worker classification to know how it impacts your bottom line.

What If a Worker is Misclassified?

Even if the costs are higher, workers whose job duties are controlled by the organization must be classified as employees. No choice. Organizations that misclassify employees as independent contractors to save on employment taxes may be held liable for unpaid employment taxes, plus interest and penalties. Making a worker classification error, accidentally or intentionally, can get pretty expensive. 

Worker classification is an important consideration to your organization’s overall cost and worker relationship, so it’s essential to get it right. The IRS has helpful to do just that at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. Still have questions? Consider consulting a qualified tax professional to help you figure it out.