When your organization needs more help, you might be too busy and stressed to think about all the details. Worker classification — employee or a 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 your cost.
What is Worker Classification?
Workers can be employees or independent contractors. Determining worker classification comes down to the amount of control over the worker and the work in three categories:
- Behavioral: Do you control what the worker does and how the job is done? For example, who determines work hours and how the work will get done? If you set work hours and procedures, your worker is an employee.
- Financial: Do you provide the infrastructure for the worker to perform the job, such as a work space, computer, and other tools? 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 workers could be employees or independent contractors, depending on your level of control under #1 and #2.
How Does Worker Classification Impact Cost?
Costs can be higher when workers are classified as employees vs. classifying them as contractors. Employee wages are subject to employment taxes, the employer portion of social security taxes and all 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 benefits. Compare the total cost of each worker classification to know how your decision will impact 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.
The IRS has more helpful details at http://bit.ly/2h9qlho. Still have questions? Consult a qualified tax professional.