Before hiring temporary help, it is important to determine if the individual hired will be an employee or an independent contractor. Proper classification between the two is critical for many reasons including tax withholdings, payroll returns, and employment forms. There are multiple factors that determine who is considered an employee and who is an independent contractor, but the main points are control and independence of the worker.
The factors used to determine the control and independence fall into three main categories:
- behavioral control
- financial control
- type of relationship
A company has behavioral control if the company has the right to control what the worker does and how he or she does it. Financial control considers how they are paid, if expenses are reimbursed, and if a worker provides their own equipment and supplies. The type of relationship is based on items such as written contracts and what benefits are paid, including insurance, vacation, retirement, etc. Businesses must weigh all the factors in each situation to determine the classification of each worker, as no single factor causes the outcome.
Improperly classifying a worker can be costly for a business. Incorrectly classifying an employee as an independent contractor could result in the business being liable for both the employer and employee’s portion of employment taxes and withholdings as well as any possible employee benefits or underpaid wages (including overtime or minimum wages). When in doubt on how to classify the worker, the conservative approach is to treat him or her as an employee and pay all applicable employment taxes.
Documentation is very important if the classification is challenged. It is prudent to have a written contract in place, although a contract stating classification as an independent contractor not enough to make the determination alone. It is also important to keep records of time sheets, how the worker was paid, whose supplies were used, etc.
The treatment of the worker needs to be determined before he or she starts. In addition to tax withholding, there are other employment laws to consider, such as unemployment compensation and workman compensation insurance. Businesses that currently have incorrectly classified workers should correct the situation as soon as possible. Some relief provisions, including possible relief of some employment taxes, exist for businesses that voluntarily correct the misclassification.
For more information, please contact a tax advisor at your local Blue & Co. office. They will be happy to assist you in determining your risk and remedies in this area.