Small business owners often get the pitch from various news outlets, accountants, and even legal counsel that one of the most economical ways to run a business is to classify your workers as independent contractors.
It’s true you don’t have to pay employment taxes, unemployment, or workers compensation on your workers if they are considered independent contractors. However, what many do not tell is the consequence of classifying a worker as an independent contractor incorrectly; it can have a serious financial impact on your business.
Suddenly, you may owe tens of thousands of dollars in back unemployment and workers compensation, as well as employment taxes, because you misclassified a worker who really is an employee. And in this era, where the government is scrambling for cash, the Ohio bureaus of Workers’ Compensation and Unemployment Compensation are doing more audits than ever of small businesses to ensure they are correctly classifying their workers.
Although it is best to seek legal advice to ensure you are compliant with independent contractor classifications, the following are important considerations.
What is an Independent Contractor?
An independent contractor generally is defined as an individual or business that is assigned a task or job, and has complete discretion on how, when and where to do that job. The business owner may give some direction, but this is a very gray area. The aforementioned bureaus use a list of “factors” to determine whether a worker is an employee or an independent contractor. To win the battle of whether your worker is an independent contractor, you must have more factors in your favor.
1. Are you telling your workers how to do their job, when to show up to work, how long to work, and where to show up to work? Then you lose this factor. (And this one hurts.)
2. Do you allow your worker to assign the work to others or do you require the worker to perform it personally? If you allow assignment, you win this factor. Otherwise, you lose.
3. Are you providing or reimbursing the cost for your worker’s tools and equipment, i.e. pens, pencil, desk, car/truck, food supplies, or even maps? Then you lose this factor. (And this one hurts, too.) If your worker provides their own supplies and equipment (vehicle and tools), like their own GPS, or you formally lease the equipment, you win this one.
1. Are you allowing the worker to make a profit or loss? If your worker always is consistently paid (including expenses), regardless of the result of the work, you lose this one.
2. Are you providing a 1099 Misc. tax form – you win one.
Relationship of the Parties
1. Do you have a clear independent contractor agreement which outlines all the above factors? This one factor can save the worker’s independent contractor status if it is written with professional advice.
2. Do you provide any type of benefits to your workers? If yes, you lose on this factor too.
Clearly, complying with the classification rules isn’t easy. This list does not include all the factors that are considered, and what is considered varies widely with each individual case.
However, through careful consideration of how you treat your worker, along with the advice of experienced counsel, you will have smooth sailing through the treacherous waters of the independent contractor/employee classification.