Faw Casson

Independent Contractors: The Art of Worker Classification

independent contractor MISC NEC

August 15, 2022

In today’s world there are a plethora of ways to earn a salary, and to engage people to complete a job.  While some employers still employ workers in a traditional manner, many are finding ways to increase their scheduling flexibility.
One of the largest ways seen in today’s workplace is using an independent contractor (IC).  A recent study by Paychex cited that IC growth has been steadily outpacing traditional employee hiring since 2017.  This creates a lot more opportunity for both the employee and the IC, but also a lot more confusion when it comes down to how to properly classify the relationship for tax purposes.
What’s to like?
There are several advantages to hiring someone as an independent contractor.  Generally, the employer can save money by paying an IC, even if they get paid at a higher rate, as the employer isn’t responsible for healthcare costs and other benefits, equipment, taxes or creating a space for the IC to work.  An IC relationship also allows for a tremendous amount of flexibility as you can hire the right amount of personnel for each job without worrying about employing someone year-round, or meeting minimum wage or overtime pay requirements.  Being able to hire someone already prepared with the skills needed to complete the job instead of providing training is also a huge resource-saver.  In addition, hiring an IC can also reduce your risk of being exposed to a lawsuit, as the IC is not privy to the same protection that an employee is provided by government agencies when it comes to things such as discrimination, medical leave, maternity leave, etc.
What can go wrong?
While the positives do paint a pretty picture of the IC route, there are some negatives that need to be considered.  For example, employers have less control over an IC than they do an employee.  As independent business people ICs don’t necessarily have to conform to any rules of the employer.  Also, an employer’s right to disengage from a worker may be compromised if there is a contract in place with the IC that doesn’t have a written agreement regarding what happens in the case of ending a relationship.   Another thing to consider is that ICs aren’t able to collect worker’s compensation, so they may sue if they’re hurt due to a work environment or situation that the employer is responsible for.
What to know
Non-compliance with IRS rules regarding the difference between an employee and an IC can lead to hefty financial penalties, so it’s important to know the difference between an employee and an IC.  Another Paychex survey exposed upwards of 37% were not aware of or not in compliance with the applicable worker classification requirements.  Consult the graph to see some of the ways you can differentiate between the two:
Payer has total control over person’s work activities/schedule
Payer only has control over what the job’s end result will be, not how it will be done.
Employer has right to insist the employee works only for them.
IC may work for multiple people.
Employer has right to terminate at any time.
Written agreement may prohibit IC from being disengaged should a disagreement occur.
Employer must pay all payroll taxes, and file all related forms, such as Forms W-4, 941, 940
IC earnings are subject to self-employment tax. Payer should have IC fill out Form W-9, and report all payments via Form 1099-MISC or NEC.
Employer provides training.
IC is trained and ready to perform and must be licensed and insured.
Employer provides benefits.
IC is responsible for their own benefits.
If you have any questions about how to classify someone who’s working with you, or would like suggestions on how to clear the waters in a particular situation, please contact your Faw Casson advisor for guidance.

©2024 Faw Casson   |   Design, Hosting and Application Development by Delmarva Digital