October 12, 2015
The classification of workers as employees or independent contractors continues to be a hot topic within the IRS, U.S. Department of Labor (DOL) and state Employment Security Commissions. Whether an employer is trying to avoid having employees that will require healthcare coverage under the Affordable Care Act or the recent proposal by DOL to increase the salary-exemption requirements, the temptation for employers to classify workers as independent contractors is on the rise. Before making any quick decisions, we encourage you to take the time brush up on the rules and remain cognizant of the significant risks and costs of misclassification.
It is important to review the relevant facts related to each worker on a regular basis. The relevant facts fall into three main categories (1) behavioral control, (2) financial control and (3) relationship of the parties. It’s important to consider all the facts – no single fact provides the answer.
With an employee, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid. You may also incur expenses related to employee benefits, training, reimbursement of business expenses, and workers compensation insurance coverage.
With an independent contractor, the worker is responsible for paying their own income and self-employment tax. Businesses may be required to provide a 1099-MISC to the worker, and the independent contractor is allowed to deduct their legitimate business expenses. A written contract may be important if it is difficult to determine the status based on other facts. These individuals should have “skin in the game”, that being the opportunity to realize a profit or incur a loss on jobs.
An annual review of continuing relationships may help identify changes to facts and circumstances. Should classification of workers be challenged, consider all ramifications before paying any assessed fines, as doing so may constitute admission of misclassification. Legal representation may be warranted.
As a general rule, the most conservative treatment of workers is as employees. However, this can come with significant costs, which may not be warranted and place undue burden on the business.
Department of the Treasury Internal Revenue Service
Contact JPS to learn more about financial and tax impacts on your business.
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About Johnson Price Sprinkle PA:
Johnson Price Sprinkle PA is a leading certified public accounting firm in Western North Carolina, providing innovative solutions created specifically for small to mid-sized businesses. With a sixty year history, JPS has built its practice on providing superior accounting and exceptional service in taxation, business advisory and assurance to move clients forward by giving them the power of a national firm with the attention of a community-based one.