Yeep. This keeps coming up this year. You have someone working for you. Is that person an employee, or is that person an independent contractor?
Most employers would like to keep as many people as possible as independent contractors, which means the worker is not on payroll and the employer is not responsible for payroll taxes. Most workers would generally prefer to be employees and have their income and employment taxes withheld. Most of the small businesses that I work with think they probably can do whatever they want, so long as no one complains or if they don’t pay out too much.
The reality is the difference between an employee and contractor is pretty well established in employment law. There are some gray areas, but not many. If you are paying someone to work for you and you are telling them what to do, where to go, how to do it, when to do it and what to do it with, that person is an employee—even if they only work for you for one day. If you have to train the person how to do the job for you, that person is an employee. If you give that person a uniform, that person is an employee!
What can happen if you misclassify an employee as a contractor? The most common scenario is the worker stops working for you and goes to file for unemployment benefits. Since the employer has not been paying the unemployment taxes, a red flag will shoot up and you will get a call from the unemployment agency (Ohio Department of Jobs and Family Services). Then, your business will most likely be audited. Workers can also file complaints if they should be classified as employees.
The ODJFS also does random audits to ensure that a business is properly classifying all its workers. I went through one of those audits this summer with a client. It was intense. While my client had only misidentified one employee, I could easily see the potential for such an audit to be devastating.
Another reason worker classification has come up is because of the new QBI deduction for businesses. There had been some theorizing (especially in the tech sector) that a business could convert their highly compensated employees to independent contractors and the employee could reap the QBI deduction while the company saved on payroll taxes. Long story short, the IRS is on to them, so that’s not gonna fly.
If you have any questions about your workers feel free to check in with me.