The US Small Business Administration has a really great article about helping employers correctly classify their employees at http://www.sba.gov/community/blogs/community-blogs/business-law-advisor/are-you-classifying-independent-contractors-cor. We also have a few more guidelines for helping business owners who may be having trouble determining an employee versus a contractor. Employees have taxes taken out of their pay automatically, while contractors are responsible for doing that on their own.
An independent contractor sets their own work hours, work order, and sequence of their work, while an employee is directed by the employer on how, when and where to do those things. An independent contractor works for more than one company, while an employee will work solely for you. An independent contractor has a contract with his or her clients, while an employee can quit or be fired at any time. An independent contractor provides his or her own tools, supplies, and training, whereas the employer is responsible for providing these things for an employee. Hopefully these classifications can help you distinguish between the two, since it can sometimes be sort of confusing. It is no secret that the lines can sometimes be blurred when it comes to employees versus contractors. Even experts agree!
"There is no standard definition," said Matthew Bidwell, a professor of management at the Wharton School of Business at the University of Pennsylvania. "There is no one test. It's never clear who's a contractor and who isn't. It's a very murky question in and of itself."
In a 2000 Department of Labor (http://www.dol.gov/) study, it was revealed that anywhere between ten to thirty percent of business owners are guilty of some degree of misclassifying when it comes to employees versus contractors. This can add up to a ton of money in unpaid taxes, or unpaid wages to employees. The IRS and the Department of Labor are both cracking down on employers that misclassify their employees.
"The misclassification of employees as independent contractors is unacceptable, and something we see all too often in industries that employ vulnerable workers and in which we've historically found significant wage violations," said Nancy J. Leppink, deputy administrator of the Labor Department's Wage and Hour Division. "Honest employers who play by the rules have a difficult time competing against scofflaws who gain an advantage by underpaying their workers. And workers and their families lose when they are denied the wages they rightfully deserve."
However, right now the IRS is offering an amnesty program that can help you to make things right if you think that you may have accidentally made a mistake. Announced in September 2011, the New Voluntary Worker Classification Settlement Program (VCSP) is a voluntary program that business owners can use if they would like to change their classifications and move their contractors onto payroll before the IRS does an audit. You can learn more about the Voluntary Classification Settlement Program here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Voluntary-Classification-Settlement-Program Talk with your tax professional to see if participating in this program is a good idea for your company. While some business experts think that the Voluntary Classification Settlement Program is a great idea, others aren't so sure.
You can read opinions on the other side of the story here. While it's clear that there is often a fine line between employees and contractors, business owners should be very careful to try to define that line as clearly as possible. Misclassifying employees can cause a myriad of problems for both employers and their employees alike. It's worth taking a closer look at your records to ensure that you are making the right choices when it comes to classifying your employees.
