Subcontractors or Employees? The Choice is NOT yours!
With $25 million dollars in new funding, the Federal Government is planning to crack down on employee misclassifications by businesses. Both the IRS and the Department of Labor are looking for companies that are misclassifying workers as “subcontractors” or “independent contractors” as a way to avoid taxes, insurance and other regulatory requirements.
Just because you label someone as an subcontractor does not necessarily make them one. Time after time when talking with business owners I ask them about their employee situation and get the response “I don’t have employees, I just give my laborers 1099’s and have them sign a subcontractor agreement”. Just because a company takes these steps, does not mean that they are not in violation of the law.
The degree of control that a company maintains over workers is central to determining whether or not the worker is an employee. The answers to the following questions, when taken as a whole, give a great indication as to how a worker should be classified.
Is or does the worker:
(1) maintain a separate business with the individual’s own office, equipment, materials, and other facilities;(2) hold or has applied for a federal employer identification number or has filed business or self-employment income tax returns with the federal Internal Revenue Service
(3) operating under contract to perform the specific services for the person for specific amounts of money and under which the individual controls the means of performing the services;
(4) incurring the main expenses related to the services that the individual is performing for the person under the contract;
(5) responsible for the satisfactory completion of the services that the individual has contracted to perform for the person and is liable for a failure to complete the services;
(6) receive compensation from the person for the services performed under the contract on a commission or per-job or competitive bid basis and not on any other basis (ie not hourly pay only)
(7) realize a profit or suffer a loss under the contract to perform services;
(8) have continuing or recurring business liabilities or obligations; and
(9) the success or failure of the individual’s business depends on the relationship of business receipts to expenditures.
The answers to these questions are looked at on the whole, so the fact that having a subcontractor agreement may satisfy question #3, if all the other factors make it appear that the worker is an employee, then the company is still in violation of the law.
Having employees involves many responsibilities. There are additional taxes that need to be paid, workers compensation insurance to carry, and many other considerations. However, these considerations are small compared to the fines and other repercussions if your company is caught in violation of the law.
While it may save money in the short term, it is illegal to fraudulently treat someone as an independent contractor if they are actually an employee. In the long term this can cause a range of problems. If you are labeling someone an independent contractor and they are seriously injured while working for you, you can still be held responsible. There are many other scenarios in which the business owner does not come out ahead in the long run. > Take a look at your company. If you are improperly labeling your workers it may be time to consider taking the step of having true employees and the responsibilities they come with.