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Employee or Independent Contractor? How to Stay Out of Expensive Trouble

March 4, 2019 By Kelley Keller

Employee or Independent Contractor? How to Stay Out of Expensive Trouble

If you hire independent contractors to work for your business, you need to make sure that they aren’t actually considered employees in the eyes of the IRS. As many large and small companies have discovered (most recently Google, Amazon, and Uber), misclassifying workers can be expensive. In fact, it could destroy your business entirely, which is exactly what happened to startup cleaning services company Homejoy just a few years ago.

Do You Have an Employee or Independent Contractor?

Independent contractors are not your company’s employees. That means you don’t pay them through your company’s payroll system. And that means you don’t have to pay employment taxes or withhold other taxes like Social Security and Medicare from their paychecks. Independent contractors are responsible for paying all of those taxes themselves.

You also don’t have to offer independent contractors any kind of medical insurance, time off, or other benefits. In other words, you can save a lot of money by using independent contractors rather than hiring employees.

But there’s a problem. In fact, there’s a very, very big problem.

Employee Misclassification Could Cost You Your Business

Employee misclassification can be a very expensive problem. Basically, if you provide the place of work, you control the hours of work, and you control the quality of work, you have an employee. An independent contractor can’t be engaged and expected to report to the office on a day to day basis. They’re allowed to do the job in whatever way they choose.

Misclassifying employees can also get you into a lot of trouble. If the IRS or another auditing agency intervenes, you could face significant penalties. For example, you’re responsible for withholding taxes from your employees’ wages. If you’re caught misclassifying an employee, you can’t go back to the employee and get the money you should have withheld, so you’re going to be responsible for all of the taxes that should have been withheld from the employee as well as all of the taxes that you should have been paying on behalf of the company.

In addition, you’re going to have to pay penalties and interest for the period of time that the lapses occurred, which could be substantial depending. The general open audit period with the IRS is three years, so they’ll look back at least that far if they review your business, and if they find fraud, there’s no statute of limitations.

3 Questions to Determine if a Worker is an Employee or Independent Contractor

To help you correctly classify your workers as employees or independent contractors, ask the following questions about each worker:

1. Do you control the work that the worker does?

If you direct how, when, and where someone works for you, then you have an employee, not an independent contractor.

2. Do you provide the worker with equipment to perform the work?

If you give a worker a computer or other equipment that they use to perform work for you, then that worker is probably an employee, not an independent contractor.

3. Do they only work for you?

Independent contractors must be free to work for anyone they choose. If they’re only working for you, then they could be an employee, not an independent contractor. Even if they don’t have any other clients that they work for, it must be clear that they are free to work with other clients at any time without asking for your permission or they could be considered an employee.

Get Help to Avoid Making Employee Classification Errors

Employee classification errors can destroy your business, so familiarize yourself with employment law! Create independent contractor contracts that ensure your contractors aren’t employees, and make sure you pay and record all taxes correctly.

About Kelley Keller

Kelley Keller, Esq. is an intellectual property (IP) attorney, speaker, and educator with two decades of experience in the IP field. She works with individuals and businesses in a wide variety of industries helping them transform their ideas, knowledge, and innovation into valuable business assets that drive profits. Kelley offers education to established businesses, startups, entrepreneurs, corporate executives, non-profits, government agencies, legal professionals, and students about starting and growing a business as well as about IP, social media law, and the importance of protecting valuable brand assets and creative work.

Comments

  1. Tara says

    November 13, 2015 at 5:47 am

    This is very insightful, however, why doesn’t anyone ever include Labour Hire in these comparisons? It’s very easy to think “I’m an employee”, but you aren’t under the “Labour Hire” rules. Would it be at all possible to do that comparison?

    Reply
  2. Lance Hylander says

    March 6, 2019 at 3:46 pm

    Kelly,

    Very useful information.
    I intend to hire contractors to help me co-present at my workshos.
    I will be carful to meet your definitions of a contract hire.
    Thanks
    Lance Hylander

    Reply

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2016-04-23T10:27:42-05:00
Kelley works differently. After an initial phone conversation (I live in CA and she's in PA), she drafted a scope of work for both efforts and set a flat fee which included (and still includes) the back and forth conversations a client needs in order to get the best results. She is extremely knowledgeable and truly able to "hear" what I'm after and create meaningful legal documents and advice that have helped me immeasurably. I highly recommend Kelley Keller.
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Kelley explained my costs and options, as well as the pros and cons of each. She also kept me informed about my matter, letting me know what I needed to do at the appropriate time. All in all, I felt very involved in the process without being overwhelmed. Kelley made a wildly stressful situation so much better. I would highly recommend her services.
2016-04-23T10:42:43-05:00
Kelley was able to explain complicated legal issues in a manner that was easy to understand without being patronizing. She was also great at talking me down from ledges - it was easy to get worked up when opposing parties weren't being cooperative but Kelley advised me to trust in the process and she was right. Kelley explained my costs and options, as well as the pros and cons of each. She also kept me informed about my matter, letting me know what I needed to do at the appropriate time. All in all, I felt very involved in the process without being overwhelmed. Kelley made a wildly stressful situation so much better. I would highly recommend her services.
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2016-04-23T10:46:03-05:00
Words cannot express how much I appreciate Kelley Keller. She has helped me and my business on so many levels. Whenever I have a question I always know that I can call her and she will give me the best advice/counsel. I know that my business is in good hands with Kelley. Kelley, THANK YOU for EVERYTHING!!!
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2016-04-23T10:49:27-05:00
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2016-04-23T10:53:29-05:00
Kelley is an exceptional IP attorney. She understands the legal nuances facing start-ups and is willing to work within those restrictions. Kelley is casual and easy to work with, but when it comes to legal action she is aggressive and takes charge. She has successfully helped us secure coexistence agreements and trademarks for our business. Here expertise has added exponential value to the technology we have built and I would highly recommend her to anyone seeking IP representation.
http://kelleykeller.com/testimonials/matt-bloom-founder-ceo-crimewatch-technologies-inc/

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2016-04-23T10:54:48-05:00
Kelley is not only extremely knowledgeable in the realm of intellectual property, but she made the whole process fun! It's not often you hear fun and legal work in the same sentence but Kelley's personality eased my worries while keeping me upbeat the whole time. She explained the entire process in language I could understand and kept me updated continuously. I would not hesitate to work with her again or refer her to my friends and family.
http://kelleykeller.com/testimonials/zachary-ziegler-brewmaster-molly-pitcher-brewing-company/
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