Classification of Workers
Now this may be a sore subject for a lot of the trade contractors out there. I have seen MANY people argue that the way they classify their workers as independent contractors, and not employees is correct. Their argument? It's the way they've always done it. As in the installation world, just because it's the way you've always done it, doesn't mean it's the correct way!
Over the past few years the IRS has implemented a set of rules to help employers classify their workforce. There are three main categories when looking at whether a worker is an independent contractor or an employee.
1. Behavioral: Does the employer have the control over how and what the worker does their job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension, insurance, vacation pay, holiday pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses have to look into all three aspects and make a determination as to classify their worker as either an independent contractor or employee. Although the worker may fit into a different category in either of the three categories, it's important to take all of it into consideration, especially the extent of businesses right to control or direct the person when you make a final decision as how to classify.
If you're still unsure of how to classify a worker, the IRS has a form you can fill out here. This form can be filled out by either party (the business, or worker) and may take up to 6 months for the IRS to make a final determination for the worker. Workers who believe they've been misclassified can also file form 8919 to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
Misclassification of an employee can lead to being liable for the taxes of that employee. The first line of Internal Revenue Code section 3509 states :
- When an employer erroneously treats an employee as a non-employee and does not withhold federal employment taxes, the employer is liable under IRC 3102 and IRC 3403 for the employee's share of social security and Medicare tax and the employee's income tax withholding.
There are some relief efforts made by the IRS as well. Section 530 can relieve you of having to pay the workers employment taxes If you have a reasonable basis for not treating a worker as an employee (you must not have paid anyone else in a similar position as an employee in order to qualify). There also the Voluntary Classification Settlement Program (VCSP) that provides the opportunity to reclassify workers as employees for future tax periods with partial relief from federal employment taxes.
In the flooring industry we are surrounded by companies who misclassify workers. Labor companies who try and "make it right" by purchasing their workers insurance policies. A group of individuals working together day in/day out led by a single person but are somehow "independent" from one another. These cases also play into the fact that a lot of these people also do not file their taxes. Why? They owe a bunch of money at the end of the year, taxes that should have been throughout the year, but was never accounted for, so they skip filing altogether.
Workers deserve the protections of being an employee when the circumstances are there. They shouldn't be liable for the employers portion of their taxes, social security and medicare. If you think as a business owner you're saving money by not having to pay for workers comp insurance, bad news, you're still liable because the worker is misclassified and should have been an employee all along. So if you have workers who should be employees, do your part, use the governments relief efforts and reclassify those "independent contractors" as employees, they deserve it!
Feel free to comment below.
For direct questions or comments email daniel@preferredflooringmi.com