By Kim Freeman, Director of HR Services, JD
When it comes to getting the work done, companies need the right people. But how do you know if you should hire employees versus independent contractors? Classifying your relationship with those who work for you is important to avoid possible costly legal issues.
The issue of proper classification of your workforce is important. Misclassification can lead to penalties that include hefty fines and your company might be subject to employment taxes, back wages, and overtime if someone was classified as an independent contractor but was actually an employee. By partnering with a Certified Professional Employer Organization (CPEO) such as Resourcing Edge, you can mitigate the risk of making such mistakes.
Employees (W-2 workers)
Generally, employees, sometimes referred to as W-2 workers, are those whose work is under your control. In other words, as management, you determine what is done, when it is done, and how it will be done. The company is in full control of the services and product, how the person is paid, and provides certain benefits. As the employer, you are responsible to pay and withhold your company’s portion of Social Security and Medicare taxes, and pay unemployment tax. Furthermore, you are responsible for withholding employee income taxes.
Independent contractors, who are paid via 1099, are typically self-employed. As a contractor, the entity that pays only controls the result of the work, not how and when it is done. There is no employer-employee relationship, and the company is not required to withhold taxes or pay the employer share of Social Security and Medicare. In addition, most independent contractors must provide their own workers’ compensation coverage.
Depending on the type of work your company does, there may be little to no reason to hire independent contractors. Should there be a need, however, an analysis should be done to ensure the work is truly for a 1099 contractor. Getting the classification of workers correct comes down to a variety of factors related to behavioral and financial control. The IRS provides several resources, including a publication that reviews an 11-factor test to determine classification.
If your company does hire independent contractors, remember that there are rules that must be followed, such as issuing and filing 1099s. A Form 1099 must be issued to any person a company paid at least $600 to for business-related services. In order to lessen your workload surrounding issuing 1099s, make sure each independent contractor you use fills out and returns to you a W-9.
A company needs to remain vigilant, too, as to not take actions that could re-classify the contractor accidentally. For example, managers should be trained about working with contractors, so they don’t inadvertently control when and where to do the work, what tools are used, or how the contractor is paid.
By partnering with Resourcing Edge, we can help. Our HR Services team can help you navigate classifications to keep your business compliant with employment law. Not only can you easily confer with HR professionals, but we have training materials and resources we can share.
Contact us to learn more about how Resourcing Edge can help you manage HR, payroll, benefits, and more so you can concentrate on your bottom line.
Kim Freeman is the Director of HR Services at Resourcing Edge, and a licensed attorney. The information presented in this article is for informational purposes only and does not constitute legal advice or create a lawyer-client relationship.