It is important for a business to be able to decipher between an employee and an independent contractor. An employee is a person, under contract, who provides a service to the employer; this employer has the right to control how and when that service is being performed. An employee completes a W-2 upon hire. An independent contractor is different. This is someone that completes work for an employer, but the work is done based on their own methods, on their own time and is only subject to the employer’s control in the final results of their work. Independent contractors complete 1099s. People who work under 1099s are freelancers, consultants and other independent workers. Using an independent contractor is often necessary under certain circumstances, but when the line between contract worker and employee becomes blurred how do you determine which is which?
It is important to remember that labeling a worker as a 1099 or independent contractor is not a way to avoid payroll taxes. Due to the increasing frequency in which corporations are mislabeling employees as independent contractors, government agencies have become more stern with their monitoring strategies. The steep penalties that are enforced when incorrectly identifying employees as contract workers are not worth the minor amounts a company may save by not including them on their payroll. Whether intentional or not, it is important to be able to correctly identify and document independent contractors and employees.
One major test used to determine this is the “Right to Control” test. This test determines the degree of control the employer has on the employee during a given workday. A few examples of the determinations of this test include the following:
- The employee has no control over the means or method of work provided by the employer
- The employee must follow orders given by employer
- The employee receives formal or informal training from the employer
- The employee must complete his or her services at times or in a particular order or sequence established by the employer
Another test is the “Economic Reality” test determines the degree of economic dependency a worker has with an employer. The more dependent a worker is, the more likely they are an employee. The following factors determine any economic dependency:
- The degree of control exercised by the employer
- The amount of investments of the worker and employer
- The degree to which a potential profit or loss is determined by the employer
- The skill and initiative required to complete the job
- The permanency of the relationship
So once you have determined whether or not a contract worker would really be considered an employee, remember the Benskin & Hott offers payrolling. Payrolling differs from our interim staffing service because the candidate has already been selected and hired. Allowing us to take over the payroll for your questionable contract workers eliminates any risk of mislabeling an employee and allows you to avoid the dreaded potential audit!!