As small business attorneys, one of the most common questions we get is whether or not a business should pay the people it hires as either independent contractors or as employees instead. This is a very important question, and if you run a small business and this has ever crossed your mind, then read on!
Many businesses elect to pay their hirelings as independent contractors. The draw is quite tempting because you don’t have to pay payroll taxes, issue W-2s or, possibly, even pay for workers’ compensation. Sounds like a good deal, right? Not so fast. The reality is, whether someone is an employee or an independent contractor depends entirely upon the job duties they have while working for you and how you instruct and control them.
The best authority on this is the United States Department of Labor, and they have a worksheet explaining this concept that you can follow through this link. Whether or not you may treat someone as an independent contractor or an employee depends entirely upon just how “independent” that person really is. There is no hard test for determining this, but there are a range of factors to be considered. And if you're telling the person when to start work, when they can quit, and how to their job, chances are good you have an employee on your hands.
So what’s the worst that could happen if you treat an employee as an independent contractor? For starters, you’re inviting penalties by the IRS or state tax authorities for the mis-classification. These could be as high as 100% of the taxes you should have paid, in addition to those taxes. On top of that, you could be held liable for wage and hour violations under the Fair Labor Standards Act. One disgruntled employee complaining is all it takes to land a nasty and expensive audit at your doorstep. Further still, if you’re hoping to sell your business one day, then failing to properly classify your employees can leave a massive black mark against your business as an acquisition target, frustrating your attempts to sell.
How can you protect your business? For starters, you can follow the link and really understand the content of USDOL Worksheet 13. This should be your first guide. If you’ve read that, and you’re still unsure, the best practice is to avoid the risk by paying the hireling as an employee.
Finally, if you really want to have confidence in whether someone is an employee or independent contractor, the best way to achieve that is by retaining a business lawyer who knows these laws well. Here at Asheville Legal, our small business attorneys have the experience and knowledge to review your employment practices to make sure they comply with the most important state and federal laws. Give us a call today.